Maquiladoras: An imminent change in tax treatment?

A Hot Tip about Law and Compliance in Mexico

Posted on: 6 Apr 2010

Discusses proposed changes to tax treatment applicable for IMMEX companies

BUSINESS NEWS ? Special Report Maquiladoras ? An imminent change in tax treatment? In November 2006, the Maquila and PITEX decrees were merged into a sole document known as the IMMEX decree (the ?Decree?) ? which created the new IMMEX companies. This decree governs not only the customs aspects of IMMEX companies, but also defines what a maquila operation should be for tax purposes through its article 33. Article 33, taken together with articles 2 and 216-Bis of the Income Tax Law and several other legal provisions, are the basis for determining the tax treatment of the maquiladora industry: ? Applicable to foreign investors who would be at risk of creating a permanent establishment (PE) as a result of their legal and economic relationships with the Mexican maquiladoras if not for the Decree. ? The Decree provides that the foreign investor does not create a PE from its operations with the Mexican maquiladora and, additionally, deems such operations as if conducted at market value. ? The Decree provides for tax profits that in practice pay no more than 17.5% Income Tax and Sole Rate Corporate Tax, mainly as a result of the tax benefits afforded to this industrial sector. However, the Decree leaves open the possibility that companies that were formerly PITEX, and who traditionally paid Income Tax at the general rate, reconvert themselves into maquiladoras and substantially reduce their Income Tax payments in Mexico, including, in some cases, those derived from their sales conducted and services rendered in our country. In order to close this loophole, the Ministry of Finance has promoted an amendment to the definition of maquila operations provided by Article 33 of the Decree. The soon-to-be-published amendment to the Decree includes the proposed changes to Article 33, summarized as follows: a. In addition to manufacturing activities, goods shall now be deemed transformed when they are (i) diluted (in water or otherwise); (ii) cleaned or cleansed; (iii) conservatives are added to them; (iv) adjusted, cut or shaven; (iv) conditioned into doses; (v) packed, re- packed, packaged or re-packaged; (vi) submitted to testing; or (vii) marked, labeled or classified. b. Goods furnished by the foreign resident that are imported temporarily should represent a substantial proportion of inputs used for the manufacturing of the maquila product. Thus, at least 51% of the goods utilized for the production of an export product must be foreign in origin. This directly impacts companies that rely heavily on domestic inputs for the manufacturing of their products (i.e., Tequila, candies, food & drinks, etc.). c. Maquila operations should be conducted with machinery and equipment owned by the foreign resident, which has been imported temporarily or definitively (through a change in regime, and provided they were not owned by the company conducting the maquila operations or any other Mexican company). This shall not apply to companies that operated under a duly authorized maquila program prior to November 1, 2006. These amendments seek to cleanse the tax scheme for maquiladoras in order to achieve the following: ? Avoid reconversions of former PITEX companies that seek to benefit from a tax scheme designed exclusively for maquiladoras. ? Restrict the application of such benefits to companies that reconverted after November 2006, since it will be hard for them to import no less than 51% of their inputs1 and utilize machinery and equipment that has not been owned by a Mexican company. ? Leave certain services maquiladoras out of the tax regime (although benefiting from the customs regime), such as those dedicated to supply and distribution, storage and warehousing, design centers, call centers, etc. ? Companies excluded from the benefits shall pay Income Tax (in addition to the possibility of paying Corporate Sole Rate Tax ? or IETU) at the rate of 30% as of 2010, instead of the actual 17.5% currently paid. We welcome the opportunity to discuss the consequences of this impending amendment on your company, including the possibility of filing a constitutional challenge to the validity of the new decree, since we believe there are sufficient grounds to this contest. If the latter is the case, suit should be filed within thirty business days of the entry into force of the relevant decree. 1 The fact that maquiladoras must import at least 51% of their inputs is contrary to the current practice, where any percentage is sufficient. It is worth noting that according to Mexican statistical data, domestic suppliers to maquiladoras account for no more than 5% The contents of this Business News Report are informational only, and should not be deemed the rendering of legal or tax advice. Vázquez Tercero y Asociados assumes no liability whatsoever and expressly waives any responsibility (actual or implied) derived from the taking of any action or omission based on the information contained in this document, including any damages or loss of profits derived from such use. In case you require any information or specific advice regarding the terms of this document, we suggest you contact Adrián Vázquez (adrian@vazqueztercero.com) or Horacio A. López-Portillo (horacio@vazqueztercero.com). Thank you.
Posted: 06 April 2010

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