Incentives Program

Federal Incentives

Maquiladora (In-Bond Assembly) Incentives

In recent years Mexican maquiladoras or in-bond assembly plants have been affected by new players in the national economy. Due to this situation, State and Federal Governments, by way of Executive Decrees and Orders, amended laws and regulations regarding taxation, in order to maintain this industry’s competitive advantage. The primary changes and benefits are listed below:

Simplification of rules for compliance of permanent establishment and price transfer provisions.

Up until 2002, maquiladoras were forced to account and use as a tax base that included the return of assets, if price transfer was being requested.

Due to changes to the Income Tax Law (Ley del Impuesto sobre la Renta) in 2003, new option compliance provisions were included, reduced taxation on refunded taxes regarding investments with excluded inventories. Also, tax authorities’ resolutions were no longer required and calculations of safe harbor (administrative option for convenience and compliance of price transfer rules) were simplified.

All this was the result of an important decrease in administrative costs for tax calculation, providing, in most cases, certain information, which reduced income tax and therefore, general costs and employee royalties.

Reduction of up to 67% in income tax (impuesto sobre la renta) for maquiladoras.

In October 2003, by way of a Presidential Decree, a maquiladora benefit was created consisting in a reduction of up to 67% for income tax (Impuesto sobre la Renta). Reduction rates vary, and are subject to the company’s choice of options in compliance of price transfer or permanent establishment provisions, but in most cases, exceed 50%.

This puts Mexico in a very competitive position with a competitive interest rate of around del 15%.

To calculate this benefit, companies should use the tax value used for safe harbor (highest taxable base, between 6.5% of operation costs and 6.9% of the net fiscal value of assets). For safe harbor companies, it means that instead of paying tax rates of between 6.5% to 6.9%, paying applicable tax rate of 3%.

Reduction of income tax (impuesto sobre la renta) advance.

The income tax herein described has no immediate effect for maquiladoras due to the fact that such companies need their own advances to be accounted for, as a tax provision. Tax authorities issued rules by which maquiladoras may reduce their advances proportional to the expected tax once the abovementioned tax benefit is applied.

Reduction in Tax Base.

Tax rules, permit maquiladoras to reduce their tax base by way of an factor that shall be determined by comparing the current year’s exports with the last three years’, and this benefit is also applicable for newly incorporated companies. For example, if the current year’s is 500 and the three previous yearly average is 1000, then the reduction factor shall be 50%.

Accelerated Depreciation.

The Income Tax Law and Executive Decree(Ley del Impuesto sobre la Renta y Decreto Ejecutivo) contain an incentive for the accelerated depreciation in new investments as it pertains to taxes that represent an immediate approximate reduction of 85%, differing payment of income tax and profit sharing to employees. Maquiladoras that opted for safe harbor (administrative option for convenience and compliance of price transfer rules) shall not benefit from this incentive, as this implies filing a minimum taxable base.

There are special provisions that maquiladoras may apply depreciation, including third party owned machinery as well as equipment used for its operation, but this tax reduction shall be returned in a short period with a substantial income tax (impuesto sobre la renta) payment.

Income Tax (Impuesto sobre la Renta) Reduction for Handicapped Employees.

Article 222 of the Income Tax Law (Ley del Impuesto sobre la Renta) sets forth an incentive consisting in deducting 100% of the State Payroll Tax for handicapped employees if duly registered before the Mexican Social Security Institute (Instituto Mexicano del Seguro Social).

Regional Incentives

Law Supporting Competitive and Economic Development for the State of Baja California

(Approved by the State Congress on June 10, 2005).

Grants tax and other benefits to companies that carry out productive activities within the State.

Among the non-tax benefits are business development brokering, market access and public infrastructure.

Among the tax benefits, is the payroll tax and fees for connecting to the potable water and sewage system are exempt. These exemptions stimulate employment generating companies directly and indirectly, that hire technical school students, adults and handicapped individuals; for investment in technology and diversification of its markets as well supporting treatment plants and avoiding dumping of raw sewage.

By way of the Decree issued by the State Government companies in the business of selling or distributing books, newspapers, magazines and other printed items are exempt completely from paying the tax on commercial and industrial activities, the purpose of this administrative action is to support and foment reading as habit and promoting general culture.

I. Benefits Granted to Newly Incorporated Companies that:

Represent a new investment, technological or expansion project *.

This may be granted with a reduction:

From 25% to 100% regarding the payroll tax, for a period varying from 3 to 5 years.
From 20% to 50% of the Fees for Connection to the Potable Water and Sewage System which shall be determined per the proposed project.

* The investment project must comply with the following:

Number employees, incorporation of students into the production process as well as handicapped individuals and people older than 60 years old.
Quality of employees.
Amount and origin of investment.
Amount invested in technology.
Domestic and local suppliers.
Market access.
Establishment’s location

Reuse or try to treat 100% of its water consumption, with a 30% exemption in monthly payments for an undetermined period of time, so long as the companies reuse or treat the residual water.
Contract or hire handicapped or individuals older than 60 years, with a 100% exemption for the payroll tax.

II. Other Non-Tax Benefits:

Public infrastructure- The creation of a Fund for the development of necessary public infrastructure for the establishment or creation of strategic corporations.
Corporations in Development.- Direct support to small and medium sized corporations regarding:

Personnel Training.
Specific Consulting.
Financial Aid.
Statistical, economic and other information for the decision making procedure.
Creation of programs, products, actions and tools in order to increase competitiveness.

Assistance.- An investment promoter shall be assigned to your project to serve as a liaison between your company and the federal, state and city government agencies.
Market Access.- The Ministry of Economic Development in coordination with other government agencies shall render services on behalf of small and medium sized companies in various marketplaces by way of:

Technical assistance to companies with high possibilities for export
Promotion of its products by way of domestic and foreign tradeshows and expos.

III. Non-Tax Incentives

Contact with Government and Non-Government Agencies:

The Ministry of Economic Development, by way of its staff, shall act as a contact with other government and non-government agencies that shall provide necessary technical assistance, and shall also act as a liaison with local businessmen, Industrial Chambers and other Organizations related to your project. Furthermore the Ministry of Economic Development may assist in site location.

Costs for Licensing:

Assistance during negotiations with the city government to secure the necessary and applicable licenses and permits for your corporation, for starting up operations in our State.

Seminar on How to Successfully Do Business in Baja California:

The Ministry of Economic Development shall provide, free of charge, seminars regarding customs, accounting and Mexican law with the intent to answer any questions regarding benefits and requirements on doing business in Mexico.

Personal Assistance:

The Government of the State of Baja California, shall assign an investment promoter to assist your during the entire life of your project. The promoter shall guide you around the principal cities, industrial parks and business centers.

Independent Consultants:

The Ministry of Economic Development shall serve a link with local consultants.

Benefits for Personnel Training:

Payment of up to 2 months in minimum salaries for trained workers. The training program is granted by the National Employment Service, and consists in supporting new employees with grants during their training. Training courses last between 1 and 2 months with 6 to 8 daily hours, such training should be 70% practical and 30% theoretical. Each class should have more than 10 people.

Using this program you save time and money in searching for qualified workers. The company shall have increased productivity, this being the most important benefit for the company.

Any agreement must be signed and authorized by the National Employment Service, its national offices assist companies in compliance with their requirements. The company shall carry out training courses in accordance with its requisites, however, if the company needs help, the National Employment Service may provide assistance.

Industrial Incentives

For Publishing Industry

Writers may enjoy a 50% reduction on taxes for publication of their books.

Agriculture, Livestock, Fishing and Forestry

People dedicated exclusively to this type of business are guaranteed to obtain a 50% decrease of their (fiscal) liability. If these individuals industrialize their products or are acting in commercial transactions, the reduction is limited to 25%.

Non- Tax Incentives

Tourist Industry

The government has stimulated the expansion of the tourist industry in Mexico. Foreigners that wish to buy property may due so, except in coastal or border areas. There is no restriction whatsoever for residents of other areas. The government has placed its faith in FONATUR, which has made substantial investments for the development of necessary infrastructure for the construction of tourist centers. FONATUR sells land use rights in tourist areas to be used as hotels, condominiums, shopping centers, all favorable per expert opinions regarding planning of such projects.

Industrial Parks

There are industrial parks in various places within the State of Baja California, such parks provide the necessary infrastructure for industrial purposes. Usually land availability is favorable.

Free Trade Zone

Mexican legislation regarding foreign investment is applicable throughout the country. There are no free trade zones for supporting foreign investment, however there are duty free zones. In 1994, Canada, the United States and Mexico signed the North American Free Trade Agreement.

Furthermore, Mexico entered into a Free Trade Agreement with Colombia, Venezuela, Bolivia, Costa Rica, Chile, Nicaragua, Guatemala, Honduras, El Salvador, Israel and the European Union.