What U.S. Companies Need to Know about Taxes and Compliance when Moving Manufacturing to Mexico
12.29.21
There is always a learning curve when operating in any foreign country. For companies considering Mexico manufacturing for the first time, there are several areas to consider, which include the responsibilities of taxes and compliance. The first step when manufacturing in Mexico is registering with the IMMEX maquiladora program.
A maquiladora is defined as a factory in Mexico that’s owned and run by a foreign company. The IMMEX program offers a significant cost benefit by exempting the 16% value-added tax (VAT) on temporarily imported raw goods, materials, and equipment used for the manufacturing process. The VAT is a one-time tax payable on all types of operations and only companies approved for certification can claim the exemption.
Though highly beneficial, it can take several weeks before approval is confirmed unless the foreign manufacturer partners with a shelter company. In this case, the tax exemption applies from the first day of operations. However, there are other taxes and compliance measures that apply in order to operate legally in Mexico. The basics of which include:
- Income Tax
- Employee Profit Sharing
- State Payroll and Property Taxes
Income Tax
Under Mexican Income Tax Law, IMMEX maquiladoras must comply with Transfer Pricing Rules. They must either:
- Prepare and maintain transfer pricing documentation determining an arm´s length level of profitability for the IMMEX maquiladora.
OR
- Declare a “safe harbor” by reporting a taxable income of either: 6.9% of assets used in IMMEX maquiladora activity (including the inventories and fixed assets owned by the foreign related party) or 6.5% of total operating costs and expenses of the IMMEX maquiladora. The manufacturer is responsible for paying 30% of the total amount of whichever of these is higher.
Additionally, per the Advanced Pricing Agreement Miscellaneous Rules, Mexican Tax Authorities can perform scheduled site visits to obtain and verify information if the foreign taxpayer information that’s supplied is insufficient. Failure to meet compliance can result in fines, production delays, and/or other legal action.
Employee Profit Sharing
Starting in the second year of operation, employers manufacturing in Mexico are obligated to share 10% of their fiscal profits with their employees. One of the benefits of operating under shelter is companies can considerably reduce this percentage by operating under its shared legal structure. Also, depending on workforce availability, it could be more convenient for companies to compensate their employees with a bonus that substitutes the profit-sharing tax to remain competitive. A shelter can help companies determine which route is most cost-effective.
State Payroll and Property Tax
The state payroll tax rate differs per region but averages 2% of the total payment that a worker receives. Property tax rates also vary with areas closest to the U.S./Mexico border often among the most expensive. U.S. and other foreign companies manufacturing in Mexico should consider these additional taxes as they choose where they will set up production. To help determine the most viable location, a shelter company like IVEMSA can put together a site selection analysis that weighs pros and cons and calculates cost estimates, including taxes, of different regions.
Working with a Shelter Company Provides Tax and Compliance Expertise
Because of the complex nature of taxes and compliance regulations, it’s best to partner with a shelter company that can provide the necessary expertise and experience. The role of a shelter alleviates the weight of administrative responsibilities from foreign manufacturers so they can concentrate on the manufacturing process. It also reduces the learning curve and minimizes legal and financial risk since the shelter provider serves as the legal entity.
In addition to the basics of what’s required to operate in Mexico as a foreign manufacturer, there’s also changing legislation to regularly be aware of. A shelter company ensures compliance is consistently met as part of its broad service offerings. To learn more about the benefits of working with a shelter company, contact IVEMSA today.
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