Maquiladoras. Get the facts.
At Made In Mexico, Inc., we believe that information is power. We are confident that an informed client will choose us for their Maquiladora Management Services because of the caliber of our successful team of professionals, our commitment to excellence, and our high value, competitively priced services.
Following are our most frequently asked questions (FAQs) and a list of terms and definitions regarding the Maquiladora industry. These have been divided into General Questions, Made In Mexico, Inc. questions, and Administrative, Human Resources, and Import-Export/US-Mexican Customs issues.
What are Maquiladoras?
The word “Maquiladora” comes from colonial Mexico when “maquila” was the charge that millers collected for processing other people’s grain. Today, the same terms are used to describe companies which process (assemble and/or transform in some way) components imported into Mexico, that in turn, are exported (usually to the United States). Other synonymous terms are: Offshore operation, Production sharing, Twin plants, and In-Bond.
How did the Maquiladora Program get started?
In 1964 the Johnson administration, under domestic political pressures, ended the Bracero Program. Under this program, Mexican nationals had been allowed to temporarily work in the U.S. agricultural sector. This had created a huge influx of Mexican workers coming from the interior of Mexico to the border cities seeking employment in the U.S. After the elimination of the Bracero Program, many stayed hoping the program would be reinstated and continued seeking employment. In 1965, the Mexican government responded by creating what was originally known as the “Border Industrialization Program” to alleviate high unemployment in the border region and to attract foreign investment and technology into Mexico; and in 1966 the maquiladora program was born.
How much money can I expect to save if I move my operation to Mexico?
On average, clients can expect to save as much as 75% on labor costs when operating in Mexico.
Can foreigners own a Mexican Corporation?
Yes. Two shareholders are required and they can be either two individuals, two companies or any combination of the two.
Do I need a Mexican partner to operate under the maquiladora program?
Maquiladoras can be 100% foreign owned, enjoying the benefit of being exempted from the Foreign Investment Law which prohibited foreign majority ownership in Mexican corporations.
Can foreigners own land in Mexico?
Yes, 75km from the border and 50km from the sea coast. Property is held in trust through Mexican banks.
Are you a government agency?
No, Made In Mexico, Inc. is a private California company owned by Dale Robinson. To find out more, see our U.S. Management Team page.
What are the major benefits of opening a facility in Mexico?
There are many, but the main benefits are lower labor costs, proximity to the U.S. market and opportunities to sell into the Mexican market and other markets that Mexico has trade agreements with. We deal primarily with the Tijuana border, and handle Tijuana border crossing issues with ease.
How can I profit from Made In Mexico, Inc.’s programs?
Made in Mexico Inc.’s labor saving opportunities will maximize your profits. We offer an entire team of highly skilled professionals in the areas of ADMINISTRATION, IMPORT/EXPORT, and HUMAN RESOURCES that are dedicated to the success of your maquiladora operation. In addition to our philosophy of complete honesty and transparency with our clients, we operate our own subcontract facility which allows us to see things from the perspective of a manufacturer in Mexico. We invite you to tell us more about your goals and needs so that we can tailor a program specific to you.
What is your relationship to Mexican Technology, Inc.?
Mexican Technology, Inc. is Made In Mexico, Inc.‘s complementary company created for our subcontracting business, whereasMade In Mexico, Inc. focuses on our Consulting and Maquiladora Management Services business.
What is a subcontracting arrangement?
Under this arrangement, Made In Mexico, Inc. assembles certain items according to the specifications of the foreign based client. The client provides the raw materials, equipment, and components. Made In Mexico, Inc. is responsible for all the manufacturing and assembly work, as well as the import-export process.
What is a “Cost-Plus”/Shelter operation?
Under this arrangement, Made In Mexico, Inc. provides U.S. and foreign manufacturers customized administrative services for their Maquiladoras. This allows the client to maintain complete control over the Mexico production management while enjoying the security of knowing that all administrative requirements are being met by the offshore operation. Our system is unique because all expenses are passed on to the client at cost. The “plus” refers to our administrative fee which is easier to understand and eliminates any misunderstanding in the total costs of operating in Mexico. For more information, please see our “COST-PLUS”/SHELTER page.
Is there a time limit to my operation under Made In Mexico, Inc.’s “Cost-Plus”/Shelter program?
Made In Mexico, Inc. offers flexibility. You are able to choose from the menu of services we offer and are billed for only those services provided based upon the number of Mexican employees and the hours they worked. A typical contract last three years; however, other options do exist.
What is Made In Mexico, Inc.’s “Share” program?
Made In Mexico, Inc.‘s Share program is a “Cost-Plus”/Shelter operation that is housed in our own Tijuana subcontracting facility. This is usually done when a client needs 1,000 to 5,000 sq. ft. Since such buildings are difficult to find, Made In Mexico, Inc. divides space in its own facility to accommodate the needs of such companies. Some leasehold improvements are made to meet individual requirements. All labor related expenses are passed on at cost. A fixed hourly fee is charged for all overhead and G & A expenses. This program allows for flexibility to grow and startup in a very short lead time.
What is a “turn-key” or “stand-alone” operation?
In a “turnkey” or “stand-alone” arrangement, Made In Mexico, Inc. would provide a client with all the necessary assistance and documentation to setup their facility in Mexico and provide expert consultation, business advice and implementation of their own entity. Once the operation is setup, the client may choose to continue using Made In Mexico, Inc.‘s services on a as-needed basis. For more information, please see our BUSINESS PLANNING and CONSULTING page.
What if I need additional space?
Made In Mexico, Inc. has its own facility in Tijuana, Mexico where our subcontract operation and some of our “Share” customers are housed. If it is mutually agreed that your operation be housed in our facility and you require special leasehold improvements, our staff will be happy to recommend reputable Mexican contractors (usually ones we have previously worked with) and obtain quotations. If you approve the job, the expense would be passed on to you at cost. If however, you need additional space, we can assist with site selection and negotiations.
What is SE?
SE is the Secretaria de Economia (Ministry of the Economy) in Mexico. They provide all the permits and licenses to operate a maquiladora. Made In Mexico, Inc., has strong ties and is actively involved with SE. At the local, state and federal levels, this allows us to foster and maintain valuable contacts with Mexican government officials and have the expertise to ensure compliance to local laws and regulations.
What permits are needed to operate a maquiladora in Mexico?
Made In Mexico, Inc. would ensure that you have all the required licenses and permits to operate a maquiladora. You need a SE permit that allows you to operate under the Maquiladora program. To qualify, the finished product must have been assembled in Mexico, in whole or part, of foreign components.
How long does it take to get them?
Six to eight weeks under normal conditions, and as little as four weeks in urgent cases.
How long does it take to obtain a Mexican Corporation?
Four to five weeks under normal conditions, however if there is a need to expedite the process, Made In Mexico, Inc. has new, never before used, Mexican Corporations that are ready for our clients immediate use.
What is transfer pricing?
Since the beginning of the Maquiladora industry in Mexico in 1965, the Mexican government considered the Maquiladora industry as a “Cost Center” for income tax purposes; that is, a small percentage of income tax was paid to the Mexican government on this basis.
In 1994 along with the advent of NAFTA, Mexico and the U.S. negotiated a Tax Treaty designed to avoid the double taxation of the Maquiladora company in Mexico. In 1995 Mexico joined the OECD (Organization for Economic Cooperation and Development), and developed policies for applying arms-length transfer pricing standards for inter-company transactions (foreign company’s payments for the manufacturing services of their Maquiladoras). The result is that the Maquiladora was recognized as a “Profit Center” and taxed as any other Mexican company.
Mexican Transfer Pricing rules for determining the Maquiladoras income are generally consistent with the U.S. Transfer Pricing rules, so the U.S. company should receive a deduction for the Maquiladora payment. This program allowed the calculation and payment of income taxes based on two options: a “Safe Harbor” alternative, and the second, aimed at obtaining a resolution on transfer pricing from fiscal authorities, referred to as an “APA” or Advanced Pricing Agreement.
Unfortunately, Mexico in 1999 adopted a “revenue at all costs” attitude and made sweeping changes to the aforementioned industry accepted Transfer Pricing policies to become effective for fiscal year 2000. These changes have created a high level of uncertainty as Mexico proposes to effect a “Permanent Establishment” rule for the taxing of all maquiladoras.
Since then, the industry has been negotiating with both the Mexican and U.S. tax authorities and this resulted in a new Intergovernmental Agreement that was agreed to in October of 1999. The end result of this new Agreement is the Mexican government has increased the level of income taxes paid in Mexico and the U.S. government has agreed to allow U.S. companies a deduction for payments made by their maquiladoras in Mexico.
There are also some choices for the payment of income tax in Mexico to avoid Permanent Establishment and that is defined as Option I which is a “Safe Harbor” calculation based on the higher of either 6.9% of the value of the assets or 6.5% of the Maquiladoras deductible operating expenses or Option II that allows for the obtaining of a Mexican APA (Advanced Pricing Agreement). If the Maquiladora does not choose either of the above Options, then it will be subject to Permanent Establishment taxes.
There are a number of other important issues that must be considered by the Maquiladora as it does business in Mexico relative to income tax, and is best discussed with your U.S. tax advisor and a competent Mexican tax expert. In some cases it may benefit the U.S company to operate in Mexico under the corporate sponsorship of Made In Mexico, Inc.; this option must also be studied before a decision is made on corporate ownership.
What is the permanent establishment rule?
Permanent Establishment is defined by the Tax Treaty as providing Mexico the power to tax the U.S. company on an undefined portion of its Income… where a Mexican person, other than an agent of independent status….. Habitually processes in Mexico on behalf of an U.S. enterprise, using assets furnished, directly or indirectly, by that enterprise or any associated enterprise.
What is IETU?
On November 5, 2007 Mexico issued a Presidential Decree moving IETU into law effective January 1, 2008. The IETU is a “flat rate tax” that affects the Maquiladora industry in Mexico. This new tax functions as a minimum corporate tax and replaces the Asset Tax in Mexico. The tax base is determined on a cash flow basis and the income tax is still based on accual of revenue and deductions. The calculation of the Single-Rate tax is determined by computing a tax base (taxable revenue less allowable deductions), and applying a flat rate (16.5% in 2008 and 17% in 2009). Needless to say the IETU tax has proved to be quite controversial and complicated and most industry observers see 2008 as a key year for additional modifications to this “flat rate tax” scenario in Mexico. We would suggest interested companies contact their international tax advisors to see how this tax could affect their Maquiladora operations in Mexico.
Who does the hiring and firing of employees?
You choose who works for you. Made In Mexico, Inc.’s expert Human Resources department does the recruiting of employees based on your specifications and requirements and in compliance with Mexico Labor Laws. We recommend you come to us before hiring and firing employees because labor laws in Mexico are strictly upheld and are quite different from those in the U.S. Our Human Resources department has the expertise to assure your compliance with Mexican law while maintaining company interests.
Do my foreign employees working in Mexico need U.S. passports, visas, what?
Yes, our Human Resources department will advise you on what is required and take you step-by-step through the process to meet all Mexican government requirements. This includes securing a 180-day temporary visa “FMN,” to a more permanent FM3 visa.
How do you help increase production and decrease turnover?
Our Human Resources department will help you to create, develop and maintain recognition programs that will help you increasing your production and reducing turnover.
Are Maquiladora products subject to tariffs?
No tariffs are paid on raw materials, equipment, and components which are temporarily imported into Mexico for manufacture, assembly, and/or processing; although there are some instances where some non-NAFTA items could be subject to Duty, Duties are paid on the value added to the original components unless they are sourced from the NAFTA regions (Canada, U.S., and Mexico), in which case they are duty free.
When my plant is in operation, how do my materials and production move in and out of Mexico?
A bill of materials and an equipment list are included in Made In Mexico, Inc.‘s Startup Manual. With the information you provide us, our Import / Export department will submit the required documentation to acquire the necessary permits to import the needed materials and equipment into Mexico and to move your finished product out.
What is the Mod Act?
The main purpose of the Mod Act (Customs Modernization Act) is to streamline and automate the U.S. Customs Service, improve compliance with trade laws and provide safeguards, uniformity and “due process” to importers. The Mod Act is based on two basic tenets, shared responsibility and informed compliance. Shared responsibility means that importers and U.S. Customs have a mutual responsibility to ensure compliance with trade and Customs laws. The purpose of informed compliance is to maximize voluntary compliance. The informed compliance concept imposed many publication, consultation and notice obligations on Customs.
What are the greatest consequences of the Mod Act for me?
The Mod Act fundamentally altered the relationship between importers and the U.S. Customs Service. The Act shifted the legal responsibility for declaring the value, classification and rate of duty applicable to entered merchandise to the importer and requires importers to use reasonable care to assure Customs is provided accurate and timely data. Customs retains the ultimate responsibility to “fix” the value, classification and rate of duty. Informed compliance is based on the premise that, in order to meet their responsibilities, importers need to be clearly and completely informed of their legal obligations. Under the Mod Act, Customs will spend more time and use more effective methods to inform the public with the goal to maximize voluntary compliance and reduce the number of instances where enforced compliance is necessary.
How will NAFTA 2001 affect the Maquiladora Program?
Effective November 20th, 2000, Non-NAFTA originating raw materials and components incorporated into goods exported to the United States or Canada will pay, within 60 days, the lesser of the Mexican import duties on the raw materials or components or the U.S. or Canadian import duties on the finished goods. The Mexican government has publicly stated that duty drawback will be phased out for all equipment imported into Mexico after the year 2000. As a result, machinery and equipment imported into Mexico for use in Maquiladora operations will be as a “definite” import and subject to corresponding duty obligations. However, the Mexican government has committed to the reduction of the duties on machinery and on raw materials imported into Mexico for incorporation into finished goods exported to the U.S. or Canada. Maquiladoras can in fact petition the Mexican government for the reduction of duties on such imported equipment and components.