Is a maquiladora right for you?
Thinking of setting up a maquiladora operation in Mexico? Consider this readiness checklist before you proceed. There’s more to a Mexican move than first meets the eye.
First established in the mid-1960s, maquiladoras now account for a large proportion of Mexico’s industrial capacity. Maquiladoras are either owned-locally or foreign-owned Mexican assembly plants that import materials and/or equipment from abroad, which they then use to produce goods to re-export.
Because the finished goods are shipped abroad, for instance to the country of the foreign owner, the maquiladora pays no duties or taxes on its imported materials or machinery — provided the finished goods leave Mexico within a specified time, which varies from 6 to 18 months, depending on the product.
They work best for labour-intensive manufacturing and make many different kinds of products, such as machinery, electronics, textiles, clothing, food, chemicals, tools, medical equipment and sporting goods. The concept has also been extended to the export of services. There are companies that import equipment and raw materials under the same maquiladora conditions, and the those companies provide those services to foreign clients. Call centres and software development firms would be two examples of such services. There are also maquiladoras that carry out research and development for various advanced technologies. Mexico places very few restrictions on what can be produced in a maquiladora and, as a result, these plants have become the country’s largest source of foreign income, exceeding even petroleum.
Tax and duty benefits of maquiladoras
Numerous Canadian companies, especially in a variety of light manufacturing and assembly sectors, are already operating successfully in Mexico’s maquiladora environment. By doing so, they benefit from several tax and duty exemptions, such as:
- avoidance of the General Import Tax, which varies according to the type of import;
- avoidance of VAT of 11 or 16 percent;
- reduced customs fees;
- easier import/export declarations;
- avoidance of taxes on purchases inMexico, provided the goods will be incorporated into the exported products; and
- the ability to use sectoral promotion (PROSEC) programs to eliminate or reduce most-favoured-nation import duties on various kinds of inputs.
Questions to consider
But do these benefits mean that shifting your Canadian production to a maquiladora is the right move for your company? To decide, carry out a readiness assessment that outlines specific cost savings, potential operational risks and regulatory requirements.
This assessment includes answering questions such as:
- Does a cost analysis suggest that the move will be an overall benefit? Will the move have a net total cost advantage for your company? To answer this, you should examine not only the duty and tax benefits, but also the location of the clients and the associated costs of transportation, production and warehousing, facilities, labour, and administrative and legal needs.
- Can you set up an inventory control system to ensure that you re-export goods and materials within the required times?
- Can you provide accurate qualification of origin for your imported goods? This is required for many types of tax and duty exemptions.
- Do you understand the exemption programs your company will be using, and how to follow the required procedures?
- Are any of your inputs subject to special non-tariff regulations, such as health or safety certifications?
- Do you have an audit plan to identify any risks associated with regulatory compliance?
Types of maquiladora
If you decide to go ahead and set up a maquiladora, you have three major ways to do it:
- You can set up a wholly-owned Mexican subsidiary, or a joint venture with a Mexican company, to establish and run the facility.
- You can use a shelter operator, which is a firm that provides all the labour and support services required for your operation. Essentially, this means you will be using a company owned by the shelter operator, which will receive and manage the machinery, equipment and inventory you need for production.
- You can subcontract with an existing maquiladora to manufacture your products. Your role in this case will usually be to provide technical assistance and quality assurance supervision.
Setting up a maquiladora
To qualify for maquiladora status, your company’s plans and intentions must be approved by the Mexican Ministry of the Economy (SECOM) (in Spanish only), which provides all the permits and licences required to establish and operate a maquiladora. The application must include complete information about:
- the product(s) to be assembled and/or manufactured;
- the manufacturing process(es) to be used; and
- the machinery, equipment, tools and auxiliary items to be temporarily imported intoMexicofor the manufacturing process.
Maquiladora operations, defined in what is known as IMMEX regulations, are complex. As well as carrying out a readiness assessment such as the one described above, you should retain qualified Mexican advisers who specialize in the IMMEX/maquiladora area, and follow their recommendations carefully.
For more information on doing business in Mexico, and to explore other manufacturing options, contact the Canadian Trade Commissioner Service in Monterrey, Guadalajara or Mexico City.
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