Supplement Firms Request Equity In Mexico's Tax Rule To Revive Sales

The U.S. dietary supplement industry requested that Mexico change its value-added tax regulation and return foreign firms to equal footing with the country's domestic industry.

Mexico implemented a 15 percent levy on dietary supplements in 2008 when the country changed its definition of imported products subject to the VAT. The tax, which was increased to 16 percent in January 2010, impacts retailers and direct sellers.

Some U.S. supplement firms doing business in Mexico assert sales there have dropped 20 percent to 30 percent under the VAT.

An economic agency official for Mexico notified the U.S. embassy in Mexico April 6 that a decision has been made on the industry's request and "will be posted in the next couple of weeks," says John Venardos, a senior VP with Herbalife, which is among the top direct-selling supplement firms and has pointed to Mexico as a driver of sales growth for much of the previous decade.

"We are eternally optimistic, but we are prepared in case the news is not good," Venardos said. A negative outcome would be a decision not to change how Mexico imposes the VAT.

Herbalife's daily consumption club sales model started in Mexico in 2000, and the Los Angeles-based nutritional and weight-management products firm is spreading similar systems to distributors in markets worldwide (¹ (Also see "Clubs Bring Customers To Herbalife Distributors, Sales Growth For The Firm" - Pink Sheet, 22 Dec, 2008.)).

However, in its most recent earnings statement Herbalife reported Mexico's VAT slowed sales there even as net sales grew in other parts of South and Central America, which was up 34 percent overall to $113.2 million (² (Also see "Sales & Earnings In Brief" - Pink Sheet, 1 Mar, 2010.)).

Venardos said Herbalife's sales in Mexico are down around 20 percent. "We decided on a business decision to pass the VAT cost onto our distributors and their customers," he said in an interview. "That has increased the price of our products to the final consumer."

"Unfair Playing Field"

Venardos explained that under the North American Free Trade Agreement, Mexican firms marketing supplements in the country should be subject to the same VAT. However, Mexico's authorities are not imposing the tax on their products.

He said industry has worked together and promoted its message over the years to the government agencies in Mexico and the U.S. Perhaps the decision is coming now, he added, because industry has "pestered long enough."

Daniel Fabricant, the Natural Product Association's VP of scientific and regulatory affairs, noted the VAT in Mexico "does set up an unfair playing field."

Fabricant also said the tax discourages firms from doing business in Mexico. He added that the VAT "seems very counter to the spirit of NAFTA."

Put It In Writing

Venardos wrote a white paper in 2008, on behalf of Herbalife, that explained the unfairness of the Mexican marketplace due to the VAT, noting 35 Herbalife supplements were impacted.

He also wrote that removal of the 15 percent VAT on Herbalife imports into Mexico could increase the firm's revenues from U.S. exports by $50 million annually.

Now, as chairman of the Council for Responsible Nutrition's International Trade and Market Development Committee, Venardos wrote a second white ³ paper explaining the inequity of the VAT.

The March 25 paper, which was presented to Mexican and U.S. officials, asserts that imposing a VAT on imports but not on similar Mexican-produced products is "discriminatory" and puts the U.S. at a "competitive disadvantage."

Without the tax assessed on Mexico's domestic products, the country's "VAT system currently discriminates against imports (which are being assessed the VAT at the border) in favor of domestic products which appear to be exempt," wrote Venardos.

In March, Brazil threatened to impose a tax that threatened U.S. personal care product firms in retaliation for U.S. subsidies to domestic cotton farmers, among other alleged trade violations. The U.S. Trade Representative, however, announced April 6 that the countries carved out "a path toward a negotiated settlement" (see ⁴ (Also see "U.S., Brazil Near Deal To Cancel Import Tariff Hikes On Personal Care Products" - Pink Sheet, 12 Apr, 2010.)).

Potential For A Monopolistic Outcome

In addition to Herbalife, U.S. firms impacted by Mexico's VAT include GNC, Amway, Shaklee and Nature's Sunshine, Venardos' paper says.

The paper also notes, "A number of importers, industry members of CRN, have formally appealed this change and have been seeking a clarification" from Mexico's Tax Administration Services on the definition of a "nourishment product."

The VAT gives Mexico-based firm Omnilife an advantage, Venardos explained. The firm markets similar nutritionals, but apparently is not required to pay the tax.

"Invoices from Omnilife and one other indigenous Mexican-based producer/competitor of nutritional supplements confirm that they were not being requested" to pay the VAT, according to the paper.

In a March 30 letter submitted with Venardos' latest white paper, CRN asked the U.S. Trade Representative and the Department of Agriculture to discuss the tax at a meeting of the U.S.-Mexico Consultative Committee on Agriculture later in the spring.

However, Venardos said the request may be "moot" with the possibility Mexico will change its VAT rule.

If not overturned or if the tax continues to increase and it becomes too much of a burden for U.S. businesses to import nutritional products into Mexico, Fabricant said that it could potentially lead to "almost a monopoly" for Omnilife.

"Industry will continue to jawbone with the U.S. government to try to encourage it to remain alert and to be supportive as best they can," adding that several options exist, Venardos said.

He said additional actions would include meeting with Mexico's tax organization, lobbying members of Congress to write the Mexican ambassador in Washington and asking the U.S. ambassador in Mexico to formally petition the Mexican government.

- Katie Stevenson ( ⁵ [email protected] )