On December 31, 2018, Mexican President Andres Manuel Lopez Obrador published a special decree some border adjustment tax) for businesses operating in the Northern Border Zone in Mexico, sometimes referred to as the “Free Zone.”

The new decree aims to attract new investments and create jobs. The new decree went into effect on January 1, 2019 and goes through the year 2020.

“It is a very important project for winning investment, creating jobs and taking advantage of the economic strength of the United States,” said President Lopez Obrador while visiting Monterrey, in the Northern Mexican state of Nuevo León.

Overview of New Incentives:

• Creates a “free zone” along the U.S./Mexico border
• Reduces income taxes from 30% to 20% (Not applicable to IMMEX companies) 
• Halves the Value Added Tax (VAT) from 16% to 8%
• Increases minimum wage to $176.72 pesos a day (approximately $8.80 dollars)
• Matches fuel prices to US prices

What Municipalities are Included in the Northern Border Region?

Under the new decree, these are the affected municipalities.

How Changes to the VAT Will Impact Manufacturers?

Jose Luis Avendano, Director of Finance for Co-Production International, offered a preliminary analysis of how this will affect the VAT for manufacturers operating in the newly declared “free zone” in the Northern Border region. Some of the following may impact your cash flow tax.

• Purchase of goods from businesses in the northern border region
  Example: Office, cleaning, packaging supplies, machinery parts, etc.
  Impact: The VAT is already at 8% since January 1st.
  (Cash flow positive impact)
  IMPORTANT NOTE: Vendors must be 100% in compliance with SAT (Mexican tax agency) and obtain written approval by this same government agency. 
  
  
• Services
  Example: cleaning, professional services, technicians, security, etc.
  Impact: Reduction to 8%
  
  
• Temporary Importations of goods
  Example: Raw material and Machinery
  Impact: stays exempt with the current VAT Certifications under the IMMEX program
  
  
• Permanent imports
  Example: any goods
  Impact: will stay at 16%
  (will apply also in case of a change of regime from temporary to permanent)

Manufacturers Operating Under a Shelter Company in Mexico

Many manufacturers opt to expand manufacturing operations under a shelter services provider in Mexico to minimize risk and liability. Shelter company providers like Co-Production International make it their job to keep up with vendors, tax compliance and compliance with new regulations in Mexico on behalf of the manufacturer as a part of their contract.

For more information or any questions regarding the border tax adjutsment and manufacturing in Mexico dont hesitate in contacting us!