09 Apr Nearshoring, Opportunities and Challenges
Nearshoring may be summarized as a business trend of moving commercial activities to a geographically closer country.
Given the 14 free trade agreements that Mexico has executed as well as its geographical position, are a key to enhance the development of the economy through nearshoring, which is why it is necessary to innovate to new challenges that logistics issues represent.
What are the advantages of nearshoring in Mexico?
- Cost Optimization: Reduction of operating costs for international companies.
- Employment Generation and Economic Development: Contributes to economic growth and job creation in Mexico.
- Trade Facilities: The free trade agreements subscribed by Mexico, facilitates commercial activity and broadens markets for the products manufactured in Mexico.
- Efficient Supply Chains: Agility and security in supply chains.
- Labor Productivity: Access to skilled labor.
- Closer distance to main markets such as US and Canada.
- Tax Benefits: Tax incentives from the Mexican government to attract investment and nearshoring operations, as well as some other duty deferral programs (IMMEX/Maquila).
What tax incentives exist in Mexico to attract nearshoring?
On October 11th. 2023, the Mexican government published a Decree granting tax incentives to promote investments, with a focus on ten highly export-oriented sectors. Such tax incentives are focused on:
- Immediate Tax Deduction of Investments. This incentive consists of making the immediate deduction of the investment in new fixed assets, acquired as from the effective date of the Decree and until December 31, 2024. This allows technology and research companies to deduct, in each fiscal year, the amount resulting from applying the percentages established in the Decree, to the original amount of the investment according to each asset type. The rates established in the Decree range from 56% to 89%, depending on the type of fixed asset. It is important to consider that the amount of the investment of the corresponding assets, can be restated for the period from the date on which the asset was acquired, until the last month of the first half of the period since the investment was made, and until the end of the fiscal year in progress.
- Additional 25% Tax Deduction. This deduction equals to 25% of the expenses incurred for the training received by its employees. For these purposes, the increase will be the difference between the expense incurred for training purposes in the applicable fiscal year, and the average expense incurred for training in fiscal years 2020, 2021 and 2022, averaged when no training expense has been incurred in such fiscal years.
If the additional deduction is not applied in the corresponding fiscal year, the right to make the deduction in subsequent years will be lost; therefore, this deduction cannot be accumulated in subsequent years.
Please note that certain general requirements must be met to apply for the abovementioned incentives.
Which business activities are eligible for these tax incentives:
- Manufacture of parts for automotive vehicles.
- Agricultural industry.
- Manufacture of pharmaceutical products.
- Manufacture of other electrical equipment and accessories.
- Manufacture of electronic components.
- Production of cinematographic and audiovisual works.
- Manufacture of non-electronic equipment and disposable material for medical, dental and laboratory use.
- Manufacture of fertilizers, pesticides and other agrochemicals.
- Manufacture of aerospace equipment.
- Manufacture of measuring, control, navigational, and medical electronic equipment.
Tax incentives implemented by the Mexican government add an additional attraction, providing strategic sectors with a framework for growth and investment. In this context, nearshoring not only boosts efficiency and competitiveness, but also contributes to sustainable economic development in the region.
Challenges
The US has implemented taxes to Chinese goods, and it is in the process of implementing taxes to electric vehicles manufactured in Mexico (as well as, certain automotive parts), which represents a major setback to free trade from Mexican goods made by Chinese companies. Since a lot of companies from different jurisdictions have put their eyes in Mexico, companies may be facing competition as to find the best location within Mexico to establish a manufacturing plan, the good thing is that there is enough Mexico for everybody.
Contact
Alejandro Martínez
Victoria Parra