U.S., Mexico Reach Deal on Factory Tax

In a victory for Mexico and the U.S. owners of its thousands of maquiladora factories, Mexico and the United States on Friday announced a deal boosting Mexico’s tax revenue from the factories by 50% and cutting Uncle Sam’s share by the same amount.

The agreement heads off, for at least three years, the threat that the firms would face double taxation--a prospect that could have cooled the industry’s rapid growth in Mexico and diverted new factories to other Latin American nations.

The nominal loser is the U.S. Treasury, which will forgo about $120 million a year in tax revenue. The U.S. foreign policy rationale is that continued economic growth in Mexico, of which maquiladoras are a critical part, has a far greater long-term economic benefit to the United States.

Representatives of the maquiladora industry hailed the accord as a step that averts higher taxes and resolves an uncertain future for a sector that has invested more than $5 billion in factories in Mexico in the past five years alone.

Mexico Deputy Finance Secretary Tomas Ruiz said the deal would boost Mexico’s tax revenue by about $120 million; the maquiladoras now generate $200 million in such revenue.

But he noted that the maquiladoras’ tax burden won’t change because the deal calls for the U.S. Internal Revenue Service to give the companies tax credits for the extra Mexican taxes.

From the U.S. perspective, it is a tacit admission that Mexico has been receiving less tax revenue from the maquiladoras than it would receive under traditional international tax treaties.

The special low-tax treatment for the maquiladoras was originally put in place to attract U.S. investment and create jobs in Mexico. The new arrangement begins to treat the factories more like other overseas affiliates of U.S. firms.

As such, it reflects Mexico’s growing clout as a trading nation because of its role--thanks in large part to the North American Free Trade Agreement--as the world’s most advantageous export platform for any manufacturing company seeking to ship products to the United States. As its standing has grown, Mexico no longer feels it has to offer rock-bottom tax rates to lure foreign investment.

“I see this as very positive. We were hoping for a solution of this nature,” said Humberto Inzunza, president of the National Council of the Maquiladora Industry. “This gives us certainty for the next three years and gives us the opportunity to keep negotiating toward a permanent solution.”

Mexico had enacted a law that would have shifted the status of the nation’s 4,500 maquiladora plants to that of “permanent establishments” as of Jan. 1. That would have subjected the assembly plants to normal Mexican income taxes--and potential double taxation in Mexico and the United States.

The deal announced Friday delays that change for three years and instead raises the tax rate somewhat.

The tax dispute stemmed from Mexico’s desire for more taxes from the booming maquiladoras, as well as from globalizing U.S. companies’ need to keep their costs as low as possible. Some companies had openly threatened to move their factories elsewhere in Latin America or to Asia if the issue wasn’t resolved.

Statistics announced this week on the maquiladora industry’s performance underscore just how important the assembly factories are for the Mexican economy.

Maquiladora production grew 16.3% in August over the previous year, and employment rose 14% in the same 12 months to 1,165,194 people. The booming industry, focused on the border but rapidly spreading throughout Mexico, accounted for 46% of Mexico’s $40 billion in exports in the first eight months of this year, Commerce Secretary Herminio Blanco Mendoza told a maquiladora conference this week.

“We want to increase public revenues precisely so that we can invest productively in infrastructure that gives the maquiladoras conditions of equality to enable them to compete effectively with the rest of the world,” Ruiz said.

He said negotiations with the industry and with U.S. officials would resume in 2000, with the goal of reaching a permanent agreement by the year’s end on the tax regime to take effect in 2003. That would give companies enough time to plan any further investments, he said.

Inzunza had complained in recent months that uncertainty over the tax situation would scare away investors who have flocked to Mexico since the maquiladora system was created in the mid-1960s.

“We still only have a clear situation for the next three years,” Inzunza noted Friday. “And this will still be somewhat risky for companies considering long-term investments.”

The current system allows most maquiladoras to pay their income tax in the form of a percentage of their fixed assets in Mexico, rather than on profits generated here. Under the new program, that amount increases to 6.9% from 5%.

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Smith reported from Mexico City and Kraul from San Diego.