#1KPMG® cutting through complexity Consejo Nacional de la Industria Maquiladora y Manufacturera de Exportación index Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG in Mexico#2Foreword 4 Executive summary 6 Introduction 6 Presentation of study 8 Key Results 8 Market selection Methodology 15 12 List of Acronyms National Council of the Maquiladora and Export Manufacturing INDEX Mexican pesos MXN US dollars USD Corporate Taxes CT Income Tax IT Flat Rate Business Tax IETU Social Security Taxes SST Total Tax Index TTI Trans-Pacific Partnership TPP Free Trade Agreement FTA United States of America USA National Institute of Statistics and Geography INEGI Content KPMG® cutting through complexity Consejo Nacional de la Industria Maquiladora y Manufacturera de Exportación index#34ndex Foreword Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. KPMG The very complex outlook of world economy is a challenge that the governments must face by promoting economic activity and the best strategy is seeking national and foreign investment. However, foreign investment is limited and the countries looking to receive it are not; therefore, the governments must offer attractive incentives and grants to global players to be able to attract these investments. The maquiladora regime has been, historically, a very successful program to attract foreign investment. Nevertheless, this regime has never been evaluated from a tax efficiency standpoint, which is crucial to compare its effectiveness against those other programs offered by other countries. Knowing the level of tax competitiveness of the maquiladora regime, will allow both, companies and government, to seek tools and schemes to improve it and contribute to Mexico's competitiveness in other areas such as overall costs, logistics, etc. The International Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective is a very valuable analysis that will show the real standing of the maquiladora regime within the global context. This analysis is not intended to highlight the weakness of the most powerful program to attract foreign investment; on the contrary, the main goal is to point out those issues that must be improved and, therefore, strengthen the maquiladora regime. The legal certainty and the administrative burden are two main topics in which companies and government must work together to enhance the tax efficiency of the maquiladora regime. We are sure that you will find this document revealing and helpful in your decision making process. Mexico is an excellent destination for foreign investment, a widely open country, strategically located, with excellent ratio of labor costs and productivity, and now concerned to analyze and offer the best and most tax efficient programs for those companies that are looking a place to locate or relocate their operations. KPMG in Mexico INDEX The complex situation currently being experienced by the global economy, demands that both countries and organizations be highly competitive in just about every aspect of the business. Cutting of manufacturing costs, modernization of production infrastructure and logistics, ongoing training of labor, regulatory and administrative simplification initiatives, trade liberalization as well as legal certainty and optimization of tax burdens are key factors that contribute to the development of a market for attracting and retaining investments. Mexico has played a leading role in globalization and the maquiladora regime has been the cornerstone in opening up trade; therefore, it is imperative to know the tax competitiveness of the maquiladora and export manufacturing industry, since such regime - particularly that of maquiladoras - continually supports the modernization of our country's industrial platform and has made it a destination with favorable conditions for receiving foreign investment. Notwithstanding Mexico's comparative and competitive advantages and irrespective of its vicinity with the world's largest consumer market, international competition is tough and, thus, our country should continue looking for new tools that enhance competitiveness and make it a natural destination for consolidation of global manufacturing processes. This is the main reason why the Consejo Nacional de la Industria Maquiladora y Manufacturera de Exportación (INDEX), in collaboration with KPMG in Mexico, has decided to conduct the International Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective we present today. At this Council, we are confident the study will be an essential tool for assessing and analyzing the regime at a time of definition and design of public policies that will chart the future not only of our organization and trade group but of the Mexican industry as a whole. Luis Aguirre Lang Chairman of INDEX 5#46 index Introduction In the current international economic order, immersed in the trends of globalization and the growing internationals trade of goods and services as well as the building of economic and trading partnerships, one of the major goals of countries is to attract, through direct foreign investment, currency flows for production processes to raise social, economic and commercial development. By the same token, businesses seek the optimum form for managing raw materials and finished goods that are supplied, manufactured and sold in and from various countries, thus creating a global supply chain that enables companies to minimize transportation and logistics costs associated with the importation and exportation of inputs and manufactured goods. To that end, some countries have developed schemes for promoting economic, industrial and commercial activities, emphasizing their competitive advantages and offering a favorable customs treatment. However, most important of all, they grant tax incentives, encouraging the establishment and operations of contract manufacturers. These schemes exist in the various tax jurisdictions with different names but common objectives. In Mexico, the most developed and widely used by the industry scheme. is known as the maquiladora regime. For the purposes hereof, any references made to the maquiladora regime (in any fiscal jurisdiction) relate to the regime that promotes investments in each of the countries mentioned. Executive Summary For most of the countries evaluated, these regimes are defined as "foreign trade zones" or "free trade zone" In essence, these schemes consist of industrial parks or bonded premises (as is the case of Mexico), where Mexican and foreign companies may introduce goods and raw materials for purposes of being subject to manufacturing, assembly, repair and distribution processes as well as other value adding activities prior to being returned abroad without being subject to customs duties and with certain fiscal concessions. On the whole, contract manufacturers are characterized by conducting previously-agreed upon industrial processes with other related or non- related entities (typically foreign), which provide knowledge and technical assistance for manufacturing the export products as well as Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. 7 the machinery, equipment, raw materials and the necessary parts and components, provided the contracted concern has the other means required such as labor, expertise and facilities for conducting the manufacturing, preparation, assembly, repair and distribution processes. The establishment of these companies under schemes such as the maquiladora regime has a positive impact on the social, economic and commercial development both at national and local level. Table 1.1 illustrates the most obvious benefits arising from the establishment of this type of entities As shown in table 1.1, the social, economic and commercial benefits associated with the establishment and development of contract manufacturers under schemes like the maquiladora regime are substantial for the development prospects of the regions where these entities decide to establish. The above is due to the fact that as with free trade zones, the maquiladora regime is aimed at promoting productivity and the quality of processes, which results in increased competitiveness and allows the insertion of companies in global markets through the granting of facilities as well as fiscal, customs and administrative support. In Mexico, the maquiladora scheme has as most immediate background the sixties, when the "Bracero"¹ Program ended. As a result, the Mexican government created a program whereby companies enjoyed certain benefits in exchange for creating the necessary jobs for former "Braceros" who returned to the country. This program opened the borders to foreign investors who wished to set up companies since then known as "maquiladoras" in Mexican territory. In 1990, there were approximately 1,9202 maquiladoras in Mexico; today, the number approximates 5,045³, with strongest presence in the Mexican border States of: Baja California, Nuevo León, Chihuahua, Coahuila and Tamaulipas4. It is important to mention that not all companies authorized under the IMMEX program are entitled to the tax benefits, which are granted solely to entities that meet the definition of "maquila" operations in terms of the respective decree. In addition, the current figure includes companies operating under the former PITEX (Temporary Import to Produce Export Products) Program, which with changes to the subject legislation, was homogenized with the maquiladora regime since 2006. The establishment of these companies has made a positive social and economic impact in terms of employment generation through hiring of local staff. According to statistics published for the period. of January to September 2011, the monthly average of staff hired by maquiladoras aggregated 1,851,431; this figure includes workers, technicians, administrative staff plus personnel contracted or subcontracted by an outsourcing Table I.1 Area 1. Exports 2. Regional supply chains 3. Foreign investment 4. Jobs 5. Revenue company. Furthermore, the impact is seen in the economic benefits for local enterprises, diversification of the productive plant and increased country competitiveness. In addition, the demand and offering of industrial spaces increases as a result of the rise in direct. foreign investment and facilities improved in order to offer better infrastructure, services and attract new investments. Last, we may highlight other benefits, such as: the inflow of foreign currencies, an increase in national income, the attraction of direct foreign investment, an increase of exports, greater consumption of goods and services in the local market, the simplification of customs procedures, the development and transfer of technological and administrative knowledge and the connection of companies under the maquiladora regime with local supplier companies. Benefits of Maquiladora Scheme Benefit More exports mean higher international reserves and a positive balance of payments More domestic producers sell inputs to manufacturers Encourages capital formation Greater job creation Although salaries may be lower than those prevailing in the country of origin, they might be higher than those of the recipient country and tend to increase over time Source: Prepared by KPMG in Mexico 2012. 1 Program that ran from 1942 to 1964, whose objective was to send Mexican peasants to work in U.S. agricultural fields due to the great demand for labor in such country as a consequence of the Second World War. 2 INEGI Monthly Statistics for the Manufacturing, Maquiladora and Export Services Program. 1990. 3 INEGI Monthly Statistics for the Manufacturing, Maquiladora and Export Services Program. September 2011. 4 Ídem. 5 Ídem.#5index Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective Presentation of study The International Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective has as main goal presenting the findings of an analysis made of the tax competitiveness of the maquiladora regime, as a result of the evaluation made between comparable promoting regimes in other economies. KPMG jointly with the INDEX seeks to present and compare the maquiladora regime tax costs and benefits to other similar regimes, which are offered in countries that are Mexico's competitors in the global arena. It is important to point out that these results are limited only to the tax efficiency of the regimes and does not analyze the overall cost index represented by each of the analyzed jurisdictions. For the analysis, we obtained reliable, relevant and updated information of the manufacturing industry in Mexico and from the various regimes in the tax jurisdictions included. As a result of this research, we assessed the tax costs both of the maquiladora scheme and the comparable regimes in other fiscal jurisdictions. Decidedly, the maquiladora scheme is a strength that adds up to the competitiveness of Mexico as leading recipient of direct foreign investment; it is therefore the purpose of this analysis to compare the maquiladora regime with others from different countries to provide concrete results that enable the preparation of a contingent plan for mitigating competitive gaps that may exist. For the findings to be more effective, this analysis includes a comparison between different regimes offered in countries similar to Mexico. The study was devised to involve different components for conducting the analysis from general to specific considerations. The components include market selection, regime analysis, fiscal analysis and findings. Each shall be explained in greater detail later on. Key Results The study compares a business model applied to each of the promoting regimes for assessing business costs over a horizon that covers the first 10 years of operations. The assessed business model assumes that the machinery, equipment and inventories used in the manufacturing processes are property of a foreign resident, whose location is not relevant for the purposes of our analysis and that these are new premises within each country, leading to the creation. of new jobs and the increase in foreign investment. Tax incentives are based on incentives available for each of the promoting regimes within each of the countries included in the study. The two main groups of taxes analyzed by the study are: Corporate Taxes (IT and IETU for the Mexican case): where it is assumed that companies have a certain level of profits before taxes and a comparable operating profit (6.5%) for each of the countries. In this sense, the corporate tax amount paid and effective rates may be compared among the various countries versus their profits before taxes • Social Security Taxes (SST): Include all costs relating to labor and salaries, computed on the rates provided by each country, which are applied to the current salary levels For location and expansion decision- making purposes, in addition to the analysis observations concerning the tax costs in the different countries the analysis of findings provides general observations. The report uses two indicators in order to assess the fiscal costs, which include any type of taxes levied on companies, in this case, both measures applied to corporate taxes and social security taxes. The first indicator, which is the effective rate, expresses (in percentage terms) the total fiscal costs in a single rate and contextualizes the tax burden on profits before taxes. This rate is the sum of effective corporate taxes and social security taxes expressed as a percentage of net standardized income before taxes. The second indicator, the Total Tax Index (TTI), which compares total tax costs for each country and is used for comparing the total tax burdens of the markets assessed. For calculating TTI, net profits before taxes were standardized in all the countries, for total taxes paid to be compared directly. TTI is expressed in scores, where Mexico, being the country taken as basis, is assigned with 100 points. The result of countries assessed may be greater than 100, where the lecture would be that the market assessed has a negative competitiveness gap with respect to Mexico; however, if the market assessed obtains a score of under 100, it means that the market has a competitive advantage in percentage terms vis-à-vis Mexico. The formula used in computing TTI is as follows: Total taxes paid by a company in a country (IC,CSS) Total taxes paid by similar companies in Mexico (IC,CSS) The study defines a secondary measure of total taxes that expresses, as a percentage, the fiscal costs in an effective rate, rather than with an index of total taxes paid. This measure is the total effective rate, calculated as follows: Total taxes paid by a company (ΣIC,CSS) Profits before taxes Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. 9 The effective rate formula allows for tax costs to be compared in percentage terms. From there, we got a ranking of country standings as regard their income taxes and social security taxes. Tables 1.2 and 1.3 show the ranking obtained by each of the markets assessed. Table 1.2 Analysis of Effective Corporate Tax Rates Both tables show that the maquiladora regime is in clear competitive disadvantage as compared to all the other regimes assessed. This result is not restricted solely to corporate taxes, but is consistent when social security taxes are included in the analysis. The TTI offers a perspective of the competitive gap existing among the markets analyzed. Below we show the ranking of all countries assessed, bearing in mind that Mexico is the basis at 100 points. This TTI includes both corporate taxes and social security taxes. type; therefore, this analysis is similar to the general regime of each of these countries. From analyzing the findings of this analysis, it is clear that the segregation of social security taxes does not significantly affect the results for purposes of measuring the competitiveness of the maquiladora regime, in view that the behavior of the markets assessed follows the same pattern. Table 1.4 Analysis of Total Tax Index Market assessed Market analyzed Mexico 17.50% China 13.50% Brazil 8.50% Costa Rica 12.00% The findings on effective rates are striking since they expose Mexico as the least competitive country from a tax stance, when compared to preferred regimes of markets assessed. From table 1.4, it gathers that South Korea has a competitive edge of 74% in fiscal costs (corporate taxes and social security taxes). Mexico 100 China 39 Brazil 43 South Korea 9.68% Costa Rica 96 Thailand 4.50% South Korea 26 Thailand 30 Source: Prepared by KPMG in Mexico 2012. Table 1.3 Analysis of Effective Social Security Tax Rates Market analyzed When these findings are compared with countries of the region with a similar level of development as ours, the disadvantage of Mexico's maquiladora regime becomes more evident. The free trade zone regime of Brazil, the largest economy of Latin America, has a TTI disadvantage of 57% with regard to the Mexican maquiladora regime. The free zone of Mexico's closest competitor, Costa Rica, holds a 4% advantage over Mexico's regime. This last comparison is intensified when the analysis broken down to separate social security taxes. Source: Prepared by KPMG in Mexico 2012. Table 1.5 Analysis of Total Tax Index, Excluding Social Security Market assessed Mexico 90.94% Mexico 100 China 29.61% China 90 Brazil 39.11% Costa Rica 89.50% South Korea 19.97% With a view to breaking down the information, a total tax index was determined solely for corporate taxes and thus be able to separate the impact of social security taxes from this analysis. Brazil 57 Costa Rica 83 South Korea 63 Thailand 28.56% Thailand 30 Source: Prepared by KPMG in Mexico 2012. We decided to carry out this separation since none of the existing regimes offers incentives of this Source: Prepared by KPMG in Mexico 2012.#610 index Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective From figures shown in table 1.5 we ascertain the fact that the competitive gap widens even more when segregating social security taxes, which are not subject to any type of incentives in the assessed regimes. This means that by comparing only the fiscal cost of such taxes that do receive preferential treatment, the result evidences a substantial drawback of the maquiladora regime versus the preferential regimes of comparable markets. Indeed it is worth emphasizing, for example, that in the case of Costa Rica and considering social security taxes, the TTI gap was only 6%; however, when segregating these taxes and analyzing only corporate taxes, the gap widens to 32%. Chart I.1 reveals that Mexico and Thailand have the highest and lowest effective corporate tax rates, respectively. Specifically in the case of social security taxes, Chart 1.2 shows that Mexico and South Korea have the highest effective social security taxes rate, respectively. The chart depicts the aforementioned findings. With respect to the total tax index, Chart 1.3 confirms the finding that puts Mexico as the least competitive country, followed by Costa Rica, Brazil, China and Thailand, while fiscally, South Korea turned out to be the most competitive. 100% 90% 80% 70% 60% 50% Chart 1.4 shows the ranking of assessed countries considering only the analysis of corporate taxes and excluding social security taxes. This analysis confirms that Mexico is the least competitive country in terms of fiscal costs being that its effective rate is the highest, followed by China, Costa Rica, South Korea, Brazil and Thailand. Therefore, Thailand, one of the most dynamic South Asian sub-continent economies, proves to be more competitive than Mexico with 40% 30% 20% 10% 0% Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. 11 Chart 1.2 Effective Social Security Taxes Rate L Source: Prepared by KPMG in Mexico 2012. Mexico China Brazil Costa Rica South Thailand Korea 15% 10% 5% Chart I.1. Effective Corporate Tax Rates 0% Mexico China Brazil Costa Rica South Thailand Korea Source: Prepared by KPMG in Mexico 2012. the lowest Total Tax Index for corporate taxes. Reference should, however, be made to the fact that thanks to the results obtained from this analysis, we have substantiated that actually, the maquiladora regime is attractive and offers more competitiveness to Mexico. However, there are areas of opportunity where much can be done to improve the fiscal competitiveness of the regime in order to stimulate further foreign investment and, consequently, the creation of jobs. This analysis is based on research of cost data of the 2010-2011 period. Taxes reflect studies made for the same period (2010-2011) and consider the legislation of each of the current promoting regimes. For this reason, results are subject to changes due to amendments to existing legislation. Evidently, rates and costs will change over time. Chart 1.3 Total Tax Index 100 90 80 70 60 50 40 30 20 10 0 Source: Prepared by KPMG in Mexico 2012. Mexico China Brazil Costa South Thailand Rica Korea 30 8852022 ° 100 90 Chart 1.4 Total Tax Index (TTI-SS) Source: Prepared by KPMG in Mexico 2012. Mexico China Brazil Costa Rica South Thailand Korea#7Market selection Table 1.6 Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. Progressive Weighting 0.0125 its respective indicators, the result according to the assigned weight and the progressive value for each indicator. Unless noted otherwise, all figures in column "Q" are expressed in thousands of millions (tm) or in millions. (m) of dollars. Column "V" represents the result obtained for each market in accordance to its position in the ranking of each indicator. The last column of table 1.7 represents the rating obtained by each country, which resulted from adding up all the values obtained. Considering that Mexico is the base country for this analysis, the rating of 76% obtained would be equal to 100 points from which the proportional rating for the other countries is obtained. Progressive Method Values Indicators Weighting GDP 0.10 Exports (EXP) 0.15 0.0188 Exports to the USA 0.30 0.0375 Manufacturing (MFG) 0.20 0.0250 Manufacturing exports 0.15 0.0188 Exports per capita 0.10 0.0125 Source: Prepared by KPMG in Mexico 2012. The first component of the fiscal competitiveness analysis seeks to select countries that are deemed comparable to Mexico as far as manufacturing industry and its various types of operations are concerned. Moreover, because of the aforementioned scheme, Mexico is regarded as a "nearshore" country (offshore markets are those who are farthest from the US market). These countries are those where production and manufacturing sites are installed for having more fiscal and operating benefits. For this analysis we identified countries with these characteristics for subsequent evaluation and selection of those most resembling Mexico. Originally, we identified 7 countries for assessment and compiled representative statistics that were obtained from economic indicators of each country, which include gross domestic product (hereinafter GDP), total exports, exports to the United States of America (hereinafter USA), percentage manufacturing output represents of total GDP, percentage represented by total manufacturing output with respect to total exports and, last, exports per capita. However, with a view to conducting the evaluation of candidate countries and their statistics, the progressive method of assessment was used. According to this method, a weight is assigned to each indicator, depending on relevance. Such weight is divided by the total number of countries to obtain a value which is subtracted progressively from each country according to their ranking position of this specific indicator. This position goes from higher to lower depending on the value of each indicator. Hypothetically, the maximum rating of 100% would be allocated to the market that best met with the total of the requirements analyzed. Therefore, the greater percentage shall be the market that resembles the ideal market most and, according to the percentage obtained by Mexico, those immediately above and below shall be comparable markets to be assessed. Table 1.6 shows the weight allocated to each of the indicators used for this assessment and the value to be progressively reduced for each indicator. All the necessary information for the assessment of candidate countries. is included in the following table, where each country appears with Table 1.7 Progressive Method Evaluation Weighting GDP (tm) EXP (tm) EXP USA/EXP Country Q V V Q V MFG (tm) 0.2 Ο V Q EXP MFG (tm) (mmd) V EXP Per Capita (USD) 0.1 Total Results O V China 10,090 0.1000 1,581 0.1500 18% 0.2250 4,732 0.2000 490 0.1500 1,183 0.0250 0.85 85% Brazil 2,090 0.0875 202 0.0750 10% 0.1500 560 0.1500 28 Mexico 1,567 0.0750 299 0.1125 81% 0.3000 510 0.1250 65 South Korea 1,459 0.0625 464 0.1313 10% 0.1500 573 0.1750 148 0.0563 0.0938 2,625 0.1313 9,523 992 0.0125 0.53 53% 0.0500 0.76 76% 0.1000 0.75 75% Thailand 587 0.0500 194 0.0563 11% 0.1875 262 0.1000 50 0.0750 2,900 0.0625 0.53 53% Malasia 414 0.0375 210 0.0938 10% 0.1125 171 0.0750 98 0.1125 7,320 0.0750 0.51 51% Hungary 188 0.0250 93 93 0.0375 0% 0.0750 69 0.0500 24 0.0375 9,369 0.0875 0.31 31% Costa Rica 52 0.0125 9 0.0188 36% 0.2625 11 0.0250 4 0.0188 2,048 0.0375 0.38 38% Source: Prepared by KPMG in Mexico 2012. сс 13#8Final Results Countries Final results According to the results set out in table Table 1.8 1.8, which arose from the preceding calculation, countries selected for this analysis are: China, Brazil, Mexico, South Korea and Thailand. Since countries selected had values which approximate that of Mexico, it is worth clarifying that in addition to the countries selected, the study included Costa Rica because it aims to evaluate another country located in the same region as Mexico, with certain similar conditions even when the values assessed were not so similar. China 112% Brazil 70% Mexico 100% South Korea 99% Thailand 70% Malasia 67% Hungary 41% Costa Rica 50% Source: Prepared by KPMG in Mexico 2012 Estudio de Competitividad Fiscal Internacional de la Industria Maquiladora KPMG. 15 Methodology After selecting comparable markets we analyzed each of the promoting regimes available offered therein. From these selected countries, some have more than one regime for the various operations a company may engage in. As for promoting regimes, we only selected one for each country subject to assessment. The criteria used for this selection was to choose the one that most resembles the maquiladora regime in Mexico. The second criteria for this selection I was to pick the regime that offered the greatest possible benefits to participating entities. To facilitate the comparison, the analysis includes various tax groups used for grouping and classifying the applicable taxes of each country. ⚫ Indirect taxes (those taxing internal consumption) Foreign trade taxes • Other taxes • Local taxes The tax groups are as follows: Table 1.9 . Corporate taxes (those taxing the profits) Promoting regimes matrix Country Regime Mexico Maquiladora China Free zone Brazil Free trade zone South Korea Free trade zone Free zone Free zone Table 1.9 shows the regime selected by country. For further analysis details, table 1.10 shows a matrix that include each of the regimes by country and the treatment afforded to each tax group. In certain cases, there is more than one type of tax per group. In treatment is different within the group, detailed explanation will be provided for each. Thailand Costa Rical Source: Prepared by KPMG in Mexico 2012#9Table 1.10 Country Regime Mexico Maquiladora Corporate Taxes 30% IT 3% Reduction 17.5% IETU Simplified Matrix of Promoting Benefits Regimes by Country Benefits Indirect Taxes Foreign Trade Export of goods imported on a temporary basis Other Taxes Local Taxes Exempt IGI (MP) IGI (MYE) Applicable IGE Exempt N/A N/A DTA MXN$223 .176% (MYE 16% VAT Exempt CC N/A Prevalidation MXN$161 per customs declaration Reduced rates 15% (1st. year) China Free zone 25% IT 7.5% (2nd. and 3rd. years) 15% (subsequent 17% VAT Exempt II Exempt IE Exempt N/A N/A years) 34% IT 75% reduction Brazil Free trade zone PIS Exempt COFINS Exempt VAT Exempt IPI ISR 24.2% South Korea Free trade zone OIC Exempt (5 years) 50% reduction (2 subsequent years) VAT Exempt || 88% Reduction IE Exempt N/A N/A Exempt ICMS ΑΙ Exempt (15 years) Exempt IE Exempt N/A IR Exempt (15 years) II (MP) Exempt 30% IT Exempt (5 years) IE Thailand Free zone 50% reduction (2 subsequent years) VAT Exempt N/A Exempt II (MYE) 50% Reduction ICAN Exempt (10 years) IT ITBI Costa Rica Free zone IRE Exempt Exempt IUD 30% IT Exempt (4 years + 2 additional years) Sources: 1. Corporate and Indirect Tax Survey 2011. KPMG. 2. 2012 Mexican Income Tax Law. 3. Decree for the Development of the Maquiladora and Export Manufacturing Industry. 4. The Brazil Business- Manaus Free Trade Zone ( http://thebrazilbusiness.com/article/manaus-free-trade-zone). 5. Superintendencia da Zona Franca de Manaus (www.suframa.gov.br). VAT Exempt (on purchase of goods and services) Canon or license II (MYE) Exempt IE Exempt 6. The Customs Department - Customs Incentives Programs (http://www.customs.go.th). 7. Thailand Board of Investment- Investment Promotion Privileges (http://www.boi.go.th). 8. Masan Free Trade Zone -Incentives (http://www.ftz.go.kr). 9. Korea Custom Service (http://customs.go.kr). 10. Managing Trade & Customs in China, 2011. KPMG. 11. Shangai Free Trade Zone-Policies (http://www.by.cpa.com). 12. Costa Rican Investment Promotion Agency (CINDE) - Régimen de Zonas Francas en Costa Rica. Service companies: 0.3% on sales. Manufacturing companies: the amount is determined according to the industrial ceiling area N/A PT Depends on the municipality where the company is located#1018 index Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective For greater understanding of the preceding matrix, below is a list of acronyms of terms used therein. Table I.11 Acronym List of acronyms for tax matrix Description Income taxes Customs processing fees Antidumping duties Social integration program Contribution for the financing of social security IT IETU Flat rate business tax VAT Value added tax IGI Import duties IGE Export duties DTA CC || Import duties IE Export duties PIS COFINS IPI ICMS OIC IAI ICAN IT ITBI Land tax IRE Tax on real-estate transfers IUD IVS Tax on profits and dividends PM Sales and excise tax MP MYE Tax on industrialized products Tax for the free circulation of goods and services Other corporate taxes Acquisition of property tax Registration tax Tax on capital and net assets Tax on remittances sent abroad Municipal tax Other Raw materials, parts and components Machinery and equipment The promoting regimes selected analyzed for arriving at the results corresponding to each country. The scope of the analysis is based on a 10 year assessment horizon, reflected on an income statement in accordance with a "type" operation that includes the following assumptions and parameters: The analysis involves the promoting regimes of the following selected countries: Brazil, China, South Korea, Costa Rica, Mexico and Thailand • Details of results by country were developed and obtained with the same operating base and considering that all comparisons are to Mexico and specific operating parameters for promoting regimes. This approach allows for a more precise comparison between the different countries, recognizing the tax benefits of each . Operating parameters were divided. in two types, which are fundamental and additional. Both were developed by the KPMG team from figures and results included in the 2010 Competitive Alternatives prepared by KPMG International • Fundamental operating parameters are those that were considered for the income statement of the standard operation that will enable the quantification of the effects of regimes in each country within a possible scenario. The base country for developing this analysis is Mexico; accordingly, parameters are determined under the industry assumptions therein. However, elements of other markets were also considered for contextualization purposes. Parameters include operating costs, which cover operating requirements such as labor, premises and capital requirements In addition to fundamental parameters there are the additional parameters, where an initial investment in fixed assets is included. For the manufacturing industry, the analysis is based on new premises located in industrial areas Source: Prepared by KPMG in Mexico 2012 Source: Prepared by KPMG in Mexico 2012 Tax Competitiveness of the Maquiladora Industry, a Study from the International Perspective KPMG. 19 ⚫ Eleven sectors were included in the analysis of the manufacturing industry, namely: aerospace, agrifood, automotive, chemical, electronics, medical, metallurgic, pharmaceutical, plastics, precision manufacturing and telecommunications. Based on this composition, a percentage equal to the share of the sector in Mexico was applied in order to allocate a certain weight to each operating parameter • All study figures are expressed in Mexican pesos (MXN), considering Table 1.12 the exchange rate prevailing on February 28, 2012, which is equal to 12.8577 MXN per 1 USD6 • The comparison between countries and their promoting regimes is based on a income statement analysis. All details are treated on a cash flow basis, except for the initial investment in fixed assets, which are affected by the corresponding annual depreciation • Promoting regimes offer various tax incentives depending on the Fundamental Operating Parameters 000 USD application of each. Incentives include exemptions and reductions in certain areas. However, the primary analysis focus is the cost structure represented by corporate taxes and social security taxes. All other taxes and contributions were irrelevant for the purposes of our analysis Our analysis was developed considering factors that are subject to change over a defined period of time, since there might be changes in the current legislation and market conditions USD MXN 26,010,610 Costs Salaries 2,023 2,022,960 Social security % on salaries Other social benefits 599 % on salaries 599,469 % on salaries 7,707,795 Leasing of industrial 363 362,902 4,666,082 Facilities 2,343 30,123,209 Transportation (includes various items) Public utilities 374 according to each country 51 2,098 Table 1.13 Interest and depreciation Other taxes (not representative) Other operational costs Machinery and equipment Office equipment Research and development equipment Inventories Land leased (square meters) 2,342,815 374,263 according to each country 4,812,155 according to each country 651,079 26,977,219 Additional Operating Parameters 000 USD 50,637 2,098,137 US12.8577 MXN 16,100 292 268 4,374 16,100,000 292,000 267,500 4,374,000 207,008,970 3,754,448 3,439,435 56,239,580 18,374 m2 Industrial facilities (square meters) 6,867 m2 Construction cost per square meter (in pesos) 5,241 Source: Prepared by KPMG in Mexico 2012 6 Bloomberg LP (http://www.bloomberg.com/markets/currencies/#11KPMG cutting through complexity kpmg.com.mx 01 800 292 KPMG @KPMGMEXICO f KPMG MÉXICO Consejo Nacional de la Industria Maquiladora y Manufacturera de Exportación index index.org.mx 55 22 82 99 00 @INDEX México findex La Industria Global de México Contacts Mario Hernández Lead Tax Partner, IMMEX Sector at KPMG in Mexico T: +52 65 66 29 00 20 E: [email protected] Luis Ricardo Rodríguez Partner of International Trade and Customs at KPMG in Mexico T: +52 81 81 22 19 46 E: [email protected] Juan Pizano Director of International Trade and Customs and Location and Expansion of Business at KPMG in Mexico T: +52 55 52 46 88 92 E: [email protected] Eloy Celis Tax Partner of IMMEX Sector at KPMG in Mexico T: +52 66 46 08 65 00 E: [email protected] Héctor Gutiérrez Audit Partner of IMMEX Sector at KPMG in Mexico T: +52 66 46 08 65 00 E: [email protected] Contacts Luis Aguirre Lang Chairman T: +55 22 82 99 09 E: coordinació[email protected] Carlos Palencia General Director T: +55 22 82 99 01 E: [email protected] EXPANSION 31 SÚPER EMPRESAS ESR 2012 EMPRESA SOCIALMENTE RESPONSABLE GLOBAL COMPACT APOYAMOS EL PACTO MUNDIAL © 2012 KPMG Cardenas Dosal, S.C. the Mexican member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. 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