Tax Competitiveness of the Maquiladora Industry

6 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.