WHAT IS A MAQUILADORA?

The Mexican Assembly Program was started over 25 years ago in response to a private sector initiative designed to alleviate a high unemployment problem along the border with the United States. This was a key component of the Mexican government1s Border Industrialization Program. The assembly line program has charted a notable pattern of growth and success for Mexico as well as for the numerous foreign manufacturing companies the program has attracted. The assembly line industry (Maquiladora) has clearly demonstrated Mexico1sprogress in export-oriented industry growth as well as the country1scompetitive strength and investment advantages in an increasingly diversified international environment. The assembly line industry in Mexico is governed by the Decree for the Promotion and Operation of the Export Oriented Industry of December 22, 1989 the Maquiladora Decree1 and its amendments). The assembly line is an important element in the globalization of the Mexican economy. The industry has been able to grow tremendously because of the availability, trainability and productivity of Mexico1s young labor force. This industry used to enjoy a duty-free import of machinery, equipment, parts, raw materials and other components used in the assembly of manufactured or semi-finished or finished products. However, as of January 1, 2000, maquiladora assembly plants will no longer be exempt from taxes. Since 1995, maquilas have been required to pay taxes only on income associated with payroll and services. Finished products, once assembled or manufactured, are exported back to the country of origin or to a third country. Mexico1s assembly line industry is surging forward experiencing critically needed skilled employees and fast-pace industrialization. Plants are engaged in assembly and manufacturing of service activities, which generally combine Mexican labor and materials with foreign technology, components and capital. Every month between 45 and 50 new assembly line industries begin to generate more production, reinforcing the manufacturing sector. In 1997 543 new enterprises were established, and 592 previously settled decided to expand their investments. Total investment on assembly line industry was US$ 998.0 millions. During the first semester of 1998 the Assembly-Line industry had a dynamic growth. All along the country, 1,003,918 jobs were created increasing 13.3%with respect to the same period of 1997. During the same period, the new establishments totaled 2,970.

Corporate Presence in Mexico

Under the Maquiladora Decree, a foreign investor may qualify to operate under maquiladora status only if it has a corporate presence in Mexico. An important exception to the rule establishes that foreign investors may not hold more than 49% of the stock of any Mexican company. A Mexican corporation that qualifies for maquiladora status may have up to 100% foreign ownership. The great majority of export oriented industries are wholly owned subsidiaries of foreign, especially US, corporations.

Operating and Import Permits

Once a company incorporates and wishes to operate under maquiladora status, it must receive Maquiladora Program approval from Secretaría De Economîa (SE). To obtain such approval, the company must submit certain information related to the operation to be established together with a list of machinery, equipment, tools and raw materials that will betaken into Mexico. Once Secretaría De Economîa (SE) approves the Assembly line Program, permits will be issued for the importation of machinery, equipment, components, raw materials and supplies. The Assembly Line Program approval is valid for an indefinite period and it is not subject to any renewal requirements.

Custom Requirements

Mexican Customs Law provides for two different methods of importing merchandise into the country: permanent and temporary. Under the permanent importation method, full payment of import duties must be made upon the importation of the item and in very specific cases, importation permits issued by Secretaría De Economîa (SE) will be required. Temporary importation allows an item to be imported without the payment of Mimport duties, provided the item is eventually exported from Mexico. Such method of importation is only available under special circumstances and for specific purposes. One of those special circumstances is a maquiladora operation. A temporary importation entails certain record-keeping obligations listed in the Maquiladora Decree. If such obligations are not fulfilled, the importer may be subject to the payment of permanent importation duties and penalties.

Sales in the Mexican Market

As noted above, customs regulations and the Maquiladora  Decree require, as a rule, that the assembly1s total production be exported from Mexico. However, an export oriented industry may sell a portion of its output of a specific product within the Mexican market provided it obtains authorization from SECOFI. In most cases, the authorization will be granted routinely if the importation of the specific product is not subject to an import permit requirement. Authorizations are valid for a two-year term, with a yearly review of compliance, which are subject to the following additional conditions: Duties must be paid on all imported materials or components contained in the finished product to be sold in Mexico. A favorable reign exchange balance must be maintained and; Certain reporting requirements must be complied with.

NAFTA and Maquiladora

With the implementation of NAFTA, the industry will expand, as will the ratio of regional-Canadian, US and Mexican-inputs it utilizes. Benefits have already been reaped by major foreign corporations operating in Mexico, due to economic restructuring programs and an ongoing program to enhance the nation1s infrastructure in such areas as telecommunications, roads and ports .Exports from Mexico1s assembly plants grew at a rate of more than 20.0% in 1997.Previously centered along the Mexican border with the US, 273 of the 465 new maquiladora plants established in 1995 are located outside the border region. In 1996, 285 new assembly line industries were settled in the country, while 483 new enterprises were established in 1997. Now, 67.3% of the assembly line industry is located on the border region and 32.7% in other regions. The main aim in creating new export oriented industry locations is to promote a more balanced transfer of manufacturing technologies across the country, while providing significant relief to the northern border infrastructure.

What is a maquiladora?

Manufacturing In Mexico: The Mexican In-Bond (Maquila) Program. After slicing through all of the numerous definitions that cloud thisquestion, the answer is, simply, that a maquiladora is a Mexican Corporation which operates under a maquila program approved for it by the Secretaría De Economîa (SE). A maquila program entitles the company, first, to foreign investment participation in the capital Ð and in management Ð of up to 100%without need of any special authorization; second, it entitles the company to special customs treatment, allowing duty free temporary import of machinery, equipment, parts and materials, and administrative equipment such a computers, and communications devices, subject only to posting a bond guaranteeing that such goods will not remain in Mexico permanently. Ordinarily, all of a maquiladora1s products are exported, either directly ,or indirectly, through sale to another maquiladora or exporter. The type of production may be the simple assembly of temporarily imported parts; the manufacture from start to finish of a product using materials from various countries, including Mexico; or any conceivable combination of the various phases involved in manufacturing, or even non-industrial operations, such as data-processing, packaging, and sorting coupons.

The nuts and bolts legislation now governing the industry1s operation is the 3Decree for Development and Operation of the Maquiladora Industry2, published by the Mexican federal Diario Oficial on December 22, 1989. This Decree describes application procedures and requirements for obtaining a maquila program and the special provisions that apply only to maquiladora.

Is there any limitation on where a Maquiladora can be located ?

Generally speaking, no. The only limitation for deciding on a Mexican location is that new facilities will not be permitted in the Mexico City, Guadalajara, or Monterrey urban areas, due to the congestion and industrial concentration already present. Some states may have restrictions relating to types of industries based on environmental concerns, but the general rule is that, excepting the three metropolitan area mentioned, the location decision is entirely up to the company. Are foreign owned or controlled maquiladoras subject to restrictions on owning or leasing real estate in Mexico? There are two kinds of areas in Mexico where land ownership by foreign interests is prohibited: a 100 kilometer strip along the borders and a50 kilometer strip along the coasts. In these areas, a foreign-owned maquiladora may acquire trust rights to real estate through creation of a trust, with a Mexican bank of its choice as trustee. The trust rights allow full use and enjoyment to the maquiladora as beneficiary of the trust. It may use, dispose of, encumber, and sell such rights, and it may receive any income earned from the property. Trusts have a duration of 30 years, renewable at the end of the period for another 30 years. Leases are unrestricted regarding both location and duration. Outside the restricted border and coastal strips, any foreign-owned Mexican company is free to purchase real estate. Title transfers (whether transfer into trust or direct transfer to the buyer) are subject to a one-time transfer tax, in the border states generally around 3% of the total appraised value. Thereafter, there is an annual property tax, but in relation to U.S. property taxes, it is negligible.

What kinds of permits, registrations, etc. are needed and how are they obtained? The 1989 Maquiladora Decree establishes a 3Sole Procedure2 which simplifies some of the permit and registration requirements Ð and there are several. The initial permit needed is the permit to incorporate from the Secretariat of Foreign Relations, a requirement common to all companies that organize in Mexico. Once permission to incorporate is received, application may be made to SECOFI for a maquila program. The SECOFI application asks for corporate data information on processed to be used and products to be manufactured, and a description of the temporary imports to be brought into Mexico. The new company1s Articles of Incorporation, and any other relevant documents (such as a Maquila and Technical Assistance Contract, model labor contracts, trust, lease, or purchase agreements) should be submitted with the application. In processing the application, Secretaría De Economîa (SE) will obtain the needed registrations with the National Maquiladora Industry Registry, the National Foreign Investment Registry, Foreign Relations, the Federal Taxpayer Registry, the National Workers Housing Fund Institute, and Social Security. Secretaría De Economîa (SE) will also notify the Customs Bureau of the maquila program approval. Once the maquila program is approved, along with the registrations noted above, the company will need an operating license from the Secretariat of Urban Development and Ecology (SEDUE), which will mean submitting an environmental impact statement. It will also need special permits if it will discharge waste water, handle hazardous materials, or produce air emissions. Additionally, a sanitary license is needed from the Health Secretariat, as well as registration and licensing with this authority if cafeteria or dining room facilities will be operated; import/export registration from the Secretariat of Finance and Public Credit; registration with the Department of Statistics within the Secretariat of Planning and Budget; authorization from the Secretariat of Labor for operation of mechanical energy transformation machinery, if any, for gas furnaces, if any, from Secretaría De Economîa (SE) and for telecommunications systems from the Secretariat of Communications and Systems from the Secretariat of Communications and Transportation; and registration with the federal Safety and Health Commission. State and local registrations and licenses include a land-use license from local; authorities registration of employee training programs, labor contracts and internal shop rules with the State Labor Authority; registration with the Public Registry of Property in the city of corporate domicile; registration with State Tax Authorities. Complicated as this sounds, if preliminary preparation is properly done, the process does not take long. Incorporation usually takes about three weeks once the Foreign Relations permit is received, and the remaining permits and registrations involve about another thirty days.

What can be manufactured in a Maquiladora?

Any product can be manufactured Ð or assembled, packaged, processed, sorted, produced in whole or in part, transformed, rebuilt... Mexico places no restrictions on what may be made, other than requiring a special prior permit be obtained from the Secretariat of Defense for production of firearms or from the Mexican Nuclear Regulatory Agency if the product has radioactive content. What to produce in a maquiladora is dependent on the parent company1sbusiness considerations, including available markets and duties assessed on imports into those markets. For example, companies involved in textiles must consider the Multi-fiber Agreement between Mexico and the United States, and its amendments. If an export assignment is not obtained for a proposed textile company1s textile production to enter the United States, Mexico will not authorize the textile operation. U.S. customs rulings may have an impact on what a company produces, or where its components come from. One consideration often overlooked by companies setting up maquiladora operations is U.S. Customs. There are several benefits available relating to U.S. duties, depending on components and/or type of product the maquiladora is producing. There are harmonized tariff sections 9802.00.60 and 9802.00.40, where duty is assessed only on value added, and there is the United States Generalized System of Preferences, where if 35% or more of the product is deemed Mexican content, it may enter duty free. Before an operation gets underway, any necessary U.S. Customs rulings should be obtained to assure the benefits expected regarding duties.

What may a Maquiladora import into Mexico?

In general terms, it may import in bond whatever is needed directly or indirectly to support the production process. This includes line machinery and equipment, raw materials and parts, item for safety and health, boxes, labels, manuals and pamphlets, anti-pollution equipment, and equipment necessary for administration, tools and spare parts. As of the December 1989 Maquiladora Decree, computers and telecommunications equipment are included among the items that can be brought in as temporary imports. Installed equipment and machinery, and the various types of equipment used to monitor production and attend to administration may remain in Mexico as long as the Maquila Program continues. Materials and parts consumed in the production process, and shipping related items, are permitted to remain in Mexico for six months, an extension being available as long as the total period does not extend beyond one year. Trailers and trailer parts may remain only three months. Are foreign personnel subject to any kind of regulation? Maquiladoras are permitted to bring whatever professional or personnel for positions of trust they need to serve as managers, technicians and in other fields requiring specialization. These foreigners may bring their families with them. However, foreigners must obtain the proper visas from the General Bureau of Immigration Services. Ordinarily, the visas are non-immigrant visas known as FM-31s, good for six months and renewable as often as may be necessary. Visas of this type for foreign hourly wage employees can be obtained but must be shown that the employee is in truth temporary and is needed for a specific purpose such as training or supply of some technical service. Foreign personnel in Mexico under an FM-3 visa are not subject to Mexican income tax if they do not spend 183 or more nights in Mexico during the year; otherwise, they must be registered with the Mexican Federal Taxpayer registry, and are entitled to social security and other Mexican labor benefits.

Does Mexican labor law have any special affect on Maquiladoras?

The effect of labor law on a maquiladora is the same as for any other Mexican corporation, and it must be recognized that the impact is significant. Labor rights are enshrined in the Mexican Constitution. The Federal Labor Law, which implements the constitutional guarantees, is a comprehensive statute that attempts to regulate all aspects of a labor relationship, whether individual or collective. It is applicable to all Mexican companies, whether foreign or Mexican owned, with or without a maquila program. The basic provisions of interest to maquiladoras include the following: Every hourly and salaried employee must have a written employment contract. The permissible obligatory work week is 48 hours, or six 8 hour shifts; wages are based on a daily rate rather than an hourly rate, with pay for the seventh day as well as the six work days. Many companies, however, work a five-day week based on shifts of more than 8 hours, permitting two days off per week. Overtime rates are set by law on an ascending schedule, depending on how much overtime per week is worked, and whether holidays or days of rest are worked. Employees must be enrolled with Social Security, and companies must contribute to the National Workers Housing Fund. Pregnant women are granted leave of absence during pregnancy, and their positions must be held for them is they wish to return after the child is born. Statutory benefits due to all workers include vacation pay and premium, a defined vacation period, Christmas bonus, and employees profit-sharing, all of which must be provided to an employee annually, and in a proportional degree if an employee leaves the company. Without severance pay, employees cannot be fired except for cause, as specifically defined in the Federal Labor Law. If dismissed without cause, an employee is entitled to certain severance benefits. Rights guaranteed to Mexican workers cannot be waived. The way in which these rights are exercised, however, will vary from region and even from city to city depending on industrial history and culture. Further, the form of their exercise can be negotiated, and a consensual agreement between the parties will be respected. Finally, the right to unionize is constitutionally guaranteed, the interest in unionization also varies from region to region. The main concern in the union movement in industry has been improvement of working conditions. Since maquiladoras tend to provide benefits over and above those required by law, unless an area has a strong historical tradition of unionization, employees will probably have little interest in unionizing. On the other hand, that lack of interest may change if poor personnel policies are implemented and communication with management is so inadequate that a union is viewed as the only option. Generally, the existing unions tend to work with management, serving as advocate for the workers and participating in tasks such as hiring, benefit distribution, vacation schedules, and the like, often relieving management of certain burdensome administrative chores.

What general tax considerations are involved in Maquiladora operations?

There are several federal tax laws that apply to maquiladoras, the most important being the Income Tax Law and the Assets Tax Law. Since they are subject to frequent modification, with an annual readjustment of provisions at the end of each calendar year, the broadest generalizations only are noted here. The Income Tax Law provides both for assessment on corporate profits and employee withholding, and requires provisional payments to be made monthly prior to the 11th day of each month. Overpayments or underpayments of these taxes can be adjusted and refunds or credits claimed, taking deductions similar to those provided under U.S. tax law. Since maquiladoras are usually structured as cost centers, with machinery and equipment, materials, components and spare parts on loan (rent free) from the parent company, their profits are marginal, thus the income tax impact in marginal. The tax on assets, also payable monthly on a provisional basis, can be off-set by income tax paid. Mexico has a value added tax, but the rate on products that maquiladoras buy in Mexico is 0; services, however, are subject to this tax, but it is always refundable to the maquiladora with respect to exports.

Decree for Development and Operation of the Maquila Export Industry

The highlights of said additions and deletions are the following:1.1. The concept of Maquila Operations is extended to cover the service activities rendered to Maquiladoras or to companies with a Temporary Exportation Program to Produce Articles for Exportation, commonly known as PITEX companies. (Article 3)2.2.The concept of Maquiladora no longer requires that a company 3totally2 export its production. (Article 3)3.3.The materials and components imported may remain in Mexico for a maximum term of one year (and not for six months, extendible). (Article 10)4.4.Regarding the materials, components, tools and spare parts required for its industrial operations, same will now be allowed into Mexico for a term of two years and same may remain in Mexico as long as the industrial Program for which they were authorized, continues in force. (Article 10)5.5. Trailers and containers that are temporarily imported, may now remain in Mexico as long as the maquila program for which they were authorized continues in force, without their stay being able to exceed 20years. (Article 10)6.6. In the case of specific export quotas, the Secretaría De Economîa (SE) shall approve the programs pursuant to the assignment policies of the quantities available, eliminating the concept that the quantities available must be prorated amongst interested parties. Also, in the event that the maquiladoras that utilize said quotas require to carry out transfer operations, these must be authorized by SECOFI and said transfer operations shall be considered indirect exportations. (Article 12: 25 and 26)7. Exchange Control requirements that were abrogated in 1991 are eliminated.(Article 16)8.8.Maquiladoras may carry out sales into Mexico in the following percentages, pursuant to their total annual value of the exportations made during the preceding year:1994 - 55%, 1995 - 60%, 1996 - 65%, 1997 - 70%, 1998 - 75%, 1999 - 80%, 200085%As of 2001, sales of Maquiladoras into the Mexican market are not subject to any limitation whatsoever, therefore, they may sell the totality of their production into the Mexican market. (Article 19)9.Maquiladoras must file every 2 months with Secretaría De Economîa (SE), are part of the sales that they carry out in the Mexican market, indicating the amount and total value of their exportations during the preceding year, of the sales into Mexico, and the percentage that said sales represent of the total value of their annual exportations that they have carried out during the preceding year. (Art. 20)10.10.TheMexican import duties of the products earmarked for sale into Mexico shall be computed only upon the import tariff corresponding to the foreign parts and components and not upon the total value of the finished product. (Article 22)11.Article 24 which allowed Maquiladoras who were duly authorized to sell into Mexico to elect for the virtual exportation of their finished products under the conditions determined in each case by the Ministry of the Treasury, is repealed. Such selection is no longer required since this issue is adequately covered by the amendments.12.12.Transfer of machinery, tools and spare parts may now be made between Maquiladoras and enterprises that have a Program for Temporary Importation to Produce Article for Exportation (PITEX), which was not available in the past. (Article 27)13.13.For sub maquila operations, the limitation that existed for textile products was eliminated, as was the requirement that Maquiladoras also be current in the filing of their foreign currency generation report.(Article 28)14.14.SECOFI may now also cancel the Maquila registration granted to an enterprise due of a petition legally supported from another agency of the Public Federal Administration. Also, the prior term for the application of sanctions by Secretaría De Economîa (SE) during which interested parties may argue what may be to their interest, is increased from 15 business days to 45 business days. (Article 32)15.15.The Consultative Committee of the Maquila Export Industry shall also be integrated by the Board of the National Maquiladora Council and by the National Directors representing local maquila associations affiliated to the National Board. (Article 37)These amendments became effective on January 1, 1994.The publishers wish to acknowledge that the all of the preceding information was supplied by :Secretaria De Economia (Formerly SECOFI)