June 8, 2016 / 9:22 PM / 2 years ago

UPDATE 2-Mexican state reaches deal with Kia to cut tax breaks

(Adds Kia comments)

MONTERREY, June 9 (Reuters) - The governor of the Mexican state of Nuevo Leon, Jaime Rodriguez, on Wednesday said that officials had reached a deal with South Korean carmaker Kia Motors to cut the tax breaks it would receive after building its first Mexican plant in the state.

Nuevo Leon’s economy minister, Fernando Turner, said the deal would reduce the incentives from 28 percent of the amount invested by Kia and its suppliers to 10.5 percent.

Turner said the deal would eliminate an income tax rebate and the carmaker had also agreed to increase its purchases from local suppliers.

Kia Motors said in a statement the agreed level of incentives was “basically in line with the original investment agreement”.

Shares of the automaker were down 0.54 percent in morning trade, lagging the wider market’s 0.4 percent gain.

Rodriguez was elected as modern Mexico’s first independent governor last year and his administration had been demanding that Kia renegotiate some of the incentives pledged in an accord struck in 2014 under his predecessor.

Nuevo Leon said the 2014 accord violated state law by offering what it had called “excessive” incentives, such as waiving Kia’s obligation to pay state income taxes for 20 years.

A statement from Nuevo Leon’s government said the deal had also eliminated other incentives, such as paying for a party to inaugurate the plant, as well as committing the state government to provide water and electricity services.

The agreement should bring relief to the federal government, as senior officials see the spat over the Kia plant as a potential impediment to future foreign investment in Mexico.

Kia Motors started production at its $1 billion factory in Mexico on May 16, with plans to increase its total production capacity to 300,000 vehicles a year, from this year’s projected 100,000.

Kia Motors plans to export some 80 percent of its vehicles produced in Mexico to countries in North America and Latin America. Affiliate Hyundai Motor also plans to build its Accent small car at Kia’s Mexico factory next year, sources earlier told Reuters. (Reporting by Gabriela Lopez; Additional reporting by Hyunjoo Jin in SEOUL; Editing by Andrew Hay and Syephen Coates)

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