10. With relatively lower hourly wages, it is always cheap to employ Mexican labor.

Although Mexican hourly wages may be considerably low compared to U.S. and European standards, employers have to be aware of indirect costs under labor laws that will increase the net cost of the employee. These include, for example, mandatory profit sharing, mandatory year-end bonuses of at least 15 days of salary and Social Security contributions of about 35 percent of salary. However, foreign investors agree that the impact of these social benefits on the profit margin is not the most important factor in considering whether to conduct business in Mexico.

9. Foreigners cannot own real property on the Mexican coastline.

For a long time, Mexican laws strictly prohibited the ownership of real estate property in the "restricted zone" that stretches 62 miles (100 kilometers) from the border and 31 miles (50 kilometers) from the coast. However, the purchase of real property for residential purposes can be done using certain trust vehicles. Foreign companies meeting certain requirements established by the Foreign Affairs Ministry may acquire real property in the restricted zone provided it is not used for residential purposes.

8. Mexican companies with taxable losses will not have to pay taxes.

Mexican tax law imposes a tax of 1.8 percent on net assets owned by a Mexican entity or a foreign resident with a permanent establishment, including companies set up under the Maquiladora regime. The tax on assets includes foreign assets if owned by the Mexican company, and this tax works as an alternative minimum tax. In this sense, the tax will be triggered when the income tax for the month is lower than the asset tax.

Companies operating under the Maquiladora regime may be exempt from the asset tax. Assets from non-Mexican residents held by the Maquiladora would be exempt from the asset tax as long as the company complies with at least one of two safe harbor requirements: 1) taxable income is not less than 6.9 percent of the assets used, or 2) taxable income is not less than 6.5 percent of the deductions for operation costs and expenses.

7. Capital repatriation is subject to strict exchange rate and administrative controls.

Mexico does not have capital repatriation controls. Currencies can be freely bought, sold, and sent or transferred abroad. Mexican subsidiaries may freely repatriate profits as long as the company is in good legal standing and meets its tax obligations.

6. For income tax purposes, inventory can be fully deducted in the year it is purchased.

For many years before 2002, this was true and provided significant planning opportunities. However, legislation enacted as part of the 2002 tax reform in Mexico determined that inventory was to be deducted for income tax purposes only in the year of the sale of such inventory, not the year of purchase as before.

5. Small companies are not required to have statutory audits.

Mexican law provides an exemption for small business from the requirements that their books and records be audited by a professional firm annually. However, this exemption truly applies to very small businesses. Generally, a company with more than approximately $275,000 of gross income, approximately $550,000 (U.S.) in assets or 300-plus employees, must have its books and records audited. In addition, companies that receive donations and companies that have had a merger or spin-off during the fiscal year are required to have their books audited.

4. Maquiladoras can only be set up for production and exports of goods from Mexico.

Although that was originally the way the Maquiladora regime was written, this situation is no longer true. As of Nov. 13, 2006, new legislation, "Decree for the Development and Operation of the Manufacturing, Maquiladora and Services' Export Industry" (IMMEX), requires only that 10 percent of total sales or $500,000 (U.S.) be used for exports. Another main change in the legislation states that maquiladora companies will be allowed to increase or create supply chains by subcontracting manufacturing operations. However, Valued Added Tax (VAT) and income taxes will apply to such subcontractors.

3. Mexican anti-abuse tax laws are not well developed when it comes to international transactions.

Mexican tax authorities have gone to great lengths to protect the Mexican taxable base from erosion through aggressive international tax planning. As a result, Mexican anti-abuse laws are substantial and strict, encompassing many areas such as transfer pricing (recently held by the courts not to be in conflict with non-discrimination clauses of double taxation treaties in effect), thin capitalization, migration of assets and tax havens. Moreover, under the constitutional mandate of the "Calvo Clause," foreign shareholders are forbidden from requesting protection from their home country in matters related to a Mexican entity with noncompliance resulting in forfeiture of the Mexican holdings.

2. Mexico is an old nation with an aging labor force.

Mexico is, in fact, an ancient country, but its labor force is anything but old. It has, on average, one of the youngest labor forces in the world, a fact that will be true for the foreseeable future. As of 2002, more than 30 percent of its population was younger than 15 years old, only about 8 percent was older than 60, and the median age was about 25. While such a young labor force provides a valuable pool of human capital for future investments in the country, a higher level of investment in the technical job training and education of such a labor force also will likely be required compared to other countries. These include the United States and Europe, which have older, more experienced, labor forces.

1. Mexican import duties are very high.

Mexico has a thriving international trade sector that boasts no or low import duties to several countries. In fact, Mexico is one of the countries with the most number of Free Trade Agreements in force. In addition to the well-known North American Free Trade Agreement (NAFTA) that eliminated some duties and is phasing out others with the United States and Canada since 1994, Mexico has also entered into Free Trade Agreements with the European Union, Japan, Chile, Uruguay, Israel and many other countries.

These are just a few of the misconceptions of doing business in Mexico. For more information, check with your accounting professional to answer any further questions. e

Octavio Lara is the international tax partner with Lores Rodrigues y Cia, S.C. in Mexico City. Contact him at octavio.lara@lores.com.mx or 52 55 5280 2939. Rafael Carsalade is a tax manager with PKF Texas. Contact him at rcarsalade@pkftexas.com or (713) 860-5412.