Relocation refers to the transfer of certain business operations to a “near” country in preference to a more distant country. This article explains nearshoring trends and important considerations when looking to Mexico.

Benefits of offshoring

Mexico has a number of proven advantages for companies looking to outsource certain operations. Mexico is a near-coastal manufacturing location with advantages in shipping, logistics and labor – areas where many auto companies struggle in other locations. manufacturing. Products originating in Mexico enjoy preferential tariff access to the world’s largest markets, and its trade facilitation programs have benefited manufacturers for years.

Whether spurred by a long-term strategic plan or lessons learned during the COVID pandemic, the focus is increasingly on the supply chain, and many companies are looking to revamp their supply chain. supply chain and their operational footprint. Global supply chains are already being transformed according to the following principles: (i) resilient supply chains (secure, redundant, diverse) are the new name of the game; (ii) alternative suppliers will be pre-approved, on a race to the bottom; (iii) the adaptability of service providers will be favored over reduced inventories; and (iv) increased transparency and preemptive stress testing regarding buyer needs and supplier ability to meet them.1.

Proximity Challenges

Despite the heightened focus on supply chain issues and the operational headaches manufacturers face, companies may be reluctant to overhaul their existing supply chain footprint or fail to consider the long-term benefits. term to undertake a more moderate outreach effort. Changing the supply base is extremely complicated. Supply chains are built on economic efficiency, with many important inputs anchored in other distant locations and companies committed to long-term contracts. However, there are a number of growing pressures – including price increases, supply chain shortages, labor issues and increased freight – that are converging to cause auto companies to reassess the viability of their existing supply base and operations.

Companies contemplating relocation to Mexico are immediately faced with the challenge of having to choose the most appropriate trade facilitation program to achieve the principles set out above.

Even if a Maquiladora is usually chosen, this program is in fact the most complex, heaviest and riskiest of all those available2. In addition to makeup(now IMMEX for Manufacturing, Maquila and Export Services Industries Program), there are a number of more or less complex trade facilitation programs, namely the Sector Promotion Program (PROSEC), the Permit of the Eighth Rule, Reimbursement of Import Duty to Exporters (Drawback), Origin Inspection (Customs Clearance Record) and Integral Business Certification System (Certified Business Record).

While each company should carefully assess the appropriate model for its planned manufacturing operations in Mexico, the following should always be kept in mind when making such an assessment: (i) better control of supply chains (more short) and operations (closer), (ii) import duties, (iii) overall taxation, (iv) value added tax, (v) anti-dumping duties and (vi) mandatory technical standards .

1. Shorter and closer product entries and operations

Shorter supply chains reduce risk. In addition, closer operations ensure greater access and surveillance. Minimizing the distance and opportunities for shipping delays, logistical issues, etc., also reduces the number of issues that can be encountered and allows a manufacturer to respond more quickly to complications.

2. Import duties

The temporary importation of goods into Mexico is subject to the payment of import duties, insofar as the final products are exported to a country covered by the free trade agreement, mainly due to the attractiveness of the market, those of the USMCA, the European Union and the European Free Trade Union. trade association3.

There is a way to receive a refund for the lesser of the import duties of the inputs or of the resulting products.

3. Overall taxation

When relocating to Mexico, companies or investors can benefit from the extensive network of treaties signed with more than 60 countries to avoid double taxation. If applied correctly, these treaties could provide benefits to repatriate profits and reduce overall tax exposure in Mexico. The current corporate tax rate in Mexico is 30%, which could be considered high compared to other countries. (Note that there is no local or state income tax on corporate profits.) However, IMMEX manufacturing facilities may benefit from tax haven rules that could yield tax savings. , as the aforementioned rules often mean less manufacturing costs to pay for the Mexican. installation, which in most cases is the main, if not the only, source of income for the Mexican operation.

Deciding on the corporate structure of Mexican operations is quite pertinent. For example, (i) a limited liability company may provide tax benefits in the United States, provided a number of requirements are met; (ii) a joint-stock company could offer more legal flexibility to shareholders; or (iii) a branch has the disadvantage that the parent company would be directly responsible for all of its liabilities.

4. Value Added Tax (VAT)

Goods temporarily imported into Mexico for processing are subject to the payment of value added tax, but eligible businesses that obtain VAT certification receive tax credits in the exact amount of this tax. Alternatively, posting a bond or a letter of credit can also avoid this levy.

5. Anti-dumping duties4

Temporary imports into Mexico would be subject to anti-dumping duties only when the corresponding final determination expressly determines that they are included within their scope. It is important and recommended that the Mexican Official newspaperbe sought.

6. Mandatory technical standards5

Until the end of 2020, the import of inputs intended for use in production processes, or products that would not be sold to the public in the same form as those imported, were allowed to enter without proof of Norma Oficial Mexicana (NAME) in accordance with the “exemption letters”. Effective immediately, importers must comply with all relevant NOMs, either before import through duly certified compliance assessments, or after the import process, using an existing contractual obligation with an authorized auditor to complete this process within forty (40) days.

Although virtually all manufactured goods for export use at least one of the trade facilitation programs mentioned, careful analysis of each is necessary to ensure the suitability of each individual operation. How each program interacts with the elements we have briefly described should always play a vital role in such an assessment.

After weighing the pros and cons, it’s hard to ignore (i) that Mexico benefits achieve certainty to the USMCA region, (ii) that Mexico represents the least expensive option in the region, (iii) that delivery times and logistics are difficult to match by any other country in the world; and (iv) that the USMCA accord Mexican exports favorable treatment with respect to United States trade remedies and national security measures.

Footnotes

1 To see Foley & Lardner, LLP, Survey Report on Global Supply Chain Disruptions and Future Strategies (September 2020).

2 The terms “maquila” and “IMMEX” are often thought to refer to two different programs, but they are identical, maquila being the original name which was later officially changed to IMMEX. All the original maquila permits, some of which are still functioning, have been automatically transformed into IMMEX permits.

3 Members of the European Free Trade Association are Switzerland, Norway, Liechtenstein and Iceland.

4 Anti-dumping duties are determined on a country-by-country basis after an investigation finds that specific unfairly traded imports have caused injury to the domestic industry concerned.

5 NOM is the name of official and mandatory standards and regulations for various goods, products and services in Mexico that may affect or pose a risk to the physical integrity and health of consumers, the well-being of workers in the workplace , food security, the environment and other legitimate policy objectives.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.