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In Mexico, US industry finds uncertainty

American and Mexican officials compromise on controversial tax plan,but long-term issues remain.

By Daniel B. WoodStaff writer of The Christian Science Monitor / November 1, 1999


For more than a decade, they have been the factory setup of choice for American corporations seeking out cheap labor and proximity to the mammoth US market.

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Known as maquiladoras, they are industrial plants south of the US-Mexico border which use local workers to assemble a broad array of products from TV sets to vacuum cleaners.

Lured by average wages of $5.30 per day - about one-tenth the US minimum wage - businesses have set up some 3,500 maquiladoras along the border. Employing some 1 million workers, these factories have, in many ways, become the foremost symbol of global commerce - and a target for American labor groups who decry the departure of more jobs abroad.

As such, a recent dispute over a Mexican plan to nearly double taxes on maquiladoras - potentially devastating the system - has been closely watched by the international business community. On Friday, US and Mexican authorities came to a compromise that details how Mexico will tax the Mexican affiliates of US companies for three years. But it leaves longer term tax questions unanswered, which could significantly stall crucial, long-term investment.

"We have an agreement at long last that is clear and gives Mexico a better share of income tax without taxing US companies out of business," says Humberto Inzunza, director of the Tijuana, Mexico-based CNIME (Consejo Nacional de la Industria Maquiladora de Exportacion), the main industry association. "But this is going to make things uncertain for those who want to start new companies. We need to have a fiscal vision that stretches longer than three years."

Mexico throws a curve ball

Late last year, Mexico threw industries into turmoil by an initiative to impose a tax on US companies that use maquiladoras. The new tax would have raised rates to as high as 75 percent, and in the eyes of many, would have destroyed the maquiladora movement.

Now, the new agreement will substantially increase the amount of tax that Mexico collects from the Mexican maquiladora companies themselves. It lowers the threshold for the taxable income of the Mexican companies.

While Inzunza and many maquiladora owners express concern about what will happen after the new deal expires in 2002, others say the accord is good in that it provides a permanent framework for resolving this issue.

"In a very real sense, we have solved the M2K [Mexico, year 2000] problem," says John McLees, leading tax adviser to the National Maquiladora Trade Association. "This is a good agreement for Mexico, the maquiladora movement, and the US government because it removes the prospect of unacceptable taxation on the US companies and creates a framework for discussing how the Mexican companies should be taxed in the future."

For years, imported components have been brought into Mexico for assembly in various factories ranging from General Electric to General Dynamics. No Mexican import duties are levied on the temporarily imported goods, so long as the product is exported. Maquiladora operators must post a bond to guarantee that components and materials are reexported within six months.