Mexico Introduces Tax Breaks to Attract Foreign Investment
New Incentives to Encourage Nearshoring
Mexico has issued a decree offering tax breaks to companies that relocate operations to the country, with a particular focus on industries such as carmaking and semiconductors. The move aims to attract companies looking to shift their offshore operations closer to their customers, known as nearshoring, following supply chain disruptions in Asia during the COVID-19 pandemic. Economists cautiously praised the incentives, which apply to 10 sectors of the economy, including the manufacture of batteries, engines, pharmaceuticals, and agribusiness.
Concerns over Infrastructure and Energy Policies
While the tax breaks were generally welcomed, concerns remain that the Mexican government needs to do more to provide essential infrastructure for companies. Critics argue that the nationalist energy policies favoring fossil fuels hinder investment. Gabriela Siller, an economist at Banco Base, emphasized the need for Mexico to guarantee power and water supply for industries and provide a stable policy environment to encourage investment.
Potential for Increased Foreign Direct Investment
Mexico has the potential to attract annual foreign direct investment flows of $55 billion to $60 billion by taking advantage of nearshoring, up from $36 billion in 2022, according to Siller. The new incentives include accelerated investment deductions and additional deductions for worker training. Certain sectors, such as automotive, farming, and technology, are set to receive deductions of more than 80%. However, concerns persist that Mexico’s energy policies and infrastructure deficiencies may hinder the country’s ability to fully capitalize on these incentives.
Collaboration Needed for Clean Energy Supply
The Mexican government’s prioritization of fossil fuel-dependent state power companies has raised concerns about the availability of renewable energy. This has dampened expectations regarding increased investment in semiconductors in North America. To address this issue, public and private sectors must collaborate to improve the clean energy supply necessary for companies to secure financial backing for projects.
Improved Infrastructure and Facilitation of Permits
While the government’s announcement of tax breaks was welcomed, Carlos Vejar, a former Mexican trade negotiator, highlighted the need for improved infrastructure, security, and permit facilitation. Mexico faces competition from other countries in North and Central America, as well as Colombia, and Vejar believes that additional measures are necessary to persuade potential investors.
The new tax incentives introduced by Mexico aim to attract foreign investment and encourage nearshoring. However, concerns remain regarding infrastructure deficiencies and energy policies. By addressing these issues, Mexico could significantly increase foreign direct investment and compete more effectively for investment in North and Central America.