Maquiladora Tax Benefits

Mexican maquiladoras have been open to U.S. companies since the mid-1960s. The major advantage of owning a maquiladora? The maquiladora tax benefits. Those, coupled with cheaper labor costs and quicker delivery, are reasons you should consider setting up a maquiladora in Mexico for your business.

Thanks to legislation like the IMMEX program and NAFTA, maquiladoras have some valuable tax benefits. Business owners looking to optimize manufacturing efficiency should be aware of these benefits. For some, maquiladora tax benefits can have a significant impact on profits, costs, and more. 

NAFTA Eliminates Many Tariffs 

No one was exactly sure what effect the North American Free Trade Agreement (NAFTA) would have on maquiladoras. But any uncertainty was short-lived as the trade accord appeared to further help maquiladoras. Northern Mexico became the hub for maquiladoras, especially along the U.S.-Mexico border. In fact, over 1 million Mexicans work in more than 3,000 maquiladoras in northern Mexico alone.

NAFTA brought along some policies that seem to be advantageous to American companies doing business in Mexico:

• As long as products used at least 50% of North American content, tariffs are waived.
• When the maquiladora program began in 1972, companies could sell 20% of their production in the Mexican market. With the implementation of NAFTA, that number rose to 100%. This greatly expanded U.S. companies’ market opportunities.
• Because NAFTA favors North American content, companies began looking for ways to keep production costs low. Five years after NAFTA appeared in 1994, maquiladoras increased at an 86% rate.
• Greater access to the Mexican labor force allows U.S. companies to produce goods at less expensive wages.
• Since 1994, trade with Mexico and Canada has tripled.

Tax Breaks in Mexico

In 1972, Mexico passed the maquiladora law. This led to a fast increase in the number of maquiladoras in Mexico because of the tax advantages. U.S. companies were able to pay less for the storing and making of their materials and goods. Here are some specific examples:

• American companies could import raw materials, machinery and supplies duty free. Once the product was built, as long as it was imported back into the U.S., there was no Mexican duty incurred.
• Because maquiladoras have no permanent inventory or fixed assets, there is no longer any asset income tax to pay.
• The shipper pays duties to the U.S. for the value added to the products manufactured in Mexico — not on the total value of the product.

Possible U.S. Tax Exemptions

There are two types of maquiladoras: sole ownership and shelter. The difference is in sole ownership, the U.S. company owns the maquiladora as a subsidiary. In a shelter set up, a Mexican company provides contract manufacturing services to the company and charges its customers a fee. For a shelter, a U.S. company will not be considered to have a permanent residency for up to four years. Once those four years expire, the company will be subject to having some or all of its production taxed.

There are more tax breaks a manufacturing operation can earn by being located in Mexico. A business can get a further tax deduction of 47% on benefits provided to its employees in Mexico. These include things like pension or retirement funds, overtime, profit sharing and other bonuses.

Another reason in setting up manufacturing in Mexico is the Value Added Tax credit. A VAT of 16% is due on temporary imports, but a maquiladora gets a corresponding credit for the full amount once it exports the product back to the U.S.

Maquiladora Tax Benefits = Lower Property Tax

With certain tariffs and taxes axed, establishing a maquiladora in Mexico is already attractive to foreign companies. Those advantages extend to the real estate market. If a U.S. business owns its Mexican subsidiary outright and the facility, it will generally pay lower property taxes than if the same factory is located in the United States as Mexican property taxes are lower.

• The Maquiladora Program was founded in Mexico in 1965. The initiative was enacted to increase foreign investment and stimulate Mexico’s economy.
• A new maquiladora can be put practically anywhere in Mexico with the exception of Mexico City, Monterrey and Guadalajara. These areas are already congested with a large industrial presence.
• About 90% of the goods produced in maquiladoras are shipped to the United States. For instance, shipping tomatoes from Mexico is big business.
• When owning a maquiladora, you are required to charge an “arm’s length” fee to the U.S. company the services are provided for.
• The Maquiladora program allows foreign investors to buy and own land — except within 62 miles of the border or within 31 miles of the coasts. In that scenario, the investor would have to partner with a trust company to buy the rights to the land.
• Something to consider when picking the site of your maquiladora is not just Mexican federal laws but also state laws. Much like the U.S., each of Mexico’s 31 states has its own set of regulations. So instead of choosing based on tax benefits alone, make sure the state you set the business in works toward your company’s goals. 

Manage Your Mexico-U.S. Freight With R+L Global Logistics

Setting up a maquiladora in Mexico might be the right call for your business to prosper. If that’s the case, let R+L Global Logistics handle your freight needs.

R+L Global Logistics offers comprehensive services for all aspects of supply chain management, has a 99.5% on-time rate and provides a distinctive customer experience. No matter whether arranging cross border shipping from Del Rio or Calexico, we have the services you need to get your freight moving.

Contact us today to receive a quote for your maquiladora cross border shipment and we’ll handle the rest.