Taxes are a hot topic that should be discussed and planned early in an expansion decision due to the significant impacts on a business. In fact, the ideal time to consider taxes is the moment a cash flow projection is created and when the business structure and plan are outlined. There are two major types of taxes to consider.
- The first includes all the taxes related to the fixed assets needed for the operation.
- The second refers to the taxes that will be present in the day-to-day Mexican operations.
We’ll address the first impact, tax-related to fixed assets needed for the operation.
Taxes affecting fixed-assets
- VAT – A 16% rate will be imposed on equipment and other property imported to be used in operations. This tax is due the moment the fixed assets cross the border into Mexico. Even though this tax is recoverable by following an additional procedure to obtain the refund, which could take up to six months, and is not considered an expense, your company will have to assess the impact of the cash flow.
- General Import Tax – Certain items coming into Mexican territory will have a general import tax. Similar to the VAT related to imports, the General Import Tax will be due immediately. According to the World Trade Organization (WTO), the average Mexico tariff is 4.4%[1]. The rate is based on import country and based on Harmonized Tariffs Code (HTC).
Other ancillary expenses
- Customs brokers fees – These fees need to be part of the cost equation and will vary depending on the level of sophistication required from customs brokers and from port-to-port entry.
- Logistics & handing – Logistics are a critical part of most expansions and could result in significant additional costs if not properly planned.
- Before moving equipment abroad, it is recommended that a logistics expert is consulted. Mexico has an extended list of restricted HTCs requiring that certain items (based on HTC code) can only be imported through the specific port of entry. This means that the logistics team will need to provide guidance to avoid unnecessary costs and delays that could be incurred from trying to bring goods into the wrong port.
- Another significant aspect of logistics is understanding and providing the documentation required by the customs broker. If the appropriate paperwork is not provided, your goods will be held up at the border. The rent to hold goods at the border is a daily rate and, depending on the space needed, could be a very significant cost.
Example of Mexico Tax Costs
There´s no better way to illustrate the costs described above than by providing a real-life example:
We are currently supporting a European company with their expansion to Mexico. They are building a plant in northeast Mexico from the ground up. They are importing aluminum composite panels from Poland that will be part of the raw material goods used in production. The aluminum composite panels value was approximately $12,500 USD, and the freight to bring in the press was approx. $1,300 USD.
In the following schedule, we will represent the costs/taxes related to the importation of aluminum composite panels:
| Vat – 16% | $ 2000 USD |
| General Import Tax – 4.4% | 550 |
| Brokers Fee | 300 |
| Handling Fees & Others | 1,000 |
| Freight from port to warehouse | 500 |
| Total costs | $ 4350 |
As illustrated in the example there would be a lot more costs related to the import of inventory to Mexico, if you are looking to expand or to know more about the operations and taxes in Mexico, contact Clayton & McKervey.
[1] This average takes as a based on those countries that Mexico has no free trade agreement. Mexico is the third country with the highest tariffs in Latin America (behind Brazil and Argentina).
