1. © Grant Thornton Setting up a Distribution Business in Mexico: Considerations for U.S. and Foreign Investors Andrew Speer Grant Thornton LLP

2. © Grant Thornton WHAT TYPE OF DISTRIBUTION BUSINESS? A.Wholesale to Maquila/PITEX customers B.Wholesale to non-Maquila/PITEX C. Retail

3. © Grant Thornton Can invoice from U.S. & incorporate a Mexican company to provide warehouse services –Advantages Easier to coordinate with parent than buy/sell operation Provides greater flexibility for income distribution and tax planning –Requirements Incorporation of company Standard licenses Service Maquila license Operating agreements Transfer pricing support WHOLESALE DISTRIBUTION TO MAQUILA/PITEX CUSTOMERS

4. © Grant Thornton U.S. Parent Mexican Sub U.S. Customers Mex Customers Invoice (B) Shipment Invoice (A) WHOLESALE DISTRIBUTION TO MAQUILA/PITEX CUSTOMERS Shipment

5. © Grant Thornton Warehouse structure complications –VAT Issue: May be unable to recover import VAT –Invoicing Issue: Sales within Mexico subject to Mexican invoice rules WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

6. © Grant Thornton Wholesale Distribution requirements: –Incorporation of 2 companies Company number one: –Import licenses –“NOM” compliance –Mexican invoicing system –Transfer pricing support Company number two: –Mexican invoicing system WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

7. © Grant Thornton Wholesale Operations –1st Company performs import duties & warehousing –2nd Company buys from import company & sells to customer Limits impact of invoicing requirements that state first hand, wholesale import sales must provide detailed customs information on invoice WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS

8. © Grant Thornton Parent Customer Service Customer Shipment + Invoice WHOLESALE DISTRIBUTION TO NON- MAQUILA/PITEX CUSTOMERS Import & Warehouse Shipment + Invoice

9. © Grant Thornton RETAIL DISTRIBUTION Difficult to implement warehouse operation for same reason VAT recovery reason as wholesale operations Retail invoices do not require customs information, however

10. © Grant Thornton RETAIL DISTRIBUTION Requirements: –Incorporation of one company –Import Licenses –“NOM” compliance –Transfer Pricing Support

11. © Grant Thornton Parent Mex Company Shipment + Invoice RETAIL DISTRIBUTION Product + Invoice Customers

12. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Incorporation Licenses Operating Agreements Labor Issues Administration Customs Taxes

13. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Incorporation: 4-8 weeks –Articles of incorporation / Corporate Purpose –Powers of attorney –Notarization –Taxpayer i.d. number

14. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Obligatory licenses –Importer registration –Foreign investor registration Licenses that may be required –Service maquila license and RECIME registration –Padron Sectorial –Environmental Permits –“NOM” compliance

15. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Operating agreements that may be required –Warehouse agreement with third party –Intercompany warehouse agreement (earnings stripper) –Equipment lease agreement (earnings stripper) –Employee lease agreement

16. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Labor issues –Collective bargaining agreement with unions –Individual labor agreements –Human resources procedures consistent with Mexican law –Mandatory profit sharing of 10%

17. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Administration –Accounting –Payroll –Tax filings –Audit requirements

18. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Customs requirements –Customs agent –Duties, possible NAFTA benefits –“NOM” requirements Benefits under Service Maquila license Provide customs classification number

19. © Grant Thornton GENERAL REQUIREMENTS / ISSUES WHEN ENTERING THE MEXICAN MARKET Tax requirements –Income tax U.S. considerations Mexican considerations –Value Added Tax (VAT) –Asset Tax –Profit sharing “Tax”

20. © Grant Thornton QUESTIONS?