Ricardo González Orta, Partner, Deloitte México: Viewpoint

Viewpoint: Ricardo González Orta

During 2017 the economy experienced moderate growth, mainly due to dynamic consumer activity. Despite the fact that GDP is forecast to grow at a rate of 2.3% in 2018, up from 1.5% the previous year, Mexico is set to face some economic challenges in 2018. Trade negotiations between the US and Canada, as well as the federal elections in July 2018, pose uncertainties for the country. On the flipside, the elections could set the stage for the first significant tax policy changes since the 2014 tax reform, and the new SEZs being rolled out could increase foreign investment in the country and boost the economy.

The 2014 tax reform aimed to increase efficiency in tax collection, combat so-called aggressive tax planning by multinational companies and curtail the black market; however, the tax revenue collected is still insufficient to overcome major challenges pertaining to competitiveness, infrastructure, health, education and the reduction of poverty.

According to the OECD, tax collection in Mexico represented 17.2% of GDP in 2016, the lowest percentage among OECD member countries, whose average was 34.3% of GDP. This disparity reflects the need to implement significant tax reforms in the short term; however, the presidential candidates have proposed changes aimed only at certain areas, such as the revision of the 2014 tax amends related to excise tax and petrol prices, a reduction in the value-added tax rate for border states and the tax deductibility of higher education fees. Though no significant tax changes have been implemented since then, Mexico has nevertheless experienced growth in terms of productivity.

Mexico has an open economy, which is attractive to investors. It has a network of 11 free trade agreements with 46 countries, as well as 56 tax treaties. Foreign direct investment is crucial for the economy, which is expected to rebound in the next few years.

Due to the developmental lag in the southern states of Mexico compared to the northern states, SEZs were introduced to support and boost investment in the least developed states and sectors. Puerto Chiapas, Lázaro Cárdenas, Coatzacoalcos, Salina Cruz, Progreso, Campeche and Tabasco were the first SEZs to be officially approved by the government.

The first step in launching the SEZs was to set up the necessary legal and institutional framework for a cross-administration project regulated by a national agency: the Federal Authority for the Development of the SEZs. The authority ensures consistent administration and regulation of SEZ rules throughout the country, avoiding the need for the involvement of state, local and municipal governments.

The second step was to make certain that, of the seven SEZs, Puerto Chiapas, Lázaro Cárdenas and Coatzacoalcos would be first in line for development.

The next part of the process includes specifying the logistics and infrastructure required to attract investment, as well as determining the anchor companies and the rules for tax incentives offered through different executive decrees. In particular, a Customs policy applicable to SEZs must be established, in addition to requirements that any interested investors will need to meet to apply for available benefits.

Furthermore, it is essential to identify companies interested in participating in the zones; as of May 2018 the authorities had received only 70 letters of intent. Although such letters expressed serious interest in the SEZs, they do not contractually obligate the investors in any way. To support production activity and help spur further investment, in April 2018 President Enrique Peña Nieto announced that a MXN50bn ($2.7bn) funding package would be provided to private companies that want to invest in the SEZs.

In this regard, the greatest risk for the development of the SEZs is if the 70 projects are not implemented or are unsuccessful. For this reason, 2018 and 2019 – when the authorities expect to see the first results – will be a crucial period for the future of the SEZs.