CHRIS KRAUL AND JAMES F. SMITH
 Los Angeles Times Service

 TIJUANA, Mexico -- Lured by minuscule taxes, cheap labor and proximity to the
 U.S. market, corporate America has flocked to Mexico over the last two decades,
 opening thousands of maquiladora factories in a country hungry for jobs and
 investment dollars.

 Now, Mexico, brimming with confidence but hard-up for money, wants to collect
 more taxes from the export-driven factories. And that has opened a can of worms.

 Barring a change in the U.S.-Mexico income tax treaty, a Mexican law due to
 take effect in January would suddenly subject the U.S. companies to double
 taxation -- unless Uncle Sam is willing to give up its right to tax the companies'
 Mexican operations.

 Predictably, the maquiladoras are howling. Some are threatening to move their
 factories to China or, more credibly, to Honduras, El Salvador and other Central
 American countries that have established equivalents to the maquiladora system.

 Then again, abandoning a cheap-labor nation that shares a free-trade border with
 the world's largest market seems an unlikely course of action.

 MEXICO `A VIABLE COMPETITOR'

 Indeed, the dispute brings into focus a maturing Mexico, one that has much to
 offer foreign businesses and no longer feels it has to give away the store to attract
 them.

 ``Mexico has tremendous leverage now with these companies,'' said Allen
 Delattre of Anderson Consulting in Los Angeles. ``It has gone from being a
 low-cost, convenient labor provider to being a viable competitor in its own right.
 The businesses there now have momentum bigger than the maquiladora program,
 bigger than NAFTA and bigger than international taxation issues.''

 Nor is there any doubt about the justification for greater tax revenue: It's needed to
 tend to the squalor that has accompanied the maquiladoras' explosive growth.

 Still, resolving the tax dispute sensibly will be a measure of Mexico's maturity as
 a trading nation. A heavy tax burden, or a prolonged period of uncertainty, could
 cool the ardor of prospective maquiladoras. They could look to Honduras, where
 dozens of maquiladoras already employ more than 100,000 and enjoy comparable
 tax and duty advantages with the United States.

 ``Mexico has a fine line to walk,'' Delattre said. ``If the [tax] changes become
 disadvantageous, that creates opportunities for other Latin American countries
 that also are trying to industrialize.''

 The tax confrontation was triggered by Mexico's passage last December of a law
 that would reclassify most of the 4,500 maquiladoras from temporary to
 permanent business establishments as of Jan. 1, eliminating tax loopholes they
 have enjoyed since the mid-1960s.

 U.S. ASKED TO FORGO REVENUES

 Under the current tax treaty, tax experts say, the result would be to suddenly
 subject U.S. manufacturers to corporate income taxes in both countries.

 A flurry of negotiations is taking place this month in Washington, where Mexican
 officials are asking the United States to forgo tax revenues it now collects on the
 maquiladoras. But negotiators have been unable to agree, and Mexican officials
 indicate they will postpone the effective date of the new tax until the dispute is
 resolved.

 John McLees, a tax attorney and advisor to the National Maquiladora Trade
 Association, said that even if double taxation is eliminated, reclassifying
 maquiladoras from ``processing centers'' to ``permanent establishments'' would
 open the door to taxing a company's worldwide profits.

 But Mexican authorities from President Ernesto Zedillo on down have repeatedly
 sought to assure the maquiladoras that the government will do nothing to harm an
 industry that now employs 1.1 million people and whose work force is growing by
 10 percent a year.

 ``We do want to charge more taxes. Certainly we feel we can and should charge
 more taxes on such a significant sector,'' Mexican Trade Secretary Herminio
 Blanco said. ``What we don't want is to have any of these firms close down. It is a
 very delicate balance.''

 Maquiladoras date from 1965, when the two countries created their special tax
 and duty status as a way to replace the jobs lost with the phasing out of the
 bracero program that had allowed Mexicans to work temporarily in the United
 States.

 Maquiladoras boomed after the Mexican devaluations of the 1980s and 1990s. A
 weak peso made Mexican labor cheap enough that it could compete with other
 manufacturing countries, especially in Asia, that until then were reeling in most of
 the offshore plants.

 `TAX WILL DISCOURAGE INVESTMENT'

 The maquiladoras themselves have grown steadily more sophisticated, evolving
 from simple ``assemblers'' to become in some cases sophisticated high-end
 producers of computers and other electronic goods.

 In addition to cheap labor, the attraction for U.S. owners is that, as long as the
 products are sold in the United States, they don't pay duty on the components,
 raw materials and machinery that they bring into Mexico.

 For U.S. companies, such as Plantronics, that have located in Tijuana, remaining
 competitive in the global marketplace is what they're after, and they contend the
 tax would make Mexico less attractive by raising costs.

 ``This tax will discourage investment here,'' said Cesar Lopez, manager at a
 Plantronics' telephone headsets assembly factory here. ``At the same time,
 China is making it very attractive for companies like ours. You pay workers only
 $2 per day, there are no unions, no turnover, and the central government takes
 care of everything.''

 The new law would subject the maquiladoras to normal Mexican income tax,
 based on the profit generated within the Mexican operation. That is standard
 practice worldwide. The difference here is that most maquiladoras are U.S.
 companies, and U.S. tax law assesses corporate tax based on global operations.
 Therefore, unless the firms can get a credit on their U.S. taxes for taxes paid in
 Mexico, the companies would be taxed twice.

 Mexico has gradually increased its tax bite on maquiladoras, from negligible to
 merely minimal. But the current rate is still a highly favorable arrangement for the
 foreign manufacturers.

                     Copyright 1999 Miami Herald