Tax Competitiveness of the Maquiladora Industry

index 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.