Copyright 1999 Times Mirror Company
Los Angeles
Times
October 12, 1999, Tuesday, Home Edition
SECTION: Part A; Page 1; Financial Desk
LENGTH: 1711 words
HEADLINE:
MEXICO WALKING FINE LINE TO TAX MAQUILADORAS
BYLINE:
CHRIS KRAUL and JAMES F. SMITH, TIMES STAFF WRITERS
DATELINE: TIJUANA
BODY:
*
Lured by minuscule taxes, cheap labor and proximity to the U.S.
market, corporate America has flocked to Mexico in the last two decades, opening
thousands of maquiladora factories in a country hungry for jobs and investment
dollars.
Now Mexico, brimming with confidence but hard up for money,
wants to collect new taxes from the export-driven factories. And that has opened
a taxing can of worms.
Barring a change in the U.S.-Mexico income tax
treaty, a Mexican law due to take effect in January would suddenly subject the
U.S. firms to double taxation--unless Uncle Sam is willing to give up its right
to tax the firms' Mexican operations.
Predictably, the maquiladoras are
howling. Some are threatening to move their factories to China or, more
credibly, to Honduras, El Salvador and other Central American countries that
have established equivalents to the maquiladora system. Then again, abandoning a
cheap-labor nation that shares a free-trade border with the world's largest
market seems an unlikely course of action.
Indeed, the dispute brings
into focus a maturing Mexico, one that has much to offer foreign businesses and
no longer feels it has to give away the store to attract them.
"Mexico
has tremendous leverage now with these companies," said Allen Delattre, a
consultant for Anderson Consulting in Los Angeles. "It has gone from being a
low-cost, convenient labor provider to being a viable competitor in its own
right. The businesses there now have momentum bigger than the maquiladora
program, bigger than NAFTA and bigger than international taxation issues."
Nor is there any doubt about the justification for greater tax revenue:
It's needed to tend to the squalor that has accompanied the explosive growth of
the maquiladoras themselves.
Still, resolving the tax dispute sensibly
will be a measure of Mexico's maturity as a trading nation. A heavy tax burden,
or a prolonged period of uncertainty, could cool the ardor of prospective
maquiladoras. They could look to Honduras, where dozens of maquiladoras already
employ more than 100,000 and enjoy comparable tax and duty advantages with the
United States.
"Mexico has a fine line to walk," Delattre said. "If the
tax changes become disadvantageous, that creates opportunities for other Latin
American countries that also are trying to industrialize. Certainly, no plants
will close in Mexico, but they may not open at the rate or scale that Mexico
wants."
New Law Would Close Old Loopholes
The tax confrontation
was triggered by Mexico's passage last December of a law that would reclassify
most of the 4,500 maquiladoras from temporary to permanent business
establishments as of this Jan. 1, eliminating tax loopholes they have enjoyed
since the mid-1960s.
Under the current tax treaty, tax experts say, the
result would be to suddenly subject U.S. manufacturers to corporate income taxes
in both countries.
A flurry of talks is occurring this month in
Washington, where Mexican tax officials are asking the U.S. to forgo tax
revenues it now collects on the maquiladoras. But negotiators have been unable
to reach agreement, and Mexican officials have indicated they will postpone the
effective date of the new tax until the dispute is resolved.
The IRS
refused to comment on the talks.
The industry, however, wants immediate
clarity rather than a postponement so its members can plan long-term investment
strategies. Kimberly Pinter, a tax attorney at the National Assn. of
Manufacturers in Washington, said that in extreme cases companies could be
subject to combined taxes of up to 75% under the new law.
"This would
kill the maquila industry in Mexico," Pinter said.
John McLees, a
Chicago-based Baker & McKenzie tax attorney and advisor to the National
Maquiladora Trade Assn., said that even if double taxation is somehow
eliminated, reclassifying maquiladoras from "processing centers" to "permanent
establishments" would open the door to taxing a company's worldwide profits in
the future.
But Mexican authorities from President Ernesto Zedillo on
down have repeatedly sought to assure the maquiladoras that the government will
do nothing to harm an industry that now employs 1.1 million people and whose
work force is growing by 10% a year.
"We do want to charge more taxes.
Certainly we feel we can and should charge more taxes on such a significant
sector," Mexican Trade Secretary Herminio Blanco Mendoza said. "What we don't
want is to have any of these firms close down. It is a very delicate balance."
Maquiladoras date from 1965, when the two countries created their
special tax and duty status as a way to replace the jobs lost with the phasing
out of the bracero program that had allowed Mexicans to work temporarily in the
United States.
Maquiladoras boomed after the Mexican currency
devaluations of the 1980s and 1990s. A weak peso made Mexican labor cheap enough
that it could compete with other manufacturing countries, especially in Asia,
that until then were reeling in most of the offshore plants.
The
maquiladoras themselves have grown steadily more sophisticated, evolving from
simple "assemblers"--the direct translation of maquiladoras--to become in some
cases sophisticated high-end producers of computers and other electronic goods.
In addition to cheap labor, the attraction for U.S. owners is that as
long as the products are sold in the United States, the owners don't pay duty on
the components, raw materials and machinery they bring into Mexico.
The
North American Free Trade Agreement in 1994 greatly fueled the maquiladora boom
by making Mexico the premier platform for exporting into the United States.
Asian and European companies climbed on board, incorporating as U.S. firms and
getting maquiladora tax advantages.
The importance of maquiladoras, to
both Mexico and their foreign owners, is clear: Their exports have doubled in
five years to $ 52.8 billion in 1998, accounting for 46% of Mexico's total
exports. The number of maquiladoras is expected to grow by 15% or more this year
alone, approaching 5,000 plants.
Employment could exceed 1.2 million at
year's end, more than double 1994 figures. Salaries, while woefully below U.S.
levels, remain about 30% higher than in other Mexican industry.
But the
boom in maquiladoras has had two downsides for Mexico:
First, the
government has struggled to find tax money to pay for schools, electricity,
sewage systems, roads and other infrastructure to cope with the huge
maquiladora-driven growth that is overwhelming communities, especially along the
U.S.-Mexico border.
Second, the maquiladoras have remained largely
separate from the rest of Mexico, creating a kind of two-tier economy favoring
the northern part of the country. Hardly any of components assembled in
maquiladoras are made by Mexicans; nearly all come from U.S. factories.
Maquiladoras 'Are Like an Island'
"If we look at maquilas as a
model for economic development, we would be making a mistake," said Pedro
Gonzalez, an economist at the Mexican Institute for Political Studies. "The
inputs made in Mexico and used by maquiladoras are as low as 2% and rarely reach
10%.
"This implies that the great expansion and dynamism of maquiladoras
doesn't have the desired multiplier effects for the rest of the economy. They
are like an island."
But such issues are of secondary importance for
U.S. companies, such as Plantronics, that have located in Tijuana, one of
Mexico's biggest maquiladora centers. Remaining competitive in the global
marketplace is what they're after, and they contend the tax would make Mexico
less attractive by raising costs.
"This tax will discourage investment
here," said Cesar Lopez, manager at a Plantronics telephone headsets assembly
factory in Tijuana. "At the same time, China is making it very attractive for
companies like ours. You pay workers only $ 2 per day, there are no unions, no
turnover, and the central government takes care of everything."
The new
law would subject the maquiladoras to normal Mexican income tax, based on the
profit generated within the Mexican operation. That is standard practice
worldwide. The difference here is that most of the biggest maquiladoras are U.S.
companies, and U.S. tax law assesses corporate tax based on global operations.
Therefore, unless the firms can get a credit on their U.S. taxes for income
taxes they have paid in Mexico, the companies would be taxed twice.
Luis
de la Calle, deputy trade secretary in charge of international negotiations,
said Mexico is asking the U.S. Treasury to forgo the tax revenues from
maquiladoras that are generated by their Mexican operations.
Mexico has
gradually increased its tax bite on maquiladoras, from negligible to merely
minimal. But the current rate is still a highly favorable arrangement for the
foreign manufacturers, and the system is virtually free of red tape.
Mexico would prefer the maquiladoras to shed their special status and
become like all other multinational firms, said Raul Hinojosa Ojeda, a UCLA
professor who follows the U.S.-Mexico economy. For more than a decade, Mexico
has tried to do away with special treatments it once gave to a number of
industries, and it sees lightly taxed maquiladoras as having a "distortionate"
effect on other Mexican manufacturers.
The looming tax change certainly
hasn't slowed the influx of maquiladoras this year. But U.S. lobbyists say those
plans were set in motion years earlier and that the flow will slow, if not stop,
once the tax takes effect.
"Investment is still high because a big
majority of the new investors are just not aware of some of these potentially
onerous tax proposals," said Tony Ramirez of Made in Mexico, a San Diego-based
maquiladora consulting firm. "They know what's on the books now but aren't so
clear on how they may be affected in the future."
*
Kraul reported from Tijuana and Smith from Mexico City.
Maquiladoras on the Rise
The number of maquiladoras
factories in Mexico has soared in the 1990s, and 1 million people now work in
them. Mexico is seeking more tax revenue. Number of maquiladoras:
1999
(projected): 4,500
*
Source: Mexico secretary of trade
and industry.
GRAPHIC: GRAPHIC-CHART: Maquiladoras on
the Rise
LOAD-DATE: October 12, 1999
