Demystifying the Corporate Shelter
When the North American Free Trade Agreement (NAFTA) was approved in 1994, manufacturing in Mexico came under the spotlight. What many do not know or understand is the fact that foreign interest in Mexico was first facilitated in 1961, when the 'National Border Industrialization Program' was introduced. This program was created to attract foreign investors and stimulate Mexico's internal market. The Maquiladora Program, which allowed maquiladoras to be 100% foreign owned, was initiated three years later with the intent to foster border region employment rates as well as further attract foreign investment. Although these programs encouraged foreign-owned production facilities, product sales to Mexican markets were controlled. A new maquiladora decree was issued in 1989, and relaxed Mexico's foreign investment laws further as well as allowing maquiladoras to sell up to 50% of their production to Mexican domestic markets.
NAFTA, among other provisions, eliminated certain customs benefits enjoyed by the maquiladora program and defined strict 'rules of origin' for products to qualify for preferential tariffs. The combination of NAFTA's amendments to the Maquiladora Decree of 1989 and ever-changing Mexican laws governing corporations and trade make the establishment and operation of a maquiladora appear daunting to even the most savvy of American businessmen. Yet thousands of companies have Mexican operations, including a large percentage of small to medium-sized American manufacturing firms. The decision to establish a maquiladora was based on minimizing overhead and increasing profit margins, and the success of manufacturing operations south of the border stems from skilled, conscientious labor at a lower cost combined with a longer workweek. Still, the mystery and skepticism attached to setting up shop in Mexico remains.
Certainly the task is an immense challenge for an American firm wishing to establish a Mexican corporation themselves without the knowledge of Mexican culture, laws and logistics. While many Fortune 500 firms choose this route, a diverse pool of consultants is required, and innumerable challenges arise in both the establishment process and operation of their maquiladora. Some companies choose to hire a contract manufacturer, but sacrifice complete control of production rate and speed. The third option companies may choose is the corporate shelter service. Although essentially the simplest way to open a Mexican plant, it is the subject of considerable confusion.
The shelter program has been in use since the 1960s. This service allows manufacturing firms to establish a maquiladora in Tijuana without owning a Mexican business. The process is quite simple. The American or foreign-owned company wishing to manufacture in Tijuana contacts Border Assembly Inc., a firm specializing in providing shelter services. Based on the production volume and the specific process required to assemble or manufacture the client's product, the shelter firm looks for an appropriate building. The shelter firm then leases the building for the client, and handles all of the real estate transactions, permits and legal work required to acquire the facility. The shelter service also acquires the maquiladora register, import permits, and local and federal licenses and permits. Bank accounts and an accounting and tax payment program are established, and prospective employees are screened, interviewed, and hired. The foreign manufacturing firm moves equipment and machinery required for assembly or manufacturing to the facility, and designates a production supervisor to run the production area.
Once the operation is established and running, the shelter firm ensures compliance with all Mexican laws and agencies which regulate taxes, customs, labor, zoning, facility management, and environmental protection. Research and management required for fiscal compliance with transfer pricing, permanent establishment, safe harbor, asset taxes, and payroll, withholding and employee benefits packages are also handled by the shelter firm. Ongoing hiring, termination, incentive and disciplinary programs as well as compliance with labor laws and the labor board are performed as part of the shelter package as well.
Additionally, the shelter firm handles all border crossing documentation, U.S. and Mexico broker coordination and transportation arrangements. The foreign-owned firm now has a maquiladora in Mexico, but avoids the challenges associated with cultural differences, employee management and compensation policies, accounting and payment of taxes, and compliance with local and federal codes, regulations and laws. A thorough involvement and focus on production efficiency and quality is afforded to the foreign firm, and the shelter service performs all other functions required to keep the operation running smoothly. Most firms specializing in shelter services are a combination of American and Mexican sister companies. All of the services discussed above are included in a weekly invoice from the American shelter firm to the foreign-owned company it has established manufacturing for.
The efficiency of shelter services has advanced to a point where an American business could potentially establish a Mexican operation in as few as six weeks without making a single border crossing. Setting up a manufacturing facility in Mexico promises reduced production overhead and better profit margins. It also represents a myriad of cultural, legal, and logistical challenges for those who endeavor to try it themselves. Many firms have established and manage their own made in Mexico corporation with productive results, but the shelter option remains the simplest, most maintenance-free method for manufacturing in Mexico.
Call Border Assembly at (619) 710-0555 to find out if a corporate shelter program is right for your company or fill out our free estimate form.