Maquiladoras 101

The maquiladora program is a business classification created by SECOFI which has traditionally allowed that foreign business invest in Mexico with the following advantages (all of which are gradually being taken away or granted to all Mexican businesses):

1. 100% foreign ownership (that point became mute as the Foreign Investment Law has changed over the years, allowing 100% foreign ownership in most business activities)
2. In-bond import of production materials, packaging, manufacturing equipment, office supplies, etc. That is to say that all of these goods can enter Mexico on a temporary basis (1 year-nonrenewable for primary materials / 2 years renewable for production equipment) without having to pay import taxes. All primary material that enters the country must be tracked to verify that it either leaves the country as final goods and scrap or is nationalized for sale in the Mexican market by means of retroactive import tax payments. I have personally sent many a truckload of empty cardboard boxes back north, as they cannot be thrown away or even donated. This advantage will become moot as the NAFTA phase out ot tariffs will make duty-free imports increasingly available to all companies in Mexico.
3. Operation without ownership of assets. Maquiladoras have had the option to celebrate "comodatos" with parent and client companies in other countries by which they revive production materials and machinery on loan. This means that most maquiladoras have no inventory or fixed assets, eliminating the most asset taxes. This means that the effect of devaluation on maquiladora tax liabilities is minimal. Nevertheless, maquiladora's receive advances for operating costs (generally dollar transfers) that are later invoiced after expenses have been paid. Exchange rate gain or loss during these periods must be accounted for, and are used in federal tax regulations. Note that exchange rate gain and loss must be reported by all Mexican companies, not just maquiladoras. In January 1995, Hacienda reported that maquiladoras would now have to use "loaned" assets in price transfer calculations (see point 4), which is the first step toward the phasing-out of this advantage.
4. Operation as a cost center. The typical maquiladora operating cycle is as follows:
   • Maquiladoras receive loaned primary material from foreign parents.
   • Value is added to this material (in the form of labor, overhead, and Mexican materials) in the fabrication of final products.
   • Products are shipped out of the country. Import taxes (to the US for ex.) are only paid over the value added (= final product total cost - temporarily imported materials cost .)
   • Maquiladora invoices foreign parent or client for operating cost (e.g. value added) plus a small percentage, traditionally between 1 and 5%.

Profits are guaranteed, but are very low. Like national companies, maquiladoras are taxed for income and must share 10% of profits with workers. A tax shelter is created as parent companies avoid home country income tax over Mexican value added, as well.

The mechanism that is changing the way maqs. must declare assets is part of a larger price transfer issue that Hacienda is now forcing on the maquiladoras. Over the next five or so years, maquiladoras will be forced to raise their declared profit percentage to a rate that is comparable to that would be charged by two unrelated companies doing the same transaction at "arm's length". Such transfer pricing procedures are implemented by all trading blocks, like the EC, and will be in effect throughout North America. Thus, this final advantage is also on the way out.

R. Bruce Sinclair
Mexico Direct Business Services
4307-F5 N.10th St. #16-162
McAllen, TX 78504
tel. in Monterrey, NL Mexico (52)(8)309-6465, (52)(8)349-3972 fax
mexdirect@infosel.net.mx