A maquiladora is a manufacturing facility established by a foreign-based corporation in a country with low-cost labor to manufacture and export finished products back to its native country. Such factories are usually set up in Mexico by companies based in the United States as a part of the Twin Plant Agreement.
Maquila plants import raw materials and machinery for the manufacturing process without paying any tariff or duty. But their parent companies need to pay duties on the value added to the finished products exported. Businesses running such manufacturing operations benefit from free trade agreements and tax advantagesTax AdvantagesTax Advantage are the types of investments or saving plans that benefit tax exemption, deferred tax, and other tax benefits. Examples include Government bonds, Annuities, Retirement Plans. . And the countries with their manufacturing plants witness significant growth in employment and economy.
- The maquiladora meaning refers to a manufacturing or processing plant in Mexico that manufactures and exports finished goods to its parent company based in the United States under the Twin Plant Agreement.
- These plants sit close to the U.S-Mexico border after their parent companies receive approval from Mexico’s Secretary of the Economy.
- These factories import duty-free and tariff-free raw materials, machinery, and equipment from their foreign-based corporations that pay duties on the value-added to the finished goods they import.
- The end of the Bracero program in 1964 led to the evolution of the Maquiladora Program that created job opportunities for the jobless, skilled Mexican workers returning from the U.S. and helped strengthen the Mexican economy.
How Does Maquiladora In Mexico Work?
The Bracero program was in effect from 1942–1964, under which skilled Mexican workers were allowed to go to the United States and work in the agriculture sector. Later on, the U.S. government saw Mexicans in the U.S. as a threat to their job market and ended the program. It led to a sudden increase in the unemployment rate of Mexico, affecting its economy eventually. It brings us to the question of what is a maquiladora in Mexico?
Given the severity of the situation, the Mexican government initiated the National Border Industrialization Program in 1965. The program aimed at bringing up industrialization in the region by allowing foreign-based corporations to set up their manufacturing plants in Mexico. These factories can import raw materials and machinery on a duty-free and tariff-free basis. They manufacture products at cheaper labor costs and export the finished products back to their parent companyParent CompanyA holding company is a company that owns the majority voting shares of another company (subsidiary company). This company also generally controls the management of that company, as well as directs the subsidiary's directions and policies.. The foreign companies, however, have to pay the duty on value-added to the finished products.
Maquiladora At A Glance
- The program is a part of the Twin Plant Agreement between the U.S. and Mexico. It allows a U.S.-based parent company to have a maquiladora in Mexico.
- To set up a maquila plant, the company must first get approval from Mexico’s Secretary of the Economy.
- These plants can operate anywhere in Mexico. But they are usually set up close to the U.S.-Mexico border for hassle-free export and import. However, some factories are near roads, railroads, ports, and airports, for it helps reduce transportation costs and improve supply chain management.
- The program ensures that these economic zones will be 100% owned by foreign businesses. Besides, the finished goods will be exported to them instead of being sold in the domestic market.
- These factories are free to manufacture any product, from consumer electronics to automobiles and medical equipment to aircraft parts. However, manufacturing firearms or radioactive devices, or any other harmful products requires foreign companies to obtain approval from the Mexican Nuclear Regulatory Agency and the Mexican Secretariat of National Defense.
- The Mexican maquiladoras provide employment opportunities to locals and have become the largest source of foreign exchange earnings for Mexico.
The concept of maquila plants started with the end of the Bracero program in 1964. The return of thousands of jobless, skilled agricultural Mexican workers from the U.S. forced the Mexican government to take some revolutionary initiatives.
The Mexican government started the National Border Industrialization Program. It attracted foreign investmentForeign InvestmentForeign investment refers to domestic companies investing in foreign companies in order to gain a stake and actively participate in the day-to-day operations of the business, as well as for essential strategic expansion. For example, if an American company invests in an Indian company, it will be considered a foreign investment. in Mexico, encouraged industrialization, created jobs, and boosted the domestic economy. The motive of this program was to establish special economic zones to allow foreign corporations to involve in production sharing through channelized import-export.
Under this scheme, the raw materials would come from different corners of the U.S., but the production and processing would take place in Mexico due to low-cost labor. The success of this program led to the generation of foreign exchange earnings. Moreover, it transformed the nation from just being an export-oriented nation to a domestic industry.
Until 1972, the Mexican maquiladoras could not be within 20 kilometers of its border with the U.S. But by 1994, these plants were allowed to be set up anywhere in the country. Also, they were permitted to sell up to 50% of the manufactured goods to the domestic market.
After The 1980s
- In 1985, maquila plants became the largest source of foreign exchange earnings for Mexico.
- Between 1989 and 1994, the number of such plants increased by more than 200%. This growth was attributable to the North American Free Trade Agreement (NAFTA) in 1994 and increased U.S. demand.
- In 1996, maquila plants became the second-largest industry after petroleum in Mexico.
The National Border Industrialization Program (or Maquiladora Program), created in 1965, was modernized to the Maquiladora, Manufacturing and Export Services Industry (IMMEX). Aside from modifying requirements for a maquila plant, IMMEX defined its five categories based on the products manufactured and exported.
#1 – Holding Company Program
Applicable for any holding company that can set up a manufacturing plant in Mexico.
#2 – Industrial Program
Applicable for any manufacturer that can convert raw materials into finished goods and export them.
#3 – Services Program
Applicable for service providers that can assist in the export of goods and services to different manufacturers within Mexico.
#4 – Shelter Program
Applicable for any foreign company that can provide raw materials for manufacturing in Mexico without registering with IMMEX. Also, for any Mexican company ready to take legal risks and liabilities from IMMEX-registered maquila plants.
#5 – Outsourcing Program
Applicable for any company that manufactures products through a third party due to lack of resources.
Maquila plants are subject to two Mexican laws – Income Tax law and Assets Tax Law.
Income Tax Law
A maquiladora in Mexico must make provision payments every month before the 11th. The adjustments occur through refunds or credits in the event of overpayment or underpayment. However, due to the import nature of manufacturing plants, the effects of income tax are nominal.
Assets Tax Law
It applies to all of the maquiladora-owned assets and must be paid monthly. If the manufacturing plant has already paid income tax, it does not need to pay the asset tax.
A maquila plant certified by the Mexican tax authorities need not pay VAT at 16% on temporary imports of goods, which is mandatory under the IMMEX program. In case of no certification, it may obtain a bond from a financial authority.
Frequently Asked Question (FAQs)
The Maquiladora Program allows foreign companies to import finished products from their plants in Mexico. To get products manufactured at cheaper labor costs, they need to provide plants raw materials and machinery.
The maquila plants can be located either around the border or nearby roads, railroads, airports, and ports. It is so to reduce the transportation cost and improve supply chain management.
The emergence of Mexican maquiladoras helped create more jobs, especially for its agricultural workers who had to come back from the U.S. after the withdrawal of the Bracero program in 1964. Besides, they attracted foreign capital investment, strengthened the regional economy, allowed for duty-free imports, and boosted industrial growth.
This has been a guide to Maquiladora and its definition. Here we discuss the history, program categories, and tax implications of Maquiladora, along with key takeaways. You may learn more about financing from the following articles –