As part of the series, read the first blogs, "Is your Multitenant Shelter Holding you Back?" and "5 FAQs about Transitioning from a Multitenant to a Dedicated Shelter".
Many companies are drawn to the initial cost-attractiveness of multitenant shelters in Mexico. However, we have seen a growing concern about the true financial picture of this operational model. Let's dive deeper into the financial aspects of multitenant shelters and the dedicated shelter model, helping you make an informed decision about your nearshoring strategy.
Shelter services in Mexico provide a turnkey solution for foreign companies looking to quickly establish manufacturing operations while minimizing risk. These services include everything from human resources and legal compliance to facility management and logistics support, allowing businesses to focus on production and growth. The two primary models offered by shelter providers are multitenant and dedicated shelters, each catering to different operational needs and cost structures.
Multitenant shelters allow multiple companies to share a single facility and pool resources such as administrative services, legal assistance, and compliance management.
Dedicated shelters offer a tailored solution for companies that prefer complete control over the operations. With dedicated shelter services in Mexico, businesses have exclusive use of a facility and access to customized services that are specifically designed to meet their unique needs.
When deciding between multitenant and dedicated shelter models, its important to weigh not only the operational benefits but also the financial implications. Each model comes with its own set of costs, and understanding these differences is key to selecting the best fit for your business. Let's take a closer look at the cost structures of multitenant versus dedicated shelter services in Mexico, and how they impact your bottom line.
Speaking with corporate finance executives on a regular basis, many have reported a concern over lack of financial transparency and cost management in a multitenant shelter operation.
How much could the increased risk of a multitenant shelter cost you?
Let's explore.
In a multitenant shelter, your employee operations may be impacted by other companies on the same, shared legal entity in Mexico.
Many of the multitenant shelter companies on the market are accustomed to bill based on man hours worked in the Mexican facility. This can create potential cost overruns, especially for projects with unpredictable timelines or production peaks. In this type of labor cost model, overtime can really affect a company. With a flat-fee based pricing model based on administrative responsibilities, labor costs are transparent and there is little incentive to accept turnover.
You could experience possible restrictions on the employee compensation package if you are located in close proximity to other companies on the same shared entity. Operations must be very clearly separated in order to rely on complete autonomy over the definition of certain employee compensation decisions.
One part of the compensation package is the work risk premium, which defines certain Social Security taxes based on the types of activities actually performed in the operation. As an example, a large company was paying a higher work risk premium than necessary due to their specific multitenant situation and some unfortunate accidents of another company. They transitioned to a dedicated shelter model and the savings from the premium they were classified by the authorities (corresponding to their isolated operation) offset the cost or hiring Prodensa as their operational partner. The risk is that the highest worker risk premium required about companies on a shared entity within close proximity of each other could cause an increased risk of excessive tax. In general, the lack of transparency in the criteria for the application of the work risk premium could potentially affect individual operations under a multitenant shelter umbrella.
Another company renegotiated their medical and life insurance policies for a +1,300-person operation upon transition to a dedicated shelter entity. They obtained a 36% savings due to their increased bargaining power as well as the separation of the client from the claims of the large group policy under the previous multitenant shelter provider. Companies with a large headcount could benefit from a renegotiation of their employee insurance.
A dedicated legal entity would allow you complete freedom to choose the compensation package that best fit your operation and goals. The worker risk premium will always be based on the actual operation of the single, dedicated entity.
First, it’s important to note there are two main types of IMMEX operations for manufacturers, and the rules for the extent of profit allowed in each differs. Although there may not be direct risks related to how much profit can be generated by the specific operation, there are other implications for income tax and profit-sharing between the models.
All companies on a multitenant shelter must declare income taxes in the same way. The Safe Harbor calculation allows the higher of two calculations: 6.5% over costs and expenses of the operations, or 6.9% of the value of the assets. This could mean that another company on the same shared entity may have high assets, and force the rest of the companies to declare taxes based on the same calculation. The risk exists of paying higher taxes based on the lack of isolation of your operation from others.
The Safe Harbor calculation is based on the specific situation of the single company. In a Shelter IMMEX operation, some of the benefits package is no longer a deductible expense, and that increases the taxable base used to calculate taxes. For specific operations with large headcount, a subsidiary or other operational model on a dedicated entity could provide different tax strategies and incentives and further optimize the financial structure of the operation.
Overall, there are multiple areas of operational costs that rely on third-party vendors to provide services in the manufacturing operation in Mexico. These could include anything from customs brokerage or logistics to cleaning or security services.
The shared nature of a multitenant shelter operation can make it difficult to accurately track and allocate costs. This lack of transparency may result from shared costs with other companies on the entity, or stemming from certain costs that are included in a fee but not broken down for complete visibility. It’s important to note that there may be some advantages to supplier costs based on volume, but in many cases the lack of transparency and breakdown make it difficult to see exact allocations. In general, multitenant operations allow very little customization or bargaining power over the suppliers that are used in the operation, and some of these suppliers may be owned by the same shelter company.
Although a dedicated shelter could also provide cost-savings from volume-based pricing, the visibility and allocation of costs will be clearer. Service fees should be based on exact volumes of needs of the single operation, and not mixed with other operations. This provides greater visibility into financial performance, allowing for better cost control and decision-making.
Arguably the most important financial risk is the interruption or cancelation of incentives that allow companies to effectively eliminate value-added tax on temporary imports after a process of certification.
The shared nature of the entity means that all companies will use the same IMMEX and VAT Certification, creating new extensions for each additional operation added to the group. Although each physical address is treated for most purposes as a standalone operation, other companies under the same group could have a major affect on compliance. A simple mistake on import/export or VAT declarations could put the tax incentives in jeopardy for all the companies on the shared entity.
The shelter IMMEX may provide faster VAT certification times than an Industrial IMMEX as well as a streamlined process to certify sensitive materials in the operation. The VAT reimbursement process is isolated from other operations due to the dedicated legal entity. The risk of cancelation for error in declarations still exists, but the adverse affect of other companies that are out of your control is eliminated.
For many foreign companies in Mexico, the goal is continued growth in their operations. Nearshoring is bringing more companies to the region, and local content prescribed in the USMCA is driving supply chain shifts. Agility is the name of the game.
The great benefit of a multitenant is the fast-track start to producing your products in Mexico. This relies on a shared entity and pre-existing business structure that you take advantage of to meet your goals. If the time comes where you seek to grow and expand, or even transition to your own independence, the process could cost you a great deal more than anticipated. You will need to obtain a new entity, whether you incorporate one or find another shelter provider, and then transition your operation. For multitenant operations, the IMMEX and IVA/IEPS Certification remains on the shared entity. Basically, you must start from zero if you wish to become an independent operation. This limits your agility in a booming market.
The legal entity of a dedicated shelter model can be transferred to your ownership according to contractual terms. It is a fairly simple legal process, and a good shelter provider will have this process built-in to the contract, providing a simplified “offboarding” process and a streamlined process to become an independent operation in Mexico.
While multitenant shelters may initially appear cost-effective, the hidden costs and risks combined with a lack of control can significantly impact your bottom line. By carefully considering the financial implications and exploring the benefits of dedicated shelter operations, you can make a more informed decision about your nearshoring strategy and mitigate potential risks.
Are you considering a transition from a multitenant to a dedicated shelter?
Transitioning to a dedicated shelter may require a higher initial investment compared to a multitenant model. However, the benefits of transparent cost structures, increased control, and reduced risk should be factored into your financial analysis. By conducting the recommended research, you can gain a clearer picture of the true financial cost of each operational model and make the best decision for your business in Mexico.
Remember: Don't underestimate the potential long-term savings and efficiency gains associated with increased control in a dedicated shelter environment.