As shorter supply chains become more desirable, maquiladora manufacturing in Mexico is becoming increasingly attractive. Globally competitive manufacturers in the US (and abroad) are leveraging Mexico’s unique production ecosystem to their advantage.
In short, a maquiladora is a foreign-owned factory or manufacturing operation in Mexico, producing goods for export. In this way, US companies can outsource cost-intensive segments of their production process and under preferential tax arrangements to maximize efficiency.
Below, we will explore the key ways in which maquiladora manufacturing provides strategic advantage to these manufacturing companies, allowing them to be more flexible, competitive, and successful.
Manufacturing operations with a maquiladora certification may pay VAT with a special credit. This is especially helpful, considering how many special imports and exports required along the value chain the manufacture of a finished good. Using this special tax credit relives a substantial burden and allows companies to focus more on their product and maximizing profitability.
Virtually any product may be successfully manufactured in Mexico. With limited exceptions (some weapons and radioactive components need special permitting), factories in Mexico have access to any components, materials, and requirements to assemble and produce whatever their customer base desires.
For several years, the US has been experiencing a severe shortage in skilled manufacturing labor. And in just the past couple of years, the problem has become much more severe. By 2030, the problem is supposed to have escalated to a whopping 2.3 million unfilled manufacturing jobs.
However, a key advantage held by those with a maquiladora is access to a whole new labor pool. Rather than relying solely on US personnel, US producers can tap into a vast pool of skilled, low-cost, manufacturing labor. Mexico’s industry-focused educational institutions produce thousands of technicians and engineers, made-to-order for specific manufacturing jobs in the country.
When outsourcing manufacturing to another country, there is always the risk of triggering permanent establishment taxing status. In this scenario, regardless of the country of residence, the foreign company then becomes liable for income tax in the country of operation simply by having an established operation there.
However, when participating in Mexico’s maquiladora manufacturing in partnership with a shelter service, this tax burden can be eliminated. Provided that the manufacturing company and their shelter service provider meet certain criteria and provide certain information on taxes paid to the country of residence, they will not be considered a permanent establishment of Mexico.
Maquiladora manufacturing in Mexico qualifies US companies for special import/export tax treatment. Typically, under the IMMEX Program, the company may eliminate their VAT burden, as well as the general import tax for goods that enter the country for a limited time. This period is usually 6-12 months, but depends on the kind of product. As long as these goods and materials are imported for the sole purpose of manufacturing goods for export, these inputs and goods are classified in a temporary classification and exempted from duties.
In this way, US companies are able to take advantage of all the raw materials, technology, and inputs from, not one, but two countries without exposure to any import/export taxes. A US company may set up a maquiladora in Mexico, import technology and equipment from the US, use inputs and materials from both Mexico and the US, and then export the finished product back to US consumers, paying little or no duties.
A US firm has virtually unfettered access to prime Mexican manufacturing locations, without paying customs, so long as their products are exported out of the country. From the Bajio in the center of the country to the bustling industrial complexes along the US border, US companies may set up shop anywhere. And those who manufacture in border regions like Tijuana and the Baja California area find the proximity to US markets a boon.
Perhaps Mexico’s most powerful strategic advantage is the world’s largest free-trade network. While US has free-trade agreements in place with several countries, Mexico’s collection of over agreements (FTAs) is the largest of any country, giving access to those who manufacture in her maquiladoras access to over 50 countries and more than two thirds of the world’s population.
In addition to avoiding customs and VAT taxes on imported inputs and exported goods, maquiladora manufacturing in Mexico offers other savings advantages. Labor costs in Mexico are substantially lower than in the US and even lower than in other popular outsourcing destinations like China. Highly specialized manufacturing clusters and industrial parks help streamline costs and maximize economies of scale.
Companies who want to leverage the many strategic advantages of maquiladora manufacturing should first identify which route they want to take. There are several popular methods, including purchasing a wholly-owned subsidiary, contract manufacturing, or partnering with a shelter service for optimum protection and process control. If the decision is made to open a maquiladora, depending on which route you take, you may need to provide several key documents and requirements in addition to your IMMEX application.
We can help walk you through the process and simplify things for you. Just contact our maquiladora specialists for a consultation.
