Whether you’re already in Mexico or thinking of making the move, you’re probably already familiar with the many benefits of manufacturing in Mexico. However, with those benefits come new tax laws you’ll need to navigate.
Here’s what you need to know about taxes in Mexico and how you can stay compliant.
MAQUILADORAS AND TAXES: AN OVERVIEW
As a foreign manufacturer, your first step to understanding tax compliance in Mexico is understanding the maquiladora industry. Simply put, a maquiladora is a factory in Mexico owned by a foreign company that exports out of the country. The maquiladora program (IMMEX program) is a program that allows for duty-free import of manufacturing materials.
Thanks to its significant cost-saving benefits, this program is one of the biggest reasons companies from across the globe choose to manufacture in Mexico. However, if companies truly want to take a low-cost approach to manufacturing, they need more than just duty-free imports.
From profit-sharing to transfer pricing, foreign companies need to be aware of the other tax laws with which they’ll need to comply. Luckily, Mexico also offers numerous support options that can help manufacturers adjust to these new tax systems.
The Value-Added Tax (VAT) on imported goods is usually 16% for manufacturers, but companies can forego this tax when they work as part of the IMMEX program. Under IMMEX, the VAT tax rule dictates that manufacturers can temporarily import goods at a 0% tax rate, but those goods must be exported out of the country as a finished product within a specific timeframe.
This rule is highly beneficial to manufacturers, but receiving VAT certification is a complicated process that can take several weeks to complete. During that time, manufacturers would need to pay the standard tax rate or temporarily hold off on importing. To avoid delays, U.S. manufacturers often operate under a shelter company that has certifications already in place.
In addition to the IMMEX program’s tax benefits, U.S. manufacturers in Mexico are able to take advantage of the country’s many free trade agreements (FTAs). The USMCA, for instance, allows for tariff-free trading between North American nations, with the goal of boosting North American manufacturing. However, many industries are subject to the rule of origin, meaning products may be subject to tariffs if they contain significant amounts of material sourced outside of the U.S.
Mexico’s many other free trade agreements also offer manufacturers incentives to move their manufacturing to Mexico.
- Under the EU-Mexico Association Agreement, 99% of trade between Mexico and the EU is tariff-free
- The Pacific Alliance eliminates 90% of tariffs between Chile, Peru, Columbia, and Mexico
- The Comprehensive and Progressive Agreement for Trans-Pacific Partnership eliminates all tariffs among the 11 member nations
Thanks to its many FTAs, Mexico is an ideal manufacturing destination for all industries, but to realize the benefits, manufacturers will need to figure out the regulations and certifications applicable to them. To better navigate these complexities, many manufacturers choose to forego establishing themselves as their own legal entity. Instead, they operate under a shelter organization, so they can immediately reduce costs and startup times while lowering risk.
CORPORATE INCOME & TRANSFER PRICING
Under Mexico’s Income Tax laws, maquiladoras must follow transfer pricing regulations, which were created to prevent multinational organizations from manipulating where they are taxed.
Arm’s-Length Prices: To ensure multinational companies don’t treat their own entities more favorably, Mexican tax authorities require them to show how they determine transfer prices. In other words, companies must charge their related entities the same price as they would unrelated parties if they were to undergo the same transaction of goods.
Safe Harbor: Instead of determining arm’s-length prices and maintaining documentation, IMMEX manufacturers can declare a “safe harbor.” This means the IMMEX company reports a taxable income of either 6.9% of the total value of assets or 6.5% of operating costs. The manufacturer is then required to pay 30% of whichever is higher.
Failure to comply with income tax laws can lead to slowed production, fines, and even further legal action. A safer option is to work with shelter companies, which take on any tax liabilities and can help you avoid potential double taxation tax treaties.
The United States and Mexico share many tax law similarities, but profit sharing is one of the greatest differences. While specific amounts can change depending on current economic circumstances, in general, employers are required to share 10% of their income.
U.S. companies often mislead themselves by assuming profit sharing is similar to the 401k contribution model. There are, however, very clear and major distinctions. Profit-sharing in Mexico is not a deferred portion of an employee’s salary, and it is legally mandated, unlike profit-sharing in the United States.
Shelter companies can help manufacturers navigate the rules and find the most cost-effective option. Under the shared legal structure, manufacturers are able to reduce their sharing percentage. Additionally, with the expertise of the shelter company, manufacturers may be able to substitute profit-sharing taxes with employee bonuses or determine a different alternative.
Support Options for Tax Compliance in Mexico
Operate under a NAPS shelter company
Setting up under an IMMEX shelter company has significant advantages for manufacturers expanding into Mexico. Working with one of our shelter organizations not only gives you instant access to IMMEX tax benefits but our full suite of accounting services as well. We take over all aspects of your payroll and tax administration, ensuring complete compliance with all of Mexico’s social security, fiscal, and tax laws.
Take advantage of our Administrative and Compliance Management Program
Even businesses not interested in shelter manufacturing can benefit from added tax compliance in Mexico for support. That’s why we created our Administrative and Compliance Management Program. Whether or not you choose the shelter route, we’ll handle your tax processing and compliance (and just about everything else), so you can focus on your production.
Want to know more about our proven approach to successfully setting up business in Mexico? Contact NAPS today to learn about the benefits of our services and find the path that works best for you.