Northern Border Region - Deloitte United States › content › dam › Deloitte › mx › ... ·...

Border Economic Zone IIPulse of the business sector and strategic analysis of impact for Northern Border Region

Brochure / report title goes here | Section title goes here

02

Introduction 03

Economic Outlook 04

Survey 09

Fiscal impact on companies 11

Final Observations 15

Border Economic Zone II | Pulse of the business sector and strategic analysis of impact for Northern Border Region

03

IntroductionOne year after the Decree establishing Northern Border Region Fiscal Stimulus, Deloitte conducted its second annual Business Survey to monitor the progress of its implementation, and report on results and the outlook for the region.

Through the fiscal stimulus, the Federal Government’s aim as stated in the Decree was to boost development of the region by enhancing competitiveness and generating jobs in order to slow the flow of migrants to the United States.

Because of the timeliness of this matter, Deloitte has monitored the unfolding of the stimulus initiative, holding diverse forums with the participation of regional entrepreneurs, industrial chambers and authorities of the Tax Administration Service (SAT).

Our first forum was held on December 19, 2018, with the participation of the Business Coordinating Council of the State of Baja California, diverse Business Associations and the government’s point man for the Northern Border Region Don Pedro Romero, as well as many other leading entrepreneurs from the region. On that occasion, several Deloitte specialists addressed economic, fiscal and legal impacts of the fiscal stimulus package.

Deloitte held its second forum to examine the Decree on March 14, 2019, which focused on implementation. On that occasion, Fiscal Prosecutor of the Federation Carlos Romero Aranda addressed the forum, and participants also heard from the SAT team in charge of implementation of the Decree. The forum also provided opportunities to hear the concerns and questions of entrepreneurs in attendance.

In 2020, we will continue to monitor the implementation and results of the Decree closely. These efforts include organization of informative and analytical forums, and publishing surveys providing valuable information to our clients and the general public.

This edition presents the results of a survey of several companies of the Northern Border Region regarding their compliance with VAT and ISR (income tax) provisions in the Decree, the difficulties they faced and their expectations of the impact the Decree on their economic activities.

We invite you to examine this information and continue to participate in the initiatives and information forums organized by Deloitte.


04

Economic outlook First of all, it is important to attain a proper understanding of the dimension of the Northern Border Region within the Mexican economy. In this vein, we provide a map of the region and municipalities addressed in the Decree.

The following municipalities are eligible to enjoy the stimulus provided in the Decree:

The total population of these municipalities comes to nearly 8 million, lead by Baja California (37%), Tamaulipas (28%) and Chihuahua (14%) accounting for the largest share of inhabitants.

In terms of economic activity Tijuana, Ciudad Juárez, Mexicali, Reynosa, Matamoros, Ensenada, Nogales and Agua Prieta, where many in-bond plants are established, account for the lion’s share of the region’s regional development. Unfortunately, it should be noted, the in-bond sector is not eligible for the tax benefits provided in the Decree, a situation we believe should be reviewed.

To be sure, the Northern Border Region has in recent years has generated significant development and job opportunities for the local citizenry, while also attracting workers from other regions of the country.

A brief analysis of the performance of economic growth, inflation and employment in the eligible states under the provisions of the Decree is provided below.

Baja California (5)• Ensenada• Playas de Rosarito• Tijuana• Tecate• Mexicali

Sonora (11)• San Luis Río Colorado• Puerto Peñasco• General Plutarco Elías Calles• Caborca• Altar• Sáric• Nogales• Santa Cruz• Cananea• Naco• Agua Prieta

Chihuahua (8)• Janos• Ascensión• Juárez• Praxedis G. Guerrero• Guadalupe• Coyame del Sotol• Ojinaga• Manuel Benavides

Coahuila de Zaragoza (8)• Ocampo• Acuña• Zaragoza• Jiménez• Piedras Negras• Nava• Guerrero• Hidalgo

Nuevo León (8)• Ocampo• Acuña• Zaragoza• Jiménez• Piedras Negras• Nava• Guerrero• Hidalgo

Tamaulipas (10)• Nuevo Laredo• Guerrero• Mier• Miguel Alemán• Camargo• Gustavo Díaz Ordaz• Reynosa• Río Bravo• Valle Hermoso• Matamoros

1Desafortunadamente, la maquiladora fue excluida de la opción de acceder al Decreto de ISR.


05


06

Economic GrowthEconomic growth in the Northern Border Region is generally dynamic, largely due to the following factors:01. Economic activity associated with

export of goods. According to the National Institute of Statistics, Geography and Informatics (INEGI), in the third quarter of 2019, Chihuahua, Coahuila, Baja California, Nuevo León and Tamaulipas led the nation in exports.

02. High levels of participation in the formal economy. SAccording to INEGI, in the third quarter of 2019, the level of participation in the informal economy of the northern border states was lower than the national average of 52%. Chihuahua, Coahuila and Baja California (at 33.1%, 33.7% and 37.1%, respectively) are the lowest nationwide in terms of informal economy participation. That is, 7 out of 10 economic activities in these states are carried out within the formal economy between parties duly registered in the SAT, and compliant with IMSS and Infonavit requirements. Moreover, these economic agents use the banking system to carry out their transactions and operations. This stands in stark contrast to the economies of the Central and Southern Regions of country, where informality rates range from 60% to 70%.

03. Binational relationship. The border dynamics in the country’s Northern Region entail close social, commercial and business links with the southern economies of California, Arizona and Texas of the United States. This cross-border feature provides an array of economic opportunities for the

inhabitants of the Norther Border Region. That said, economic growth in northern border states has performed as follows2.

We find that Baja California exhibits economic growth across all four quarters above the national average3. Baja California’s five municipalities (comprising the entire state) are eligible for the stimuli provided in the Decree. As such, 100% of the state’s economy may well be affected by the provisions of the Decree.

Interestingly, despite implementation of the Decree, growth rates of the state’s economy in 2019 remain similar to 2018 levels.

In the State of Coahuila, Ciudad Acuña and Piedras Negras are the most important eligible municipalities, accounting for roughly 11% of the state’s output, which would seem to limit the impact of the Decree statewide.

With the exception of the third quarter of 2019, the economy of the state Coahuila has failed to expand significantly.

Meanwhile, in Chihuahua, where Ciudad Juárez accounts for almost half of the state's output, we observe 2019 growth trending above the national average, despite falling by 1.9% in the third quarter.

The leading border cities of San Luis Río Colorado, Agua Prieta and Nogales in the state of Sonora account for almost 20% of total state production.

The graph shows the state's economic performance has been sporadic and with low levels of growth.

Finally, in Tamaulipas, the pertinent cities are Reynosa, Nuevo Laredo and Matamoros, which together account for almost half of the state's economic activity.

3.22.8

2.01.5

2.5

1.1

2.51.6

3.02.5

1.7 1.2

-0.9-0.3

-2.0-1.00.01.02.03.04.05.0

I II III IV I II III2018 2019

Baja California

Baja California National

2.1 1.6

0.8

-…

0.7 0.4

3.0

1.6

3.02.5

1.71.2

-0.9-0.3

-2.0-1.00.01.02.03.04.05.0


Coahuila

Coahuila National

-0.4

0.0

1.52.3

2.9

4.2

1.91.6

3.02.5

1.7 1.2

-0.9-0.3

-2.0-1.00.01.02.03.04.05.0


Chihuahua

Chihuahua National

1.30.2

1.9

3.4

1.7 2.1 1.91.6

3.02.5

1.71.2

-0.9-0.3

-2.0-1.00.01.02.03.04.05.0


Tamaulipas

Tamaulipas National

0.3

-1.0-0.4

1.4

0.0 0.41.1

1.6

3.02.5

1.71.2

-0.9 -0.3

-2.0-1.00.01.02.03.04.05.0


Sonora

Sonora National

2Charts based on INEGI information from de-seasonalized series. Percentage change from the same quarter of the previous year. 3Expressed by the growth rate of the Quarterly State Economic Activity Indicator (ITAEE) for states and quarterly growth in national GDP, based on INEGI information.


07

In 2019, the state achieved growth rates above the national average, albeit at levels similar to those achieved in 2018.

Overall, the average growth rate in 2019 of the states of the Northern Border Region came to 2%, which was higher than the national average. This growth rate is far from that required to meet the needs of the region and below the expectations generated by the implementation of the Decree.

InflationTo account for inflation, INEGI employs a specific subset of price performances in the Northern Border Region based on percentages of growth over the same month of the previous year).

Compared to 2018, inflation levels fell very significantly in 2019

Moreover, inflation has continued to wane steadily since May 2019 to date

As of December 2019, inflation rates recorded in key cities of the Northern Border Region came in as follows: Ciudad Acuña with 1.53%, Ciudad Juarez with 1.56%, Matamoros with 2.19%, Mexicali with 0.16% and Tijuana with 0.78% (versus the same month of the previous year).

EmploymentIn general terms, expansion of employment continues wane compared to rates of the previous year. The following graphs show

IMSS affiliation growth versus the same month last year.

In Baja California, where all of the state’s municipalities are eligible for the stimulus provided in the Decree, the pace of job creation slowed from 5% in 2018 to 1% in 2019.

In Coahuila, the pace of job creation has also fallen. In the last three months of the year, IMSS affiliations dropped significantly as show in the graph.

In Chihuahua, IMSS affiliations also trended downward moving from 3% in June to 1% by December of 2019.

In the case of Coahuila, clearly the pace of job creation has fallen. In the last three months of the year, IMSS affiliations declined as shown in the following chart.

As for Chihuahua, we also observe a downward trend in the pace of IMSS affiliations from June 2019 to December 2019, sliding from a rate of 3% to 1%.

Sonora exhibited a similar trend in the pace of job creation compared to the previous year.

Finally, the pace of job creation in Tamaulipas, gauged by new IMSS affiliations, also declined from May 2019.

4.3 4.3 4.6 4.5 4.6 4.8 5.2 5.3 5.6 4.9

4.5 4.3

2.8 2.2 2.4

3.3 3.3 2.8 2.6

2.2 1.7 1.5 1.1 1.31

1.0

2.0

3.0

4.0

5.0

6.0

Ene Feb Mar Abr May Jun Jul Ago Sep Oct Nov Dic

Northern Border Region

NBR 2018 NBR 2019

4.67

4.61 4.54 4.06

4.90

3.77 4.32

5.02

4.30

5.06 4.99 5.36

4.81 5.13 4.47 4.50

3.39

4.13

3.48

2.30 2.31

1.27 1.95

1.53

-

1.00

2.00

3.00

4.00

5.00

6.00


Baja California

2018 2019

2.37 2.49 2.23

2.55 2.46

2.05 2.22

2.72 2.91 3.21 3.09

3.41 3.35 3.08

2.54

2.09 2.24

1.92 1.70

1.15 1.45 1.29 1.22 1.14

- 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00


Chihuahua

2018 2019

3.88

2.59 2.48

2.78 2.83 2.72 2.86

2.19

2.83

2.02 2.21

1.70

2.98 2.66 2.54 2.76

1.77

2.57 2.69 2.52

1.52

2.28

0.80

1.35

0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50


Sonora

2018 2019

5.48 5.37 5.01 4.84 4.72 4.25

5.22 5.19 5.03 5.04 4.35 4.63

4.37 3.87

3.32 2.94 3.44 3.21

2.88

2.12 1.47 1.27

0.61 0.23

- 1.00 2.00 3.00 4.00 5.00 6.00


Tamaulipas

2018 2019

4.84 5.12 4.66

5.22 4.92

4.31 4.10 4.02 4.37 4.31

3.79 4.00

3.07 2.45 2.46

1.77 1.64 1.44 1.53 0.85

0.46

-0.42 -0.40 -0.39 -1.00

- 1.00 2.00 3.00 4.00 5.00 6.00


Coahuila

2018 2019


08

Discussion on the economic situation of the Northern Border RegionIt is important to note that the Decree is a public policy instrument deployed to support economic growth and job creation in the Northern Border Region; however, it is not the only policy currently arrayed, and economic growth of the municipalities in the region also depends on other variables.

With the lowering of VAT and income tax rates, one would expect significant economic and jobs growth in the region, something that has not materialized in general terms.

The results above also show that each state its own distinct features and the region does not behave homogeneously. Structurally these states are distinct; therefore, in order to produce better results, public policy should be adapted to the structural dynamics particular to each state.

With this in mind, we present the results of our 2nd Northern Border Region Survey on the implementation of the Decree.


09

The DecreeThe aim of the Decree was to allow taxpayers in the Northern Border Region to pay lower VAT and income tax rates. Specifically, the Decree sets VAT at 8% and income tax rate at 20% for the region, but to qualify for these lower rates taxpayers must jump through several eligibility hoops.

Moreover, as previously noted, the Decree does not include the in-bond sector, with the administration arguing this sector already enjoys a series of tax benefits. In our view, the administration’s policy failed to consider the current circumstances an in-bond sector facing stiff competition from manufacturing centers worldwide. Undoubtedly, the inclusion of the in-bond sector in the Decree, especially with regard to income tax, could enhance the sector’s competitiveness, allowing it to continue to attract investment and generate jobs, which, after all, is the stated aim of the fiscal stimulus package.

SurveyThe SurveyGeneral InformationTo gauge the impact of the Decree, this edition reports the results of a survey of key officers in more than 150 companies not belonging to the in-bond sector. Most of those surveyed hold upper management positions such as finance manager, chairman, partner and other senior positions. The distribution of the professionals surveyed is provided below.

20.9%

7.6%

Chairman, partner, senior managementFinance officerOther

71.5%


10

Regarding sources of investment, most respondents work for companies financed nationally, with U.S. financed companies coming in second place. The following graph shows this distribution.

This breakdown demonstrates the importance of national entrepreneurship, largely in the commercial and service sectors, in the economies of the Northern Border Region..

Most of the companies surveyed employ from 101 to 500 employees, followed by companies with less than 100 employees and companies with more than 100 employees. The following graph shows this distribution.

Of these companies, nearly 50% belong to the services sector, followed by consumer products at 23%, manufacturing (non-in-bond) at 16%, the primary sector at 6%, construction/real estate at 4% and public sector/government at 1%.

Range of employees

15%

39%

8%

5%

33%

More than 1,000101-500Between 501 and 1,000Less than 100Information not available

0

10

20

30

40

50

Construction/Real EstateConsumer productsManufacturing (non-in-bond)

Primary SectorPublic Sector/GovernmentServices

79%

2%1%1%

13%

2%2%

MexicoEuropeU.S.A./MexicoU.S.A.

ChinaCanadaAsia


11

Lowering the corporate income tax rate from 30% to 20% doubtless constitutes a significant incentive. In light of this, we asked companies the following questions:

Did your company opt to enjoys the benefits of the Decree of a reduction in the income tax rate?

This is a very important first conclusion. After a full year since the Decree took effect, less than half of respondents chose to exploit the income tax reduction to 20% provided in the Decree. This result completely frustrates the objectives of the Decree, as just over half of non-in-bond

Fiscal impact on companies

companies in the Northern Border Region prefer the status quo, evidently indifferent to the lower income tax rate offered and the freeing up of resources for investment and job creation such a reduction might be expected to offer.

To gain a better understanding of why employers decided not to exploit the tax benefits offered in the Decree, employers were asked why they chose to stand pat. Among many reasons given, the inability to meet the requirements set forth in the Decree was frequently cited. In other cases, applications were initially rejected, and companies did not bother to follow-up, request clarification or reapply.

Certainly, requirements to qualify for the lower rates set forth in Decree were several and subject to various interpretations by taxpayers. At our session in March 2019, we identified many circumstances not foreseen in the Decree that should be brought to the attention of tax authorities.

We should acknowledge that the SAT has always provided avenues for taxpayers to review cases; and those companies that did not take the initiative to approach the tax authority were unable to exploit the tax benefits offered.

Regarding SAT’s response time, 55% of respondents reported receiving a response within a month of submitting application, while 30% report a response coming after one month, with only 15% reporting receiving no response as of the date of survey.

42%

58%

NoYes

55%

15%

30%

Still unansweredMore than a monthWithin a month


12

For those taxpayers whose applications were approved, only 8% reported any problem implementing the terms of the Decree in their provisional income tax payments. In general, most were able exploit the lower tax rate without any problem.

Regarding the process required to maintain the benefits of the lower income tax rate, 61% of respondents reported that they periodically monitor compliance with the requirements of the Decree.

This ongoing follow up key to ensuring SAT does not suspend the benefit and thereby affect the company’s planning and cash flow, or otherwise undermine competitiveness.

With regard to VAT, the rate decrease from16% to 8% was better received.

Regarding companies’ compliance with the lower VAT rate provided in the Decree, participants were asked: Did your company opt for the benefits of the Decree to reduce the VAT rate? In this case, 71% confirmed that they had opted to exploit this benefit.

Of the companies opting to enjoy the VAT reduction, the vast majority reported that their decision was driven by the desire to remain competitive in the market by providing end customers the VAT rate of 8% that their competitors were also charging.

Taxpayers enjoying this benefit were asked if there have been any problems in implementing the 8% VAT rate, with 57% reporting that implementation was not at all troublesome.

39%

61%

NoYes

71%

29%

NoYes

43%

57%

Not troublesomeIt was troublesome


13

Those calling it troublesome mostly cited to the lack of clarity of rules, limitations in billing systems and difficulties on the part of customers to process invoices at the new rate.

Regarding maintenance of the VAT benefits provided in the Decree, 66% of respondents reported that they conduct periodic monitoring of compliance with the terms of the Decree.

We should stress that this is crucial to ensuring compliance with the VAT provisions contained in the Decree and to avoid suspensions, which might hobble company operations, cash flows and competitiveness.

One of the most contentious issues of the Decree is its exclusion of taxpayers involved in transactions with suppliers listed under Articles 69 and 69B of the Federal Fiscal Code.

The survey revealed several situations where taxpayers had performed such transactions but for insignificant amounts. In these situations, several taxpayers contacted the authority to clarify such situations and continue the process of securing the VAT benefit provided in the Decree.

In other cases, there were taxpayers who decided not to peruse the application process. In view of this situation, companies performing operations with suppliers listed in 69 and 69B were asked what actions they took to continue or qualify for benefits of the Decree.

Of the responses received, 55% of respondents chose not to take any action, 26% made clarifications with the SAT, 16% corrected their tax situation by paying differences, and only 3% chose to change suppliers.Customer difficulties in accepting

invoices at 8%Billing invoice providersnot readyUnclear Rules

30%60%

10%

70%60%50%40%30%20%10%

0%No Yes

34%

66%

60%

50%

40%

30%

20%

10%

0%

Changes supplierCorrected your tax situationpaying differencesDid not take any actionPerformed clarifications to the SAT

3%

16%

55%

26%


14

Companies were asked whether they have received benefits from the stimulus provided in the Decree. Most respondents (59%) confirmed that they had.

In order to identify these benefits, respondents noted that the reduction in VAT provided the following benefits:01. Increased sales02. Maintain higher cash flow03. Offer more competitive prices to

the consumer.

41%

59%

NoYes


15

We found that the VAT portion of the Decree has been well-received by entrepreneurs in the Northern Border Region as almost three-quarters of the total number of respondents reported taking advantage of the benefits offered, stemming mainly from competitivity concerns in a market where their competitors were also offering the lower VAT rate.

It is interesting to note that their decision to exploit the VAT portion of the Decree was not driven by an interest in improving cash flows, but rather by the economic reality requiring them to act in consequence.

The general reduction in VAT to 8% seems to have aided a significant slowing of inflation in the region. As previously noted, all the municipalities of the Northern Border Region recorded declines in prices beginning largely after May 2019, by which time most of the cases before SAT had been processed and resolved.

The degree to which inflation slowed because of the VAT relief; however, should be weighed in light of slack output growth in the Northern Border Region, which can also explain some of the slowdown in the rate of price growth.

Moreover, it is unfortunate that the income tax portion of the Decree failed to gain the traction enjoyed by the VAT portion. Unlike the latter, there are no competitive incentives for taxpayer to adopt the income tax benefits offered in the Decree. Consequently, just over half of survey respondents decided to forego these benefits.

Final discussion

As previously suggested, this is not good news, because the opportunity to free up resources allowing regional businesses to create jobs appears to be significantly underexploited.

Moreover, excluding in-bond manufacturing from the income tax portion of the Decree undermines competitiveness, the ability to attract investment and the generation of jobs in the Northern Border Region.

In the first year of implementation of the VAT and income tax measures for the Northern Border Region, we can safely conclude that results have been middling at best.

01. On the one hand, these measures have aided in price competitiveness, while also tamping down inflation compared to levels recorded in 2018.

02. On the other hand, economic growth and employment were not significantly boosted as anticipated in the objectives set forth in the Decree.

As noted above, the Decree is only one of the factors influencing the several economies of the Northern Border Region; and because of the complex features of each subregion, other significant variables also exert influence on economic growth and employment. Nonetheless, in our view entrepreneurs’ unwillingness to partake of the benefits provided in Decrees constitutes a lost opportunity for progress in the region.

The administration, in our view, should reconsider the requirements for eligibility in the VAT and income tax relief measures, making compliance simpler and more flexible; thereby freeing up more resources for investment in local economies.

Additional support from the federal government for job creation can certainly complement this good initiative. Otherwise, neither the strategy nor the aim of stimulating economic growth and job creation as set forth in the Decree will be fully achieved.

In Deloitte, we will continue to track and report on the progress of implementation of the Decree for the Northern Border Region.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/mx/aboutus to learn more about our global network of member firms.

DDeloitte provides audit & assurance, tax, consulting, and advisory to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 312,000 professionals are committed to making an impact that matters.

As used in this document, "Deloitte" means Galaz, Yamazaki, Ruiz Urquiza, S.C., Deloitte Auditoría, S.C., Deloitte Impuestos y Servicios Legales, S.C., Deloitte Asesoría en Riesgos S.C., Deloitte Asesoría Financiera, S.C. which have the exclusive legal right to engage in, and limit its business to, providing auditing, tax consultancy, financial advisory, and other professional services in Mexico, under the name "Deloitte".

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication. © 2020 Galaz, Yamazaki, Ruiz, Urquiza, S.C.

Mario García+52 (664) 622 [email protected]

Gonzalo Gómez+52 (664) 622 [email protected]

Gilberto Gómez+52 (664) 622 [email protected]

Héctor Vega+52 (664) 622 [email protected]

Simón Somohano+52 (664) 622 [email protected]

Manuel Muñiz+52 (664) 622 [email protected]

Marco Díaz+52 (664) 622 [email protected]

Miguel Ángel López+52 (686) 905 [email protected]

Contact

Editor and content:Antonio Ochoa+52 (664) 622 [email protected]

Northern Border Region - Deloitte United States › content › dam › Deloitte › mx › ... ·...

Documents

Transcript of Northern Border Region - Deloitte United States › content › dam › Deloitte › mx › ... ·...