Deloitte, the accountant consultant firm, through the Otay Mesa Chamber of Commerce, offered a web seminar for American companies who operate in Mexico, where they cleared up the most important effects the tax reform proposed by President Enrique Peña Nieto would have on them. The conclusions were not very positive.

The main subjects were the consequences of standardizing the VAT in the border with the rest of the country, the effects that would be caused if this increase to the VAT is applied to imports from manufacturing companies and the 10% tax on the companies dividends.

First of all, the issue of the VAT standardization in the border needs to be set aside, in the spirit of making the subject more easier, it really is about increasing the tax in the border; a 5% increase going from 11% to 16% to the Value Added Tax.

The most notable impact for the companies working at the border would be through the manufacturing industry, which really is a fiscal area (a special treatment given to some businesses) where they allow foreign companies to work in the country paying less taxes so they can establish and create jobs in the country, in exchange they receive savings when manufacturing products, although the manufacturing industry in the region goes far beyond that.

A factory receives foreign and national providers, and exports products to the exterior with the effort of being continually known as a foreign company producing in Mexico. The objective is to avoid being recognized permanently as a Mexican company, this way they avoid a lot of national legal and fiscal obligations, they do not pay VAT or other Mexican taxes this way.

This diagram was presented in the web seminar given by Deloitte, where they clear up a bit about the essence of what manufacturing company in Mexico is :

This way manufacturing companies can import materials, machinery and equipment without paying import taxes or VAT, having the finished products being exported.

But the Tax Reform would change this.

All transactions with "foreign countries" and manufacturers or between foreigners only, would no longer be VAT exempt. President Peña Nieto's government is doing this with the final objective being that manufacturers will seek out Mexican providers more rather than importing, but the questions that the border industry is asking is, what will we do in the meantime while we find these local providers? It may result in the fact that many of the companies located in the border find the costs too high, and decide that it's not worth looking for national providers.

The reform will also practically force foreign companies to become Mexican companies after working 3 years as manufacturers. It will be much more difficult for manufacturers to avoid being classified as a permanent company in Mexico, and in order to maintain themselves registered as manufacturers they will need to export at least 90% of what they produce.

It should be noted that there is a possibility of requesting a VAT refund for the costs they will incur on the products being imported for manufacturers, such as materials, machinery and equipment, but it could take over 6 months, and would represent thousands even millions of dollars for a lot of these companies.

Deloitte also published a release through the Otay Mesa Chamber of Commerce, where it comments that these changes go hand in hand with the "Governments objective to eliminate all tax exemptions to all of those who are not under privileged", while the reforms towards the manufacturing area have a main objective of "supervising and controlling manufacturing operations better"

Outside of the manufacturing industry, there are other ways the tax reform will affect American and other foreign companies.

There will also be a 10% tax on dividends (profits) of manufacturing companies and other Mexican or foreign companies which come and go into the country. Basically, these are the governments attempts to eliminate incentives so that the earnings made by Mexican and foreign companies stay inside the country.

The web seminar concluded with the advice to foreign companies with presence in Mexico to prepare by modifying the structure of their factories or investments in the country, be it reorganizing the entire corporate structure or moving stocks in the meanwhile.

Jose.Sanchez@sandiegored.com

Daniel.Aguilar@sandiegored.com