Some say Mexican tax reform could harm industry

REYNOSA — An aggressive business tax reform signed into law last week in Mexico City could significantly harm the competitiveness of U.S. companies operating maquiladoras in Mexico, according to business officials in both countries.

In an effort to more evenly tax businesses in Mexico, the Mexican Congress and President Felipe Calderón passed a sweeping tax called the Impuesto Empresarial a Tasa Única, or IETU, which replaces Mexico’s old asset tax on businesses.

The new law more than doubles the taxes maquiladoras pay to the Mexican government. It also could hurt the industry that sustains growth on both sides of the border.

The direct impact is still uncertain, though many say it will almost definitely hurt the maquiladora industry unless some provisions are made for international companies.

No maquiladoras have left the country yet because of the tax reforms, but many are reevaluating the financial advantages of operating in Mexico, said Randy Main, president of the Reynosa Maquiladora Association and manager of the Dulces Famosas factory, which makes candy such as Now and Later and Fruit Stripes gum.

The new tax reform is aimed at decreasing Mexico’s dependence on oil revenues and shifting that burden across the board to all businesses, according to a statement on Calderón’s Web site.

It also is intended to eliminate the skirting of taxes by a large number of companies and pay for infrastructure such as roads, schools and hospitals throughout the country.

Calderón says the reform proposal helps low-income people and small businesses who previously incurred an unfair tax burden.

But the measure means trouble for foreign investors.

“Maquiladoras are not opposed to pay an income tax,” said Javier Ledesma, operations manager at medical equipment maker Invacare’s Reynosa maquiladora. “We are opposed to the fact that we have already been paying our fair share. We want to support the Mexican government to improve the needs of the country, but in our case we are already paying our fair share of taxes.”

The plan creates a 17 1/2 percent flat tax on revenues in 2010, minus deductions for salary credits and some other expenses. For larger firms it would mean additional millions of dollars a year in taxes.

Under the North American Free Trade Agreement, cross-border companies get tax discounts on both sides of the border to eliminate paying twice and encourage cross-border manufacturing. Because of the way it’s structured, the tax reform could jeopardize that tax discount.

It’s still unclear whether the United States government will take action to eliminate the double-tax problem, said Scott Sneckenberger, an accountant for Michigan-based accounting firm Plante & Moran, which serves several international manufacturers.

Calderón may also be working on some orders that would at least partially exempt maquiladoras from the tax.

When the tax was at 19 percent, the 120 members of the Reynosa Maquiladora Association stood to lose about $150 million a year under the program, Main said.

Maquiladora industry lobbyists have made progress on reducing the tax from 19 percent to 17 1/2 percent, Main said. They also have convinced government officials to reduce the tax in 2008 and 2009 to 16 1/2 percent and 17 percent, respectively.

Still, many say their tax burden will be substantially increased, so much that it may affect the maquiladora industry’s ability to compete globally.

The maquiladora industry adds $2 billion a year to the Valley’s economy and represents about 32,500 jobs.

“They need to look at what they can do to make sure (the tax) doesn’t make the maquilas non-competitive in the market,” said Keith Patridge, president and chief executive officer of the McAllen Economic Development Corp.

Many are concerned the proposed law has already had an impact, though — particularly on companies considering doing business along the Mexican side of the border.

“It’s already affecting companies’ decisions to locate here,” Patridge said. “They’re all waiting to see what happens.”