Tax incentives in Mexico for the auto industry

Given the various positions on this issue, it is necessary to compare fiscal incentives in other countries and determine why tax incentives in Mexico are different in each case.

Recently, a much-discussed question has resurfaced in the country:  Are the tax incentives in Mexico that are extended to the automotive industry too generous? Often members of the private sector and the political class differ in their opinions.

The differing positions of public officials and industry executives on tax incentives in Mexico put stress on the automotive sector in Mexico. This is the case just as the industry struggles to overcome the downturn that the coronavirus pandemic has caused. Some of the industry’s difficulties in recent times include a shortage of semiconductors and huge costs associated with the development of technologies to make the transition to the production of electric and autonomous vehicles.

UNDERSTANDING TAX INCENTIVES IN MEXICO FOR THE AUTO INDUSTRY

To begin to break down the situation, we must understand its context. Investment tax incentives in Mexico are not offered to the industry just for the sake of it. They have benefits as well as costs. According to the Economic Commission for Latin America and the Caribbean (ECLAC)/Oxfam International, in its document Tax Incentives for Companies in Latin America and the Caribbean: ‘an incentive policy will be cost-effective if the benefits that it results in (economic, social and environmental) outweigh the associated costs.”

According to the ECLAC study,  Mexico is one of the most advanced countries using cost-effective tax incentives. This is due to instruments such as deductions, tax credits, and tax deferrals.

It is imperative to know that although tax incentives in Mexico for the auto industry may become tax expenditures (loss of collection), not all spending corresponds to incentives. Some may simply be tax benefits. Explained another way, every incentive implies a benefit, but not every benefit constitutes an incentive. The main objective of an incentive is to promote a change in the behavior of economic actors; for example, to change the composition of the GDP of a state like Guanajuato from a predominantly agricultural entity to one that is primarily engaged in manufacturing (which is a reality today).

In general, Mexico still has a way to improve tax incentives’ governance. There needs to be an emphasis on deadlines for preferential regimes and periodic evaluations of the cost and effectiveness of preferential tax treatments.

THE CASE OF MEXICO WITH THE AUTOMOTIVE INDUSTRY

Raquel Buenrostro Sánchez, Head of the Tax Administration Service, recently was quoted in the Economista magazine that the Mexican automotive industry “enjoys many tax benefits compared to those in other countries.”

Let’s compare this state of affairs with what Federico Ovejero, GM’s Vice President for Argentina, Paraguay, and Uruguay, communicated to the publication Infobae: ‘We did a study three years ago with an international consulting firm to find out the competitiveness of the vehicles produced in Brazil, Mexico, and Argentina. It is 30% more expensive to build a car in Brazil than in Mexico. Additionally, Argentina is 60% more expensive than Mexico to build a car. ‘ This is, in part, due to tax incentives in Mexico. It can be said that Mexico has better tax benefits than its main Latin American competitors. 

In Mexico, a 25% income tax deduction is available for investors in the automotive sector and a 30% credit for R&D projects. This is in addition to an exemption from indirect taxes and tariffs for IMMEX companies, according to ECLAC. According to the study mentioned above, tax expenditures for these investment incentives in Mexico are less than 0.9% of GDP. This is one of the lowest percentages in Latin America.

For its part, the SAT recently presented a table that demonstrates that the automotive sector has an average effective tax rate of 1.39% for assemblers and between 2.17% and 4.67% for companies engaged in the production of auto parts.

Taking these contrasting data into account, some may ask: Are there too many tax incentives in Mexico? We can assume that: there are more tax incentives in Mexico for the automotive industry than in other countries, but not so many as to represent excessive tax spending.

Daniel Romo, Director of Intelligence at the Automotive Directory, has researched the true magnitude of the support for the industry in Mexico and its results: ‘In general terms, the incentives have not only been fiscal but, also, critical infrastructure is often negotiated (such as land, connection to railways or roads, urbanization, etc.). Additionally, in place of tax incentives in Mexico, automotive suppliers also receive economic assistance that includes help in the training and qualification of personnel and the costs related to bureaucratic procedures. In most cases, Incentives are a package of different considerations negotiated and tailored to each specific case.

A DELICATE BALANCE

A review and study of the tax incentives in Mexico that are in force for the automotive sector in Mexico are necessary. This is because they have not been conducted during several administrations. A careful review of the considerations is essential so that  Mexico remains one of the leaders in capturing FDI in the world.

As one of the world’s major automotive manufacturers, Mexico cannot afford to ignore policies that make the industry globally competitive. Therefore, finding a balance in this area is of immense importance. This is especially the case when the successes of having tax incentives have translated into hundreds of thousands of jobs and tens of billions of dollars in investments. This economic activity has positively transformed entire regions such as the Bajío into the most prominent areas of automotive production in the country, the continent, and the world.

The key seems to lie once again in the governance and transparency of the automotive industry, as well as in the responsible use of tax incentives in Mexico. How can the country strike a balance between the continuation of tax incentives and the increased need to collect revenues from large corporate taxpayers? That is a question that only time can answer.