VZCZCXRO5063
RR RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0278/01 2042118
ZNR UUUUU ZZH
R 232118Z JUL 09
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC 3832
INFO RUEHME/AMEMBASSY MEXICO 4903
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9426

UNCLAS SECTION 01 OF 02 MONTERREY 000278 
 
SIPDIS 
 
STATE PASS TO USTR 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ETRD EFIN MX
SUBJECT: MAQUILA ASSOCIATION WARNS OF LOSING COMPETITIVENESS 
 
REF: MEXICO 1841 
 
MONTERREY 00000278  001.2 OF 002 
 
 
¶1.  Summary.   With the economic crisis and falling oil revenue 
impacting Mexico's federal budget, maquila owners are concerned 
that federal lawmakers will raise taxes on their industry to 
increase government revenue.  John Castany, President of the 
Nuevo Leon Maquila Association, told EconOff on July 17 that any 
tax increases will make Mexican maquilas less competitive than 
manufacturers in China and other developing countries.   End 
summary. 
 
Maquilas Reeling from Economic Crisis 
 
 
 
¶2.  The maquila industry represents the second largest source of 
foreign currency for Mexico behind petroleum sales.  The 
worldwide economic crisis has taken a damaging toll on the 
industry; revenues were down 37% in the first quarter of 2009 
when compared with the previous year.  Castany does not expect 
the economy to start improving until sometime in 2010.  To help 
weather the downturn, he points out that labor unions have 
worked positively with manufacturers, allowing them to cut hours 
and benefits for workers.  Conversely,  companies have received 
little aid from the federal government, despite requesting 
assistance to prevent layoffs. Moreover, GoM aid promised is 
mainly targeted towards the automotive industry, excluding many 
other sectors such as electronics and durable household goods. 
 
 
 
 
 Tax Uncertainty Looming Over Maquilas 
 
 
 
¶3.  To increase tax revenue immediately, Castany stated that PRI 
lawmakers have explored raising taxes on maquilas.  Instead of 
income taxes, Maquilas normally pay a preferential tax based on 
their fixed assets or operational costs and not income taxes. 
In a presidential decree issued by former President Fox in 2003, 
the tax rates were lowered by over 50% until 2011.  By raising 
taxes on maquilas earlier than 2011, lawmakers may be able to 
avoid imposing unpopular value added taxes on food and 
pharmaceutical goods in order to balance their budget. 
 
 
 
¶4.  In addition to the general tax increase, lawmakers are 
considering a prohibition on "virtual exportations," which allow 
maquilas to source goods locally.  When maquilas were originally 
established, goods were imported from companies abroad, 
assembled in Mexico and then re-exported.  As part of a 
concerted effort to build up the national supply chain, the GoM 
allowed maquilas to source tax exempt supplies and equipment 
nationally by filing importation documents and paying tariffs as 
if the goods had been imported - a process termed "virtual 
exportation."  Under currently proposed legislation, a portion 
of these taxes would become refundable, but the reimbursement 
process would add additional expense and red tape and refunds 
could take up to three months. 
 
 
 
¶5.  Legislators also may decide to revoke the maquila exemption 
from the corporate flat tax (IETU) that other Mexican companies 
must pay.   In early 2008, the National Council of Maquiladora 
and Export Manufacturing Industry (CNIMME),  won concessions 
from the GoM that allows them to hold off on paying the IETU 
until 2011 when congress will revisit the issue.  If the 
exemption is eliminated, it will increase the maquilas' overall 
tax burden and investment risks because of the way the IETU is 
structured.  IETU tax exaggerates the effects of an economic 
recession such as the one Mexico is currently facing since the 
IETU taxes gross revenue with very few deductions allowed for 
cost - i.e. companies will have to pay taxes even if they are 
operating at a loss for the year since the tax. 
 
 
 
More Than Taxes Hindering Industry 
 
 
 
¶6.  Castany added that taxes are just part of the 
competitiveness problems that Mexico faces.  CNIMME's agenda for 
2009 includes addressing bureaucratic hurdles, outdated labor 
laws, high electricity costs, poor infrastructure, 
telecommunications problems, and education (especially bilingual 
training).  For example, employers are required to pay salaries 
 
MONTERREY 00000278  002.2 OF 002 
 
 
and bonuses in cash, creating a security risk for the company 
and its employees given rising crime rates.   Statutes that 
require companies to provide employees three months of severance 
plus 20 days for each year of service if they are laid off have 
been a disincentive to hiring new employees.  Interestingly, 
Castany said that narco related violence is not a major concern 
for the maquila association at this time.  (Note:   Mexico's 
ability to compete has dropped in recent years.  In 2008, the 
World Economic Forum competitiveness survey ranked Mexico 60 out 
of 131 countries surveyed.  In 2000, Mexico was number 32.  End 
note.) 
 
 
 
¶7.  Comment.  With the PRI now formulating a legislative agenda 
strongly focused on economic relief, maquila association members 
 feel they will become an early target in an effort to increase 
GoM tax revenues.   Export driven maquilas, however, have 
already suffered huge losses because of the global recession - 
which has impacted Mexico worse than most economists have 
forecast.  The new congress' handling of the maquilas tax and 
competitiveness concerns could be a preview of its ability to 
tackle larger fiscal reform issues.  End Comment. 
WILLIAMSON