MEXICO CITY – Industry groups say President Enrique Pena Nieto’s proposed tax overhaul, expected to pass the Senate late Tuesday or early Wednesday, could strangle one of Mexico’s economic success stories, the border factories known as maquiladoras.
Owners of the maquiladoras, which turn out everything from auto parts to candy for the U.S. market, argue that the plan would harm the border city of Ciudad Juarez just as it begins to recover from a three-year wave of brutal drug-gang killings.
“The businesses, the stores, the restaurants have just begun opening up again,” said Claudia Troitino, head of the Ciudad Juarez maquiladora association. “The economy was just beginning to recover … This will be a heavy blow.”
It’s one of numerous business sectors opposed to the tax proposal already approved by the lower house and a Senate committee. Mining companies, soft-drink bottlers and employer associations all protest tax hikes that supporters say are needed to strip some tax privileges away from the wealthy and help remedy deep income inequalities. The current tax code, for example, encourages business executives to create fleets of corporate jets to get tax deductions.
The legislation to raise taxes on businesses and top-end wage earners and end some deductions has drawn full-page ads and radio spots from opponents warning it will discourage investment.
But supporters point out that Mexico currently has a low tax collection rate of just 10 per cent of GDP, far less than the average 34 per cent among developed countries, leaving little for government social programs. They argue it would bring some social justice to Mexico’s lopsided distribution of wealth.
“Seldom has there been such a blunt, undisguised campaign by private interests, a massive and virulent campaign against the tax reform,” dozens of intellectuals wrote in an open letter to Congress this week. “Apart from the poor and those who can’t meet their basic needs, what product, service, industry or company, corporate group or region deserves special privileges?”
The plan would end tax deductions for rich foreign businesses such as mining companies, which for the first time would have to pay a 7.5 per cent royalty tax. Mining companies in Mexico currently pay tiny per-acre concession fees but no royalty payments on the minerals extracted, a tax commonly charged elsewhere in Latin America.
Business leaders say that reducing those benefits could prompt them to invest elsewhere.
The new royalty tax “would bring Mexico up to an effective tax rate of 73 per cent,” said Rosalind Wilson, who heads the Canadian Chamber of Commerce’s Mining Task Force. “So you might as well forget any new investment.”
Pena Nieto has proposed ending the maquiladoras’ current exemption from the country’s 16 per cent sales tax on goods imported for assembly. It says maquiladoras would be reimbursed for the new tax once the finished products are exported, but industry leaders say that would be a costly, lengthy and bureaucratic process. Industry leaders say the plan would also significantly raise the maquiladoras’ low corporate income tax rate of 17.5 per cent.
Opposition to the plan is especially sharp in Ciudad Juarez, just across the border from El Paso, Texas. There, 228,000 maquiladora jobs support about 1 million people, including workers’ families, about three-quarters of the population. And the city is just starting to recover from a wave of violence, with 341 homicides recorded in the first eight months of this year, down from 952 killings by gangs in the first half of 2012, and 1,642 in the first half of 2011.
Adding to the opposition is the reform’s proposal to raise Mexico’s border-area sales tax from the current preferential rate of 11 per cent to the 16 per cent rate in effect in the rest of the nation. About 5,000 people marched through Ciudad Juarez in protest last week.
Luis Aguirre, head of Mexico’s national maquiladora council, said companies won’t likely leave immediately if the new taxes are approved, but increased costs could encourage them to start projects in Central America, where taxes are lower.
For an industry that provides 2.3 million direct jobs in Mexico, that’s a big concern. “Right now, there is about $3 billion in planned investment that has been detained,” Aguirre said.
Industry analysts agree that some companies have misused the maquiladora tax breaks by importing tax-free raw materials and never exporting them, instead selling inside Mexico. They say the system should be reformed, but not so drastically.
“It’s true that they were given privileges and now they’re being taken away,” said Alfredo Coutino, director for Latin America at Moody’s Analytics. But, he adds, “they’re being taken away in a fashion that could discourage (business activity), and that’s not right.”