The size of the economic boost of the Border Economic Plan for the U.S.-Mexico border region is unclear. The rules of this decree only allow lower taxes for a few companies at the border, reducing the economic impact many anticipated.
“The rules are very strict and rule out many companies; therefore, only a few companies will get the lower tax benefits, while their payrolls go up with the new salary increase,” explained tax attorney Miguel Angel Diaz Marin. “The losses in revenue for the Federal Government with these lower taxes for everyone at the border was going to be huge and they lower the impact with all the restrictions.”
President Lopez Obrador Border Economic Plan represents that the corporate income tax would be reduced from 30% to 20%, it also bows to reduce Mexico’s sales tax (VAT or IVA) from 16% to 8%, it pairs the cost of utilities with U.S. neighboring cities and it doubles the minimum wage.
The Center for Economic and Budgetary Research (CIEP), a Mexico City think tank, forecasts that the tax changes will cost the government between US$4.2 billion and US$5.3 billion in lost revenue.
Experts said the balance of gains and losses for the border region, for Mexico and for the broader bilateral commercial relationship will not be clear for some time.
Others believe the new changes will likely bring additional economic activity to Mexican border communities and offer the prospect of growing cross-border manufacturing, but those benefits will come at a cost.
To be able to apply the 8% Value Added Tax, tax payers must apply online and wait for the Tax Service Administration (SAT) to answer the petition.
Once the petition is granted, the company can do invoices using the 8% VAT. If SAT denies the petition, the company must continue to charge 16% VAT.
The decree also lowers the Payroll Tax (ISN) from 30% to 20%. To access this fiscal benefit, the companies must apply to have this lower rate. SAT can grant or deny the petition.
Although Mexico’s President Andres Manuel Lopez Obrador (AMLO) presented this program in Ciudad Juarez as a Free Trade Zone, the decree only gives certain tax incentives for some tax payers. The decree mentions the new salary in the northern Mexican border, but this change was already published in the Official Journal of the Federation (DOF).
Furthermore, the campaign promises to pair the price of the gasoline, electricity and natural gas with the nearest U.S. border city was not included in the decree. However, the price of gasoline and diesel dropped in the Mexican northern border in January.
“The program is way too far to offer a Free Trade Zone at the Northern border, but it can be an economic boost. We must wait to see the results,” said Jose Manuel Lopez Campos, president of Mexico’s Confederation of the National Chambers of Commerce (Concanaco).
Some of the requisites tax payers must meet to get access to these tax reductions include to have operations at the border municipalities for at least 18 consecutive months prior to the decree; 90% of the income must come from this border communities; if they have other incentives, they cannot apply for this one; they must be credit free from the Federal Government; and they must not be in the SAT blacklist as well as their suppliers.
“The decree was issued providing that it could be misused, but the authority, instead of having established internal surveillance measures, limited access to that benefit through ‘padlocks’ and left its application as an option, which goes against the final consumer,” said Leonardo Mendez Cervantes, president of the Institute of Public Accountants in Baja California.
The decree includes 43 Mexican northern municipalities.
During the presentation in Ciudad Juarez, Economy Minister Graciela Marquez noted that the border region targeted economic stimuli accounts for 7.5% of Mexico’s Gross Domestic Product.
Marques explained that the 43 municipalities included in the plan have boasted combined economic growth of 3.1%, above the national average of 2.6% for the six years through 2017. Much of that robustness owes to trade and proximity with the U.S.
The Minister expressed optimism that the stimulus plan will direct more Mexican and foreign investment into the border region.
Even though the decree is only valid for 2019 and 2020 creating uncertainty among the business community President Lopez Obrador said in Ciudad Juarez that the benefits would last up to six years and offer an analysis of the impact of this decree in April.
“Investors want certainty and two years is not enough,” said economist Miguel Angel Calderon. “The economic benefit is that the border region might be limited with all the restrictions the Federal Government will put on this decree.”
VAT
Even though most of the border population believed the new VAT was going to be effective immediately on January 1, 2019, this was not a reality. The rules for the new decree were published on January 7, and companies had to wait for the SAT authorization to lower the rate for this tax. Most of the companies that applied the next day the rules were published are still pending of approval.
“People are getting anxious,” said Raul de Leon Apraez, coordinator of the Business Coordinator Council (CCE) in Ciudad Juarez one of the benefited communities with the decree. “Most of the customers demand a 8% VAT, but companies cannot do an invoice using this rate because they still have no approval. This is a positive decree, but some changes must be made to make it easier to operate.”
The northern border had a lower VAT until 2014, when the administration of President Enrique Peña Nieto homologated it to the rest of the Nation to 16%.
On January 1st, 2019, the minimum wage at the Mexican northern border is US$9.3 per day ($176.72 pesos). The new rule was published last December on the DOF. This was one of AMLO’s campaign promises.
The top 10 Mexican border cities account for 1.8 million formal workers, but less than 7% of them earned one minimum wage per day in 2018, according to data from the Mexican Social Security Institute (IMSS). This data does not account for informal workers or labor who works outside the IMSS system.
The maquiladora industry is the biggest employer at the northern Mexican border. Even though most of the workers on this industry earn more than the new minimum wage, the increase forced maquiladoras to change their entry daily salary, which was between US$6.8 ($130 pesos) and US$7.3 ($140 pesos). Once the worker got experience and lasted more than three or six months in the position, he or she would get a pay raise.
Now, entry level workers get the minimum wage salary and the employees of higher hierarchy have earn more or they would end up going somewhere else. This situation is costly for the industry.
Salvador Diaz, president of the Otay Mesa Industry, said the wage changes had a negative impact on the payroll, which is somehow an increase between 15% to 30%, depending of the field.
Managers of human resources at the northern border explained the new wages for the operative workers increased the payroll because the bonusses and the IMSS and Infonavit fees also go up because they are co-dependent of the salary of each employee.
“Maquiladoras are worried for these changes. Some of my clients are doing a cost-analysis and the annual increase of payroll for the year is up to US$1 million,” said Diaz Marin. “Some maquiladoras might even freeze hiring at their border facilities and send those jobs to the inner Mexico factories. We must wait to analyze the impact.”
Martha Ramos, INDEX Reynosa director, said maquiladoras are facing higher operation costs due to the adjustments that are needed to meet the new wage requirements.
“Small companies are the more vulnerable as well as some suppliers,” Ramos expressed. “The changes might inhibit the growth we have seen in the latest years.”
The National Employment Service (SNE) forecasts that 80% of the workers in Reynosa will have a pay increase in 2019, to meet the new criteria.
“Any increase in the labor costs in Mexico will need to be passed onto our customers,” said during a conference call Gary R. Fairhead, President and Chief Executive Officer at SigmaTron International, Inc.
Maquiladoras do not meet the criteria to apply for the VAT and ISN reduction because they already work with another decree that gives them incentives to operate in the country.
For Calderon, the border population had high expectations from this Border Economic Plan, but the real economic impact might be less than expected and it will not meet the goal that will help reduce migration.