The Maquila Program

1
The Maquila Program

• The Rules of the Game

2
The Rules of the Game

• First, ensure that your product may be produced
  under the Maquila program. Some products are
  restricted and require special permits.
• These products include

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The Rules of the Game

• Textile goods and wearing apparel subject to the
  multi-fibers agreement.
• Articles containing radio active devices such as
  smoke detector.
• Firearms and parts of firearms
• Wood products

4
The Rules of the Game

• Unless the company is working under the shelter
  plan agreement, the company must form a Mexican
  corporation.
• Mexicos foreign investment law establishes that
  foreign investors may hold 100 in the capital
  stock, of the Mexican corporation.

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The Rules of the Game

• A Maquila may be established anywhere in the
  republic of Mexico. Companies wishing to set up a
  maquila in Mexico City may be required to obtain
  a special operating permit.
• A Maquila must function as a Mexican corporation
  for all legal, fiscal and labor purposes.

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The Rules of the Game

• A Maquila is allowed to import into Mexico,
  machinery, equipment, tools, materials and
  components duty free provided the goods are
  covered by a valid NAFTA certificate of origin.

7
The Rules of the Game

• Machinery and equipment imported into Mexico that
  are not covered by a NAFTA Certificate of origin
  are subject to Mexican customs duties on the date
  of importation.
• Mexican value added taxes (VAT) are not assessed.
  

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The Rules of the Game

• Materials imported in to Mexico are subject to
  Mexican customs duties if they are not covered by
  a NAFTA Certificate of origin.
• Duties are due 60 days after they are exported to
  the US.
• Duty drawback may be applicable

9
The Rules of the Game

• Materials may only remain in Mexico for a period
  not to exceed 18 months.
• Maquilas are allowed to recover most value added
  taxes paid in Mexico
• A Maquila is required to export at least 30 of
  its production.

10
The Rules of the Game

• No more than 70 of a maquilas production may be
  sold in the Mexican national market
• Maquilas are allowed to sell their products to
  other maquilas.
• Maquilas are required to pay Mexican corporate
  income taxes of 34 on the companys taxable
  profits.
• Maquilas are required to pay the Federal Tax on
  Assets of 1.8
• Maquilas are required to provide employees with a
  profit sharing program of 10 of profits.

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The Rules of the Game

• Maquilas are obligated to choose between meeting
  a Safe Harbor provision or secure an Advance
  Price Agreement issued by the Ministry of finance
  to declare a minimum taxable income in Mexico
• Safe Harbor 6.9 of the value of the assets, or
  6.5 of the total cost of operation in Mexico,
  which ever is higher.
• Transfer Price the maquila applies for a
  resolution on a transfer price for determining
  the taxable profit in Mexico.
• Maquilas are obligated to maintain an automated
  inventory control system.

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The Rules of the Game

• Should a maquila leave Mexico, it must notify the
  Ministry of the Economy within 30 days of the
  expected move.
• If a maquila is closed, all machinery and
  equipment entered into Mexico under the maquila
  permit must be exported from Mexico, and
• The maquila is required to fulfill all legal
  obligations incurred in Mexico.

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Licenses and Permits
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Licenses and Permits

• A Maquiladora program issued by the Ministry of
  the Economy provides the company with an
  open-ended license to operate under the Maquila
  Regime.
• Imported materials may be imported temporarily
  for a period of 18 months without having to pay
  the VAT.
• Machinery and equipment may be imported into
  Mexico under a temporary permit and not be
  subject to the VAT.
• All foreigners staffing a maquila must have a
  Mexican work permit FM-3 Non-immigrant Visa.

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The Application Process
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The Application Process

• It is recommended that the company establishing a
  maquila retain a reputable Mexican law firm to
  set up the Maquila.
• The following description of the application
  process is intended for illustrative purposes
  only
• The first step in establishing a maquila is to
  obtain a permit for incorporation form the
  Ministry of Foreign Affairs.
• A Mexican corporation must be formed under the
  General Law of Mercantile Companies.

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The Application Process

• The most popular style of incorporation is the
  variable capital company designated as SA de CV.
• The corporations name must be approved by the
  Ministry of Foreign Affairs.
• The Ministry of the Economy must approve a
  maquilas operating permit before any goods are
  imported into Mexico.
• Once the Maquiladora program is approved, the
  companys name is entered into the National
  Register of the Maquiladora Industry.

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The Application Process

• The maquila must also be registered with numerous
  governmental agencies ranging from the Customs
  bureau to the Social Security Institute. Regular
  reporting is required by many of these agencies.

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The Three Options You Have to Enter the
Maquiladora Program
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3 Options

• Contract Manufacturing
• Direct Ownership
• The Shelter Plan Program

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Contract Manufacturing in Mexico
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Contract Manufacturing

• You provide materials and components, specialized
  equipment and blue prints.
• Your product is built to your specifications and
  your delivery schedule
• You are billed at the contracted piece price.

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Contract Manufacturing

• Advantages
• No long-term investment in Mexico
• No long-term commitments in Mexico
• No legal involvement in Mexico
• Very Quick start up
• Disadvantages
• Usually the most expensive option
• Lack of control over product
• Your product can be placed on the back-burner
• You are dependant on the integrity and financial
  strength of the contractor.
• Possible unauthorized transfer of technology

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Direct Ownership
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Direct Ownership

• You establish a subsidiary company in Mexico
• You secure all of the necessary permits.
• You establish accounting and personnel procedures
  to comply with the requirements of federal and
  state agencies.
• You establish procedures to comply with Mexican
  and US customs.
• You locate and lease a production facility
• You deal with and engaged the services of Mexican
  contractors in fitting-up the production facility.

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Direct Ownership

• Advantages
• Usually, the most cost effective option in the
  long term.
• You have complete control of your product
• You have complete control of the Mexican
  operation
• Disadvantages
• Lengthy start-up time
• Long term lease on the production facility
• May be required to transfer US administrative
  personnel to Mexico.
• Arrange for telephone service and utilities.
• Severance pay obligation for all employees hired
  in Mexico.
• The maquila will be subject to Mexican transfer
  tax or safe harbor agreement.
• The maquila will be subject to the asset tax.

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The Shelter Plan Program
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The Shelter Plan Program

• You contract with a Shelter Plan Operator in
  Mexico
• You provide on-site plant management and the
  transfer of technology.
• The Shelter Plan Operator provides its knowledge
  of the Mexican corporate structure, maquila
  operating permits, labor hiring and
  administration and Mexican customs procedures.

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The Shelter Plan Operator provides

• Personnel administration
• Payroll administration
• Mexican and US customs documentation services
• General administrative services in Mexico
• Warehousing
• The Shelter plan operator secures all necessary
  permits.
• The Shelter Plan Operator is usually paid on a
  clock-hour basis (usually the number of hours
  worked by the Mexican direct labor workers at an
  agreed upon hourly rate)

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The Shelter Plan Program

• Advantages
• Quick start-up time
• Lower start-up expenses
• Flexibility Remain under shelter plan or use the
  shelter plan as a stepping stone to direct
  investment.
• You have complete control over the production of
  the goods produced in Mexico.
• Possible assistance in reducing severance pay
  liability when reducing the workforce.
• Peace of mind

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The Shelter Plan Program

• Disadvantages
• In the long-term, usually less cost-effective
  than direct investment for larger operations.
• You do not have complete control over the Mexican
  corporation

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• Proman - Trento Shelter Plan

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Departments

• Personnel
• Payroll (Administration is Shelter cost)
• Infirmary (Customer cost)
• Guards (Customer cost)
• Union relations
• Accounting (Mexican Fiscal Shelter cost)
• Import/Export (Shelter cost)
• Environment (Shelter cost)
• Permits (Administration is Shelter cost)
• Maintenance (Supervision is Shelter cost)

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Shelter Plan Services

• Provide information and assist in your value
  analysis project
• Assist in building design
• Assist in building facilitation
• Assist in relocation of plant manager
• Use of office space and services during
  construction phase

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Shelter Plan Services

• Screen, test and hire the direct labor personnel
• Hire the indirect and salaried personnel
• Secure the necessary Mexican permits
• Ensure compliance with US Customs import/export
  regulations
• Provide payroll administration

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Shelter Plan Services

• Assist in developing training/motivational
  programs for the client companies
• Provide ongoing operational support in Mexico
• Assist in securing staging warehouse space in
  Nogales, Arizona
• Provide information for tax declarations for
  foreign personnel

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Items included in the Mexican GA Column

• Mexican indirect labor
• Mexican salaried labor
• Shipping/Receiving expense
• Employee benefits
• Production expense
• Q.C. Department expense
• Rent
• Mexican Insurance
• Plant Facilitation
• Plant Maintenance
• Utilities

• Telephone Expense
• Office Equip Maintenance
• Office supplies
• Maintenance Supplies
• Data processing
• Equip, Repairs Purchases
• Equipment Rental
• Outside services
• Mexican Broker
• U.S. Brokerage Charges SB
• Mexican Permits

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Freight connections and costs
Distance Obregon Nogales 330 miles Nogales
Detroit 2190 miles Land Freight By
Train Obregon Nogales 215 usd (one
way) Nogales - Detroit By Trailer Obregon
Nogales 600.00 (Round trip)
United States of America
SONORA

• Obregón

Gulf of México
México
Pacific Ocean
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Thank you!

• Trento Industrial Parks of Sonora / Promotora de
  Manufacturas
• November 20, 2002