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The IMMEX program in Mexico

by | May 12, 2024

Porfirio Waters
CEO
The Trade Flex Group
McCallen, Texas
pilo@trade-flex.com

LATAM FDI: Today, we have Porfirio Waters with us. Porfirio is the CEO of a company based in McAllen, Texas. It’s called Trade Flex Shelter Services. Today, we will have a conversation about the IMMEX program in Mexico. Welcome, Porfirio. Please tell us about yourself and your company.

Porfirio Waters: Hi, Steven. Thank you for the introduction. My name is Pilo Waters, and I’m the CEO of Trade Flex Shelter Services, or better, the Trade-Flex Group. We specialize in business model analysis, manufacturing management strategies, duty tariff optimization, compliance management, and any regulatory consultation for businesses trying to do a soft landing in Mexico. That’s what our core competency is. We ensure that companies that utilize the IMMEX program in Mexico can succeed. Customer success is critical to us. We also make sure that their cross-border operations are efficient, compliant, and cost-effective,

LATAM FDI: Well, today, we’re going to concentrate on a particular issue, the IMMEX program in Mexico; it is particular to Mexico and its Maquiladora Industry. Porfirio, can you tell us what the IMMEX program in Mexico is? How does it function to promote foreign investment and export-oriented manufacturing?

Porfirio Waters: Well, thank you. The IMMEX program in Mexico is an acronym. It stands for the Manufacturing Industry, Maquiladora, and Export Service. The IMMEX program in Mexico was initially started as the maquiladoras in the old days. Everybody is familiar with the term maquiladora, which was initially established in 1964. Back then, it was called the Fomento a la Industria Maquiladora. It was changed to the IMMEX program in Mexico in 2006. They changed the scheme, making it more modern and more involved with the fiscal aspects of companies to make them more of a bonafide Mexican legal entity. The Maquiladoras, before 1964, were created because the Bracero program ended, and the Mexican government had to produce a way to attract foreign investment.

The primary purpose of the IMMEX Program in Mexico is to allow foreign-based manufacturers to import raw material components into Mexico and process them into manufactured goods for export. Under IMMEX, the benefit is that you can do this without paying any import duties and some of the taxes involved in Mexico. The IMMEX Program in Mexico helps companies with taxes, duties, and things like that, especially countervailing duties and value-added tax.

Mexico does have a value-added tax system, so you get the benefit of avoiding it.

LATAM FDI: As an expert in the IMMEX program in Mexico and dealing with companies that invest in the country to do export-oriented manufacturing, your business plays an active role in guiding companies through the process of getting the IMMEX designation. Is that correct?

Porfirio Waters: Yes, that is correct. We’re involved at the beginning with companies when they are engaged in doing their business planning, their cost models, and things like that. We also help them go through all the steps involved, which can become pretty complicated. They are dealing with a foreign country, so they must understand Mexican tax and business laws and how to structure the entity. We help clients from the very beginning to structure the entity, comply with all the regulatory requirements, and analyze their business model to ensure success. Not all projects are made for the IMMEX program in Mexico. We want to ensure that all clients are successful, and because of this, we want to participate in the due diligence process. Also, as a licensed federal customs broker, I can look at duty strategies, especially in a multinational environment, because many components come from Asia or other countries. We look at the business model to ensure that the goods companies make in Mexico meet substantial transformation requirements. With what’s going on with China in particular, this is very important.

So, we help customers analyze that. We file customers’ rulings on their behalf just so that when they begin operations under the IMMEX program in Mexico, they’re very secure in the decisions that they’ve made. This is because some of these decisions are very expensive and long-term decisions. We help them with all of that.

LATAM FDI: You made a distinction, and you mentioned that you look at a company that you look at, a company, and the IMMEX program makes sense for them and not for others. Can you tell which types of companies it makes sense for and which companies it doesn’t make sense for?

Porfirio Waters: Well, most importantly, the companies that it makes sense for are the ones that can benefit from the labor costs because the majority of savings in Mexico comes from labor. Most expenses are greater in Mexico than in the US. The actual savings is in labor. We see a lot of companies that may come to Mexico with only a 13-employee operation or 15-employee operation. They may already need help in the US to be profitable. They think that by coming into Mexico, they’re going to be profitable all of a sudden. They do not have the labor content required to benefit from being in Mexico. For example, the electricity, utilities, and rent might be more expensive than they’re used to paying in the US. They sometimes discover this after they’ve already launched their project. Then, once they decide to go to Mexico, it’s different from the US, where you can furlough and lay off people. Mexico has stringent laws that protect the workers, where companies have to indemnify them and liquidate them entirely off your payroll before they can let them go. Those are some of the factors that are involved.

Another common issue is that some customers may think they will bring a semi-knock-down product into Mexico, assemble it, or do the finishing operation in Mexico and then with Chinese components. For example, they intend to get it into the US but must pay duties because it is not considered a Mexican-made product.

We see a lot of companies that come in under the IMMEX program in Mexico that need to do their due diligence for the substantial transformation correctly. They come in, make the investment, and import all the components and raw materials. Then, when they export their product, they find out that, Oh, my gosh, I still have to pay the Chinese tariffs, or I have to pay extra duties or dumping duties. Those are the two main things that I see.

LATAM FDI: Are there any specific requirements or criteria for companies to qualify for the IMMEX program in Mexico?

Porfirio Waters: Yes, there are. The most important thing to cover is that to become certified as IMMEX or get approval for the IMMEX program in Mexico, you have to meet a lot of the tax requirements. The first requirement is to have a minimum of $500,000 of finished goods annually. That’s the first requirement. The second requirement to participate in the program is that you must comply with all the fiscal responsibilities that the government requires. Those could be very demanding. There’s a lot of them. Companies have to register with the IRS. They have to register their tax ID number. Also, they must register to import into the United States.

Additionally, they must incorporate their companies. Companies must have their incorporation issued by a notary public. They must also have a very specific contract about how they will operate, their customer, and the entities involved in the transaction. Then, of course, since under the IMMEX program in Mexico, companies are only allowed to import the goods temporarily, and they have to be returned, they have strict inventory guidelines that must be followed.

Everything that’s imported has to be returned within a certain period. It’s 18 months. Some operations, like textiles or sensitive goods, might take six months. Then, the government established a company as an authorized economic operator (OEA), so that’s important. You have to get an additional certification under the OEA to get some of these benefits.

LATAM FDI: What was that term you just mentioned, OEA? Tell us a bit about it.

Porfirio Waters: OEA is Mexico’s security program, which is similar to the Customs, Trade, and Partnership Program (C-TPAT) that we have in the United States. Companies have to comply with some security guidelines and criteria. They have to prepare their procedures manuals, et cetera, and submit them to the government, and then the government gives authorization and makes sure that they comply with it. It takes about a year to get it. Once you comply, you will receive a gold card that you can use for many other benefits that are available under the IMMEX Program in Mexico.

LATAM FDI: Can you elaborate on any incentives provided to companies under IMMEX to encourage them to participate? You just mentioned the… What is it again? OEA?

Porfirio Waters: Companies have fewer customs inspections under the Authorized Economic Operator program (known in Mexico as OEA). The Mexican government treats OEA companies better than those that are not OEA. OEA companies can keep goods in the country longer than ]]those organizations that are not OEA-certified. Also, regarding the IVA or VAT tax, if a company files for refunds or wishes to avoid payment, it facilitates the administration of your value-added tax, which is 16% in Mexico. Those are the main benefits of being an Authorized Economic Operator.

LATAM FDI: What evidence of data exists regarding the effectiveness of the IMMEX program in Mexico in attracting foreign direct investment to Mexico and promoting economic growth? Has IMMEX been a catalyst for a lot of foreign direct investment?

Porfirio Waters: Well, if you look at the numbers, they speak for themselves. From the program’s first inception in 1964, there were only twelve maquiladoras. Today, there are over six thousand. Employment is getting close to reaching three million employees. Those are huge results of the success of the program. The main success of it is that once you’re an IMMEX company, you’re given a lot of liberties that a typical Mexican company would not have from a tax point of view and also mainly from a customs duty point of view. The Mexican duty rates, on average, can be 15 %. They were lowered when Mexico participated in the GATT program. Last year, they increased their 15 % to 25%, and then just recently, they increased from 25 % to 55 % on some aluminum products. Some duties are higher than you are accustomed to in the US or other countries. The IMMEX program in Mexico helps manufacturers avoid all that. You can avoid the duties, you can avoid the IVA, and then you can avoid some of the other requirements that a Mexican national company may have regarding fiscal responsibilities.

Now, with the IMMEX in Mexico, the structure or the scheme was implemented in 2006. From 1965 to 2006, we worked under the strictly maquiladora regime. Then 2006, when it was changed to the IMMEX program in Mexico, they added many more fiscal responsibilities. There’s just a tremendous amount of benefit to using the IMMEX program itself. However, companies must comply and meet the program’s requirements to keep it in force and stay compliant.

LATAM FDI: Have there been any recent developments or changes that have impacted the relevance of the program that you just mentioned?

Porfirio Waters: Well, the biggest one I’ve seen is the friend shoring. Another way to call it is nearshoring, but I like to call it friend-shoring. Through this, companies can bring their supply chain closer. Often, they move it out of an Asian country and into Mexico, which is a friendly neighbor. It’s very beneficial. It’s helpful. The trend is that many companies are trying to move their supply chain, which is the reverse of what they did in 2005. They are trying to bring production back from Asia back to North America. That’s been the most significant catalyst that we’ve seen. The other thing that added a little bit of fuel to the fire was in 2018 when the Trump tariffs were levied on China, and companies had to pay a 25% duty on top of the regular duty they were already paying. This made it hard to do business. They looked to Mexico as a potential solution to that issue. Again, it is a solution, and it works great. Companies must do the due diligence required on the substantial transformation study.

LATAM FDI: Beyond the IMMEX program in Mexico, what other trends should companies considering setting up operations in Mexico be aware of?

Porfirio Waters: Mexico has thirteen free trade agreements with fifty countries besides the duty liabilities that are diminished or eliminated. Mexico has grown tremendously. We’ve seen it in their Peso, how it’s appreciated. It’s been like a shooting star here this last year. Companies have a tremendous opportunity to use it to export back into the United States and to Europe, Central America, South America, and other countries. Even some Asian countries have trade agreements with Mexico now. There’s a tremendous opportunity in Mexico. I mentioned the substantial transformation issue. Some benefits can be derived from manufacturing your product in Mexico versus being made in China or Vietnam. There’s a similarity between languages. Mexico is closer to the US. It’s easy to access. Mexican laws may differ, but they’re much more common to Western law than other countries. Those are the most significant benefits. One of the different things we saw, particularly during the COVID period, was that many companies moved into Mexico, not just because of the Chinese issue with the tariffs but also due to a lack of labor availability in the United States.

During that period, hiring people and keeping the factories running in the United States was difficult. We saw many countries keenly interested in looking into Mexico as a solution. And a lot of companies were able to do that, and they benefited greatly. As we saw the COVID surge in sales, everybody benefited from it.

LATAM FDI: We’ve gone over a pretty good amount of information.

Porfirio Waters: Yes.

LATAM FDI: We typically find that for people who listen to these podcasts, the information they’ve consumed generates further questions. That being the case, how would someone listening to this podcast contact you for assistance setting up operations in Mexico?

Porfirio Waters: Well, we have our website. Our website is www.trade-flex.com. Then we have Lula. Lula is our host. She will greet you as soon as you come to our website. She’ll ask you some questions, and those questions and those answers come directly to me. That mechanism will collect some information, including your email and phone numbers. We can reach out to those making inquiries immediately. And we also have a presence on LinkedIn. We hope that people can follow us there on Trade-Flex Shelter Services. We post many informative articles about what’s happening and the critical issues of interest. We note if we see any disruptors on the horizon. We try to post information about that to keep people informed as much as possible. We stress essential things to consider, avoiding any pitfalls or effects of business disruptions. We can do a thorough business case study. Performing a rigorous business case study ahead of time is essential and invaluable. When you negotiate any of your nearshoring agreements, if you can use someone like Trade-Flex, it’s beneficial.

When you come to Mexico, especially for the first time, having a good CPA is very important because you must be in excellent standing once in the IMMEX program in Mexico. You’re required to file all your tax declarations on time. Failure to do so could suspend some of your privileges. So, it’s essential to get a hold of a good CPA. Another thing that I suggest is to map out your inventory process beforehand. Sometimes, some people come in to make a quick decision. They need to map out their inventory process, and then they’re overwhelmed with all the customs requirements. We help with those things. The border is an invisible line, and it can be that, provided you do all the planning and the preparation ahead of time.

LATAM FDI: Well, you can take people through the process. What we’ll do so that they can contact you with great ease is in the transcript section on the podcast page; we’re going to have a link to your LinkedIn profile so people can contact you directly. We’ll include your email address, and we’ll include your website. So anybody with any questions that have to do with your expertise can contact you.

Porfirio Waters: Thank you very much, Steven. It’s a pleasure to be here with you today.

LATAM FDI: Yes, likewise. And I hope you have a wonderful day.

Porfirio Waters: Thank you.

Latam FDI: I wish you enormous success.

Porfirio Waters: Thank you so much.

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