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MAQUILA OR MAQUILADORA PROGRAM
Choose One: Approaches to Setting up a Maquiladora , Book on Subject Matter , Considerations for Setup of a Maquiladora , History of Maquiladora System , The Law , The Laws' Objectives for Mexico , National Counsel on the Export Maquiladora Industry , The Maquila System Consistency , Location of Maquiladoras , Responsibilities of the Maquiladora , Statistical Information
Approaches to Setting up a Maquiladora
Sub-Contract out : This is where the interested party simply contracts another do do a specific job for him.
Shelter Program : This is where the interested parties will provide part of that needed to do the job (like raw material and possibly machinery) and the other (a shelter company) will already have (or will create) a maquiladora setup (with administration and labor) so that the two can get the job done.
Joint Venture : This is where the two (a U.S/or other foreign company in need of product and a Mexican company with knowledge of the legalities, business cultural and social cultural of the country - Mexico) complement each other, and come together to do a project or on-going business.
Sole Proprietor : This is where the U.S./or other foreign company decides to set up it's own Mexican business entity and manufacturing/assembly plant, acquire its' own maquila or pitex authorization, its' own labor force, it's own machinery, raw materials and packaging and use it's own administration.
Book on Subject Matter.
Mr. Vernon Penner has written a book on the "MAQUILADORA" (in-bond) industry in Mexico (also known as the "maquilas"), which is presently a few years old, still it does provide the understanding and basics of the activity. If you wish to acquire a copy you may contact him through the by E-mail at : ( firstname.lastname@example.org).
Considerations for Setup of a Maquiladora
There are several areas of due diligence that should be performed before a company decides to pick a certain site for it's maquila plant, no the least of which is labor pool, logistics and other cost factors.
See the content in our Private Page on more extensive identification of issues, such as value analysis, site selection, transition issues, etc.
History of Maquiladora System.
The "Maquiladora" industry informally started in the 1950's and gathered strength in the 1960's, 1970' and 1980's. With the NAFTA accord in process and the U.S. companies seeking alternative sources for reduced production costs without going all the way to the orient, this industry concept is in full bloom.
The current "Maquila" program system is set forth in the 1989 Decree for the Development and Operation of the Export Maquila Industry (published December 22, 1989 in the Official Government gazette). This program provides the means whereby the foreign companies can set up a Mexican assembly or production company in Mexico to import into Mexico, in-bond (no duties), raw materials, equipment and packaging, which will be used to produce and re-export the resulting products (thusly paying little or no Mexican customs duties and receiving the advantage of low salaries and other benefits).
Mexico passed two decrees on November 13, 1998 affecting the "Maquiladora" and "Pitex" industries. One changed certain rules on the Development and Operation of the Export "Maquiladora" Industry.
The Laws' Objectives for Mexico.
This laws' objectives are: Creation of new jobs for Mexicans, Increase the source of foreign currency in Mexico, Achieve international competitiveness by Mexican industry, Contribute to a higher industrial integration of Mexican suppliers of goods and services, and Bring new and better technology to Mexico.
National Counsel on the Export Maquiladora Industry. The Consejo Nacional de la Industria Maquiladora de Exportación, is the quasi-governmental organization charged with assisting the maquila industry. It exists via its committees which gather information and use it to assist the industry.
The Maquila System Consistency.
The system consists of the following:
1. A foreign entity (or individual) goes to Mexico and sets up a Mexican business corporation with the principal purpose of performing the "maquila" or in-bond activity.
2. The foreigner(s) can acquire up to 100% of the Mexican company ownership.
3. The Mexican company is registered with the proper Mexican authorities to act as a "maquiladora" ( Secretaría de Comercio y Fomento Industrial / SECOFI ). In reality it is the "maquila program" that is approved.
4. SECOFI notifies Mexican Customs of the "maquila program approval", in order that Mexican Customs permits it to enjoy the benefits of it's program. With that notice, the Mexican Customs authorizes: 1. The items to be imported to Mexico, 2. The length of stay of these items, 3. The percentage of shrinkage and waste permitted (that can be lost and therefore not necessary to be re-exported), and 4. The port of entry of the imports and exports.
The Mexican customs authorities permit the Mexican company to temporarily import into Mexico in-bond (without duties): the machinery to perform the assembly or manufacturing process, the raw materials needed to perform the process, and the packaging materials needed to transport the beginning raw materials into Mexico and to transport the completed process product back out of Mexico.
The maquila company will be required to either go through an independent authorized customs broker or it can acquire an in-house authorized customs broker (of Mexican citizenship).
5. The Mexican company will be required to bring fresh and new working capital in foreign currency (other than Pesos) into Mexico each month to be used as the company's working capital.
This working capital is to be used for: i. wages and salaries, ii. lease payments, iii. services and goods acquired in Mexico, iv. Federal and States taxes in Mexico, v. insurance and bond premiums, vi. interest and related expenses on Peso loans, and vii. any other expenses that can be considered operating expenses in Mexico.
6. The maquilas are subject to paying income tax in Mexico. Although the maquilas are predominately production centers and not profit centers, the company must file it's income tax returns and pay income tax and asset taxes (the latter is a minimum alternate to income tax) (federal asset tax is 2% of the value of the assets of the company).
7. The "Maquiladoras" are exempt from Mexico's IVA tax (Value Added Tax) on that used in the assembly/production process and shipped out of the country (this exemption will be on a recovery basis, where the maquiladora must file with the taxation authority for that IVA it had to pay).
As a result, the foreign entity/individual enjoys inexpensive labor without needing to pay import duties in Mexico.
Note: The customs regulations of the country to where the resulting product will be returned will determine if there are any duties payable on the new product. In the U.S., if the returning product was principally assembled abroad, then the parts can be identified as having left the U.S. and no duties is charged on their return. Still there is a duty on the "value added". Where the process resulted in transformation, then the re-identification process can become more difficult and result in higher re-entry customs duties.
Note: The NAFTA accord will not take full effect until 2008. NAFTA seeks to reduce or take off duty/tariff charges on imports between Mexico, the U.S. and Canada.
Location of Maquiladoras.
Maquiladoras can be placed almost anywhere in Mexico, however location is important for several reasons no the least of which is communications, transportation, employee pool, and infrastructure. Those that are only a few hours in are also very popular (like Hermosillo, Ciudad Chihuahua, Monterrey). As well you can find them deeper in the interior of the country. The cities that are on the border area with the U.S. are the most popular (like Tijuana, Tecate, Mexicali, San Luis Rio Colorado, Nogales, Agua Prieta, Ciudad Juarez, Ciudad Acuña, Piedras Negras, Matamoros, Ciudad Tamaulipas), while those just a few hours in also are attractive (like Ensenada, Hermosillo, Ciudad Chihuahua, Monterrey).
Responsibilities of the Maquiladora.
*Formation of the maquila corporation
* Register, acquire ID number and comply with the Federal Taxation authority (Secretaría de Hacienda y Credito Público)
* Register, acquire ID number and comply with the Mexican Institute of Social Security.
* Purchase Mexican Peso currency with foreign currency, on a monthly basis for use as monthly expenses.
* Acquire maquila program approval.
* Periodical filings with several agencies.
Year---------------Gross Value of Production -----------------% of Change from
--------------------(billions of dollars) ---------------------------previous year -----
PITEX PROGRAM ("Programa de Importación Temporal para la Exportación" / Temporary Importation Program for Exportation) , The Law
On May 3, 1990, the President of Mexico enacted the "Pitex Program" which is designed to help the Mexican companies that see the "maquila" industry program as unfair competition, thusly permitting them to compete with the "maquiladora" by orienting their program authorization to products rather than the company and thereby enjoying the benefits of the "maquila" system. This permits the Mexican companies to import machinery, raw material and packaging into Mexico for assembly or production, with the subsequent re-export of these items and the resulting product, without paying import duties (but rather putting up a returnable bond).
The PITEX program was created by a Presidential Decree on May 30, 1990.
Mexico passed a decree on November 13, 1998 changing the Temporary Importation to Produce Export Articles Decree (reforming the decree that established the PITEX program). There was a subsequent decree that once again modified the Pitex program, on January 1, 2001
On May 12, 2003, President Vicente Fox published in the Federal Official Daily of mexico amendments to the Decree that Establishes a Temporary Importation Program for the Production of Articles for Export (the “PITEX Decree”).
The Secretaría de Comercio y Fomento Industrial (Secretariat of Commerce and Industrial Development) of Mexico has proposed a future position regarding maquiladoras and Pitexes (which need to be approved by the Secretaría de Hacienda y Credito Público - Federal Taxation authority & Customs head office).
These positions are:
1. Create a single, temporary importation program, combining the Maquiladora and Pitex programs (perhaps changing the program name).
2. The materials, parts, components and other imputes will continue to be imported under the temporary imports program, duty free.
3. Machinery and equipment imported under the maquila program before 2001 will be grandfathered. That is to say, that the grandfathered equipment may stay in Mexico under the temporary regime (without the payment of the import duties). The maquiladoras may pay the import duty of the machinery and equipment under a definitive importation and keep the machinery in Mexico. The value of the equipment and machinery used for payment of the duties would be the depreciated value (per the Customs Law).
4. SECOFI has not determined whether it will permit equipment and machinery to be imported duty free (like under the Maquila and Pitex programs), after the commencement of the year 2001. This issue has to do with NAFTA. SECOFI wants to be sure that the temporary duty free importation would not contradict the NAFTA agreement.
5. When the finished goods have non-NAFTA origin materials in them and the goods are exported to Canada or the United States, the exporter would have 60 days to show evidence to SECOFI: a) that he (they) have paid the import duties on the finished goods upon entering Canada or the U.S. and b) that he (they) have paid the import duties on the non-NAFTA origin materials as corresponding, applying the "lesser of rule".
a. The NAFTA agreement does not require that the maquiladora program be eliminated. It only places restrictions on the duty relief that may be granted on materials imported into Mexico and then incorporated into finished products that are exported to the U.S. or Canada.
b. The maquiladoras (in Mexico) that export outside the U.S. and Canada will not be affected by NAFTA.
c. If the finished products are still subject to import duties on importation to the U.S. and Canada, after the year 2000, full or partial duty relief on the materials imported into Mexico will still be available.
d. The NAFTA accord will not take full effect until 2008. NAFTA seeks to reduce or take off duty/tariff charges on imports between Mexico, the U.S. and Canada.
US CUSTOMS 800, 806.20 , 806.30, 807 . These sections of the U.S. Customs Code are what make the Mexican Maquila and Pitex industries possible. Among other, they permit the re-entry into the US without duty, of component parts that were already U.S. (per customs rules), which have been placed (assembled) in a product in Mexico. In other words, the duties for U.S. Customs is determined solely on the added value of foreign origin. If it is not possible to tell which is foreign and which is U.S., then all is treated as if of foreign origin.
Harmonized Tariffs and Generalized System of Preferences
Harmonized Tariff sections 9802.00.60 and 9802.00.40 set forth the charging of duties only on the value added.
The United States Generalized System of Preferences determines that where 35% or more of the product being imported into the U.S. is deemed of Mexican content, it may enter duty free.
For study on an alternate source of liberated import in to the frontier border areas of Mexico for the manufacturing, assembly and transformation process, I recommend that you review the "FREE ZONE" page on this website.
Mexico passed two decrees on November 13, 1998 a: Changing the Temporary Importation Program to Produce Export Articles (reforming the decree that established the PITEX program) and b: Changing certain rules on the Development and Operation of the Export "Maquiladora" Industry.