VZCZCXRO7667
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4282/01 2222147
ZNR UUUUU ZZH
P 102147Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8381
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 MEXICO 004282 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
SECSTATE FOR A/S SHANNON 
SECSTATE FOR WHA/MEX, WHA/ESP, EB/IFD/OMA, EB/IFD/OIA 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
TREASURY FOR IA (ALICE FAIBISHENKO) 
SECSTATE PASS TO USTR (EISSENSTAT/MELLE) 
SECSTATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV ELAB MX
SUBJECT: MEXICO'S MAQUILAS CLAIM NEW TAX COULD KILL 
INDUSTRY - BUT THE REAL PROBLEM IS PAYROLL TAXES 
 
REF: A. MEXICO 3246 
 
     ¶B. MEXICO 3859 
     ¶C. MEXICO 4151 
     ¶D. MEXICO 4191 
     ¶E. MEXICO 4236 
     ¶F. MEXICO 4280 
 
Summary and Introduction 
-------------------------- 
 
¶1. (U) Summary: Econoff spoke with representatives from the 
National Council for the Maquiladora Export Industry (CNIME) 
August 7 regarding the effects the new Single Rate Business 
Tax (CETU) will have on the industry.  The President, Jose 
Jesus de Calleros, said that CNIME supports the concept of 
the tax, but the way it is currently planned could kill the 
industry as it is a huge increase and eats up profits.  The 
main concern is that labor cost deductions are not allowed. 
While, even with some of the discussed changes, the tax will 
lead to an increase in taxes for the industry, it is unlikely 
that the CETU will lead to the end of maquiladoras in Mexico. 
 End Summary. 
 
CNIME Supports CETU, BUT... 
--------------------------- 
 
¶2. (U) CNMIE President Calleros stressed that the industry 
does not oppose the CETU and they understand that reform is 
necessary, particularly in light of declining oil reserves. 
He said that CNIME wanted to suggest modifications that would 
make the CETU work.  Specifically, he said that maquilas 
already pay taxes and do not want to pay more than they 
already do.  He said that the administration presented the 
CETU too hastily and without proper research into its 
effects.  The Director of CNIME's Fiscal Committee, Ignacio 
Valdes, explained that the CETU is a tax on production, and 
since the maquila industry accounts for 40 percent of the 
country,s production, they are most acutely affected. 
Additionally, he said that not only do maquilas pay taxes as 
a company, they pay employees who, in turn, pay Value Added 
Tax when they purchase goods. 
 
A Maquila Tax Primer 
-------------------- 
 
¶3. (U) By law, maquilas have a minimum profit level of 
between 6.5 and 6.9 percent for tax purposes.  They are then 
taxed 28 percent on their profits.  Earlier this decade, to 
keep the maquila industry from losing business to China, 
President Fox issued a decree halving the tax rate to 14 
percent of profits.  For example, using round numbers in USD 
for simplicity, 
 
Income =                106.5 USD 
Costs =                 100 USD 
Profit =                6.5 USD 
Tax Rate =              28 percent 
Decree Tax Rate =       14 percent 
Actual Taxes Paid =     91 US cents 
 
While the rate is 14 percent of profit, it is less than 1 
percent of income. 
 
¶4. (U) The CETU in comparison, bases the tax on income and 
not profit.  The maquila industry is labor intensive with the 
majority of its costs going to labor.  The CETU currently 
does not allow deductions for labor costs although it does 
provide credit for income tax withheld.  Using the same 
maquila from the example above, 
 
Income =                106.5 USD 
Deductible Costs =      30 USD 
Tax Base =              76.5 USD 
Tax Rate =              19 percent 
Tax =                   14.53 USD 
Paid by company =       8.65 USD 
 
According to the figures provided by CNIME the company in the 
example above will pay 850 percent more in taxes. 
 
MEXICO 00004282  002 OF 003 
 
 
 
CETU Hurts What It Is Supposed to Help 
-------------------------------------- 
 
¶5. (U) CNIME highlighted the danger the CETU poses to the two 
main areas the Government of Mexico (GOM) is trying to 
promote: investments and job creation.  Industry 
representatives feel that if the CETU is implemented without 
changes, investors will shift funds to countries with a more 
competitive tax structure.  Calleros said that other 
countries have studied and learned from Mexico's maquila 
industry and provide a viable alternative if the GOM 
implements the CETU.   Calleros also worried that the CETU 
would stifle job creation, essential to increasing Mexican 
growth. 
 
¶6. (U) CNIME maintains that anything that threatens the 
maquila industry threatens competitiveness and the overall 
well being of the economy.  Valdes noted that the maquila 
industry stimulates consumption by paying workers who, in 
turn, consume.  Maquilas employ 1.6 million directly and 
create another 5 million jobs indirectly.  Forty percent of 
participants in the Mexican social security system are 
involved in the maquila sector. 
 
CNIME's Objections 
------------------ 
 
¶7. (U) CNIME's main objection to the CETU is the lack of 
deductions, particularly for the various labor and social 
service costs maquilas pay.   A large part of the maquila 
industry is labor intensive and the payments to employees' 
pension and housing plans constitute 70 percent of business 
costs.  Under the CETU, salary costs and housing and social 
security fund contributions are not deductible.  Jesus de 
Calleros said that, it is contradictory for Mexico, trying to 
promote job creation, to penalize companies that hire more 
employees. 
 
¶8. (U) The CETU also eliminates key benefits that the maquila 
industry currently enjoys such as a 50 percent discount on 
taxes and stimulus for research and development.  The CETU 
also does not allow deductions for the temporary export of 
goods. According to CNIME, removing these deductions would 
eliminate the main draw for companies to Mexico's maquila 
sector.  Additionally, companies that also do business in the 
United States and other countries that do not recognize the 
CETU for reciprocal taxation purposes, would be doubly taxed, 
further decreasing Mexico,s competitive edge. 
 
GOM Disagrees 
------------- 
 
¶9. (U) CNIME complains that, even though the Secretariat of 
Finance (Hacienda) maintains that the tax is meant to target 
tax evaders and those who structure their books so they pay 
no taxes, maquilas, taxes will increase between 500 and 800 
percent.  CNIME and Hacienda disagree on the effect the tax 
will have on the industry.  According to CNIME, Hacienda 
based its figures on broad macro economic data which does not 
show the true effect on companies because it does not take 
into account the different expense structures of firms in 
different sectors and with different numbers of employees. 
They will be working with Hacienda over the coming weeks to 
discuss the numerical data. 
 
CNIME Will Continue Fight 
------------------------- 
 
¶10. (U) Valdes said extra revenue raised by the CETU does not 
warrant risking jobs and future investment.  He argued that 
the additional money that the government intends to collect 
from companies that are already paying taxes would be better 
left in the private sector where the money could be used to 
continue investments and create more jobs.  The alternative 
would be to overtax companies, leading them to invest less 
and create fewer jobs, which in turn would increase the 
demand for government social programs putting more pressure 
on government finances. 
 
MEXICO 00004282  003 OF 003 
 
 
 
¶11. (U) Jesus de Calleros reiterated that the CETU does not 
need to be eliminated, only modified so that it does not hurt 
competitiveness.  He said that CNIME had been in continual 
contact with members of the relevant committees of the 
Mexican Senate and Chamber of Deputies to work out changes 
that would help the maquila industry.  He stressed that the 
maquila program had survived for 40 years and had generated 
technology advances, employment and economic growth which 
would all be under threat if the CETU were approved without 
considering the maquila industry. 
 
Comment 
------- 
 
¶12. (SBU) If the figures provided by CNIME are correct, many 
maquila companies will pay more in taxes than they make in 
profits.  The GOM must increase tax collection, however, and 
any concessions granted to the maquila industry would lead to 
demands for concessions from other industries.  The best 
solution would be a labor reform that decreases the large 
amount of money companies must pay for the wide array of 
government "social security" type payments regardless of 
whether their employees benefit from the government programs 
being funded.  Such mandatory payroll expenses include 
payments for housing, daycare, pensions, health care and 
holiday bonuses.  Since the amount firms must pay is tied to 
their number of workers, labor-intensive industries would be 
hurt if they can no longer deduct such fees from their 
overall taxes.  These long-standing payroll taxes help 
support Mexico,s social welfare bureaucracy, and are viewed 
(at least politically) as providing a social safety net for 
those workers employed 
in the formal economy. 
 
¶13. (SBU)  It is unlikely the situation is as dire as CNIME 
paints it.  Companies with long histories in Mexico will do 
as much as possible to avoid beginning anew in another 
country.  We believe investors would also be willing to give 
up some profit if they believed it meant an overall increase 
to Mexico's competitiveness and future higher returns.  Most 
investors in Mexico agree on the urgent need to increase tax 
collections in Mexico, but would rather the large informal 
economy and other tax evaders be taxed rather than only 
raising taxes on those companies that are registered in the 
formal economy and already paying some taxes. The Mexican 
Congress is considering reducing the CETU rate by 3 percent 
or allowing certain additional deductions, which would be the 
most likely remedies for the maquila industry.  That being 
said, if the CETU is passed in any meaningful form, the 
industry will have to accept that they will be contributing 
more to the Mexican coffers than in the past.  End Comment 
 
 
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BASSETT