Demonstrators hold up a banner during a march along the streets in Ciudad Juarez, Mexico. The demonstrators are protesting against the federal government’s economic and tax reforms, according to local media. The banner (partially hidden) reads, “No to 16 percent of the tax increase”.

Reuters

Tlaxcala, Mexico

Mexican assembly plants have put expansion plans on ice pending a tax overhaul that threatens their perks, but low wages and proximity to the US should deter any mass exodus to manufacturing rivals like China.

Mexican light assembly factories, or “maquiladoras”, account for nearly two-thirds of Mexico’s non-oil exports at about $196bn a year and are lobbying hard against a proposed reform they say would kill their advantage over competitors.

Leon Sametz, whose 132-person factory produces stainless steel wire in the central state of Tlaxcala, has delayed the import of a $1.36mn machine that would lift production by a third, worried by plans to scrap key perks for maquiladoras.

“This fiscal reform proposal is a nightmare for us,” said Sametz, whose factory houses ovens that heat steel wire to 1,200 degrees celsius to lengthen and narrow it for use in watering hoses and speakers.

President Enrique Pena Nieto is seeking to boost an anemic tax take partly by winding back tax breaks such as those for maquiladoras, introduced over the last 50 years to help Mexican-based firms compete with factories in Asia for the US market.

Critics say the tax haven-style benefits are unfair and spur fraud, but factories complain the reform will saddle them with nearly $25bn in sales tax payments each year that could weigh on cash flow, although they would be reimbursed later.

The reform could also boost maquiladoras’ income tax more than four-fold, by raising the tax rate and the tax base and by reducing deductions, companies say.

Lawmakers are prepared to scale back the sales tax component but it is not clear how far they will go to meet demands from the industry, which has warned firms could relocate if the fiscal overhaul goes through as planned by the end of October.

Still, the government is betting firms will stay put thanks to Mexico’s natural advantages, from low wages to cheap transportation to the US. Some experts agree.

“It’s ... crocodile tears,” said Ehtisham Ahmad, a senior fellow at the London School of Economics who has advised Mexico to scrap the maquiladora tax regime all together. “These guys are not going to go away and stop producing.”

The maquiladora industry began in 1965 under a tax sweetener programme for US firms to set up light assembly plants for export on the border, and grew quickly through the 1990s thanks in part to a free trade deal with the US and Canada. The proposed reform would also kill a provision that exempts maquiladoras from paying value added tax (VAT) on “temporary” imports if they export the final product, but would require the government to refund the payment at a later date.