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Mexican Tax Reform Of 2014: An UpdateBy Expert Author: Alan Russell
In an early October article entitled, “Mexican Fiscal Reform – Sounding the Alarm,” information on what was, at the time, proposed tax reform legislation’s potential impact on the maquiladora industry was presented.
To review, earlier this year, the Organization for Co-operation and Economic Development (OECD), presently headed by Mexico’s former finance minister, Jose Angel Gurria, made several recommendations to the country’s president, Enrique Nieto Peña Nieto, on the subject of raising funds for Mexican government coffers through the achievement of a more balanced tax to GDP ratio. Although Mexico has undertaken a series of steps and measures over the last three decades that have been aimed at increasing the country’s competitiveness, and reaching its public income goals, tax revenues were responsible for a mere 18.9% of total Mexican GDP in 2010. The average for the other members of the OECD for that same year, excluding the United States, stood at 33.4%. Of the thirty four OECD member countries, Mexico ranks dead last in tax to GDP ratio figures. Just above Mexico in this economic measure comes the only other Latin American member of the OECD, Chile, whose tax collections represented 19.6% of the countrys overall Gross Domestic Product.
From a broad perspective, the purpose of the Pena Nieto’s administration’s tax reform initiative that is aimed at increasing the revenue that flows into the public coffers is two fold (1) to expand social programs, and (2) increase spending on infrastructure required to support, accommodate and incentivize future growth.
With respect to the first consideration, the reasoning of the Mexican Executive Branch holds that increased social spending on government programs will eventually have the desired effect of shrinking the size of the country’s informal sector. Economists estimate that anywhere between twenty-seven to forty-nine percent of the value of Mexico’s total GDP is “off the books,” and generates no income for the nation’s treasury. Those Mexican workers that labor in the informal economy do not have access to social programs that include state run medical care and government funded mortgage loans, for instance. The reasoning is that, if government social programs are expanded upon, and are of delivered with a higher quality, this will provide an incentive to draw some of the six out of ten Mexican workers that pay no taxes to the State at present into the formal economy, thereby expanding Mexican government’s limited base of tax collection and revenues. Some critics of this approach point to the fact that much of this informal economy’s workforce lives in rural areas where opportunities for employment in the formal sector are few.
The second broad goal of the Mexican tax reform initiative of 2014 is to raise revenues that will fund the infrastructure that will ensure the success of Mexico in its march towards economic modernity. As Mexico joins the ranks of top tier world exporters such as Germany, the United States, China and other developed and developing countries, and as its domestic demand increases, the greater will be the need for the construction and maintenance of a world class network of highways, railways, airports and seaports. In essence, this is the macro context that explains the reason for the Peña Nieto administration’s priority in achieving tax reform.
Although the legislation that has passed goes beyond the scope of effects on industry, the rest of this article will concern itself solely with the ramifications of the Tax Reform as they relate to the maquiladora industry, or, as it is otherwise known, the IMMEX program.
One of the Fiscal Reform imposed changes that is of most concern to maquiladora industry stakeholders relates to Mexico’s value-added tax, or IVA. Since the inception of the maquiladora program in the mid-1960s, the IVA has not been levied on machinery, raw materials, as well as components and sub-assemblies temporarily imported for incorporation into goods subject to subsequent exportation. The legislation that was recently passed is due to put an end to this advantage, with the exception of raw materials. Raw materials will continue to be imported temporarily on a duty free basis.
Although companies that are “certified” as exporters by Mexico’s tax authority, the Secretaria de Hacienda y Credito Publico (SHCP) through its Servicio de Administración Tributaria (SAT) or Tax Administration Service, will be able to apply for and receive a rebate of these funds, it is anticipated that there will be significant financial carrying and bureaucratic costs related to their recuperation. Since the the SHCP will not begin to collect Mexico’s 16% value-added tax on these once exempted items until 2015, the Tax Administration Service will be consulting with maquiladora industry leaders thoughout the course of 2014 for to gather their input in setting certification criteria. Lobbying by industry groups also offers the possibility that a certification process will be developed over the course of the coming calendar year that will enable companies meeting specific criteria to avoid the payment of the VAT on temporarily imported items altogether. Whether or not this comes to fruition at a future date is to be seen. Finally, as it relates to the value-added tax, the Mexican Fiscal Reform of 2014 codifies a uniform rate for the entirety of the country. Prior to the passage of legislation this fall, the border region was subject to an 11% IVA, while the rest of the country was assessed a rate of sixteen percent. A lower value-added tax in Mexican border cities enabled them to compete on a more even footing with U.S. border communities for retail sales.
The second Fiscal Reform change with the most impact on stakeholders in the maquiladora industy has to do with adjustments to the corporate income tax. Beginning in 2014, maquiladoras will be subject to a hike in the corporaate tax rate to which they are subject from 17.5% to thirty percent. Some individuals, such as the head of the Juárez Maquiladora Association, or AMAC, Claudia Troitiño, believe that this will put Mexico at a competitive disadvantage vis-à-vis other countries with lower corporate tax rates in the global competition for the attraction of foreign direct investment (FDI). Troitiño was quoted as saying in a recent interview with the El Paso Times that, “the same tax in China, Brazil and Thailand is 13 , 8.5, and 4.5 percent, respectively. Honduras and Nicaragua have no tax.”
Although only the long term will reveal if the Peña Nieto administration’s tax reform will result in the achievement of the positive consequences of increasing the number of workers incorporated into the firmal economy, and providing greater resources for modern infrastructure that it wa designed and envisioned to bring about. The effects of the legislation on the maquiladora industry, will, most probably, evidence themselves in a shorter time frame. We will be keeping a watch during 2014 to observe any effect that a higher corporate income tax may have on the ability to attract new investment into the maquiladora industry, as well as work diligently with our industry associates and colleagues throughout the coming year to minimize the negative repercussions that changes to the value-added tax may result in in 2015.
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