Mexico offers tax breaks for nearshoring investors

2023 10 02 MEXICO USA UKRAINE scaled
Mexican President Andres Manuel Lopez Obrador speaks during a news conference in which he panned U.S. military spending on Ukraine as "irrational" stepping up criticism of the war effort as he urged Washington to devote more resources to helping Latin American countries, at the National Palace in Mexico City, Mexico October 2, 2023. Mexico Presidency/Handout via REUTERS ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. NO RESALES. NO ARCHIVES.

On Wednesday, Mexico issued a decree to provide tax incentives to companies relocating their operations to the country, with a focus on key export industries like automobile manufacturing and semiconductor production.

These incentives are tailored to attract companies looking to shift their offshore operations closer to their customer bases, a strategy known as “nearshoring,” in response to disruptions in global supply chains, particularly in Asia, caused by the COVID-19 pandemic. The incentives would be applicable to 10 sectors of the economy, including battery manufacturing, engine production, fertilizer production, pharmaceuticals, medical devices, and agribusiness.

President Andres Manuel Lopez Obrador has expressed the belief that Mexico should benefit from the trend in the industry to reduce its reliance on China. However, critics argue that his administration has been slow to provide clear and compelling incentives for foreign investment. While these measures have been welcomed, concerns remain about the government’s failure to provide essential infrastructure, especially in light of its nationalistic energy policies that favour fossil fuels.

The new incentives encompass accelerated investment deductions, ranging from 89% to 56% for the years 2023 and 2024. In addition, there are extra deductions of 25% over three years for worker training, particularly in the automotive, agricultural, and technology sectors. The highest deduction of 89% is available for machinery and equipment used directly for research into new products or technological development within Mexico.

However, concerns persist about the government’s prioritisation of supporting Mexico’s fossil-fuel-dependent state power companies, and also the lack of available infrastructure.

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