Mexico Tax Reform: Implications for the Maquiladora Manufacturing Industry
In October 2013, the Congress of Mexico passed and approved a package of laws that amend and repeal some existing tax laws and also create new tax laws that will take effect in 2014 (“Tax Reform”). Some of the laws are yet to be published in the official gazette, but most of those laws will become effective January 1, 2014.
Even though the Tax Reform affects a wide range of taxpayers in Mexico and outside of Mexico, in this document we will comment only on the main implications of the Tax Reform for the maquiladora manufacturing industry in Mexico.
Income Tax Law
New Income Tax Law
The Tax Reform basically created a new Income Tax Law (a federal law), which contains changes to the treatment of the maquiladora regime.
Permanent Establishment and Safe Harbor Rules
The new Income Tax Law, as created by the Tax Reform, states that maquiladoras will not be considered to have a permanent establishment in Mexico as long as they determine their profits as per the “Safe Harbor Rules” (6.9% of assets or 6.5% of costs and expenses). Maquiladoras will no longer be permitted to determine their profits based on a rate lower than the “Safe Harbor Rules” as previously allowed under presidential decree. As in previous years, however, the taxpayer may still obtain an advance pricing agreement (APA) with the Mexican tax authorities.
Extended Concept of Maquiladora
The new Income Tax Law establishes its own definition for a maquiladora operation. Under the new Income Tax Law, a maquiladora operation requires that: (i) the merchandise delivered by the foreign entity pursuant to the maquiladora agreement and program are imported on a temporary basis and exported out of Mexico; (ii) the income of the production operation must be derived entirely from the maquiladora operation; (iii) national (Mexican) merchandise incorporated into the production process shall be exported together with merchandise imported on temporary basis; and (iv) the resident abroad, i.e., the non-Mexican party, must own at least 30% of the machinery or equipment used in the maquiladora operation in Mexico.
Traditionally, the concept of maquiladora operation was defined only in the Decree for the Promotion of the Manufacturing, Maquiladora and Exportation of Services Industry (“IMMEX Decree”). Now, the maquiladora operation concept is defined both in the new Income Tax Law and in the IMMEX Decree. This means that to determine if a maquiladora may be treated as a maquiladora for Income Tax purposes (i.e., to be able to use the Safe Harbor Rules) it will have to meet the definition of a maquiladora operation under the new Income Tax Law, as opposed to just meeting the definition of a maquiladora operation under the IMMEX Decree.
Elimination of Tax Benefits
The elimination of the current Tax Law (Income Tax and Flat Tax, also referred to as IETU), effectively cancels the tax benefits and reductions granted by previous presidential decrees.
Shelter Maquiladora Operations
Parties abroad (i.e., not from Mexico) with shelter maquiladora operations in Mexico will continue to be treated as not having permanent establishment in Mexico, but only for a maximum period of four years. Therefore, such parties now must include in their plans the necessary strategies for continuing production operations in Mexico beyond the 4-year period (i.e., conversion to a maquiladora).
Value Added Tax
The Tax Reform also had a significant impact on the Value Added Tax (“VAT”). Accordingly, the VAT law was amended because government income from value-added tax in Mexico was relatively low as compared with other national jurisdictions. The difference was due to the application of special treatments for some goods and services, exemptions, and tax reductions in “Border Zones.” As explained herein, changes in the VAT might have a significant impact on maquiladora companies.
During 2014, the Mexican Tax Administration will publish the rules for the certification of maquiladora companies in order to properly control temporary imports. Commencing one year after the publication of such rules, temporary imports made by maquiladora companies under the IMMEX Decree will be subject to 16% VAT. Maquiladora companies that are “certified” under the new rules, however, will receive a 100% credit on, and will not be required to disburse, the 16% VAT. Only non-certified maquiladora companies will be required to pay such 16% VAT on temporary imports, thus impacting significantly the cash-flow of some maquiladora companies.
As soon as the certification rules are published, maquiladora companies should immediately review such rules and start the certification process, to the extent certification may be obtained. Attainment of certification should mitigate the impact of the VAT on temporary imports.
As a second option for not paying the VAT, companies may also file a bond with the Tax Administration as a guaranty for the VAT payment. This option is pursuant to a different set of rules to be published by the Tax Administration.
VAT Payments by Residents Abroad in Sale of Goods to Maquiladoras
In regards to the sale of goods by a resident abroad (i.e., not a Mexican party) to a maquiladora, the resident abroad must pay a 16% VAT. In this case, the maquiladora is required to withhold such VAT and pay it to the Mexican Tax Administration; however, such VAT may be credited in the following month when the VAT is paid by the resident abroad.
Withholding of VAT from Local Suppliers
Maquiladora companies will no longer be able to withhold VAT from domestic (Mexican) suppliers of goods and services. Maquiladoras will be required to pay the 16% VAT to suppliers in such transactions.
Elimination of Preferential Rate in Border Zones
All operations that occur in “Border Zones” will be subject to the general VAT rate of 16%, thus eliminating the previous preferential treatment of 11% rate.
It is important that maquiladora companies, and/or foreign entities conducting business in Mexico associated with maquiladora operations, review changes in laws as well as the new laws, regulations and rules developed under and pursuant to the Tax Reform. By determining the applicability of these changes and new laws, regulations and rules to their operations, businesses can ensure compliance and reduce both legal and financial risk. Companies may wish to consult their legal and tax advisors as part of this review and planning process.
 The contents of this document are for informational purposes only and are not intended as professional, tax or legal advice or as an aid in decision making. In any case, the legal and tax provisions and a qualified professional should be consulted.
For Additional Information
Jose Luis Carbonell
Chair – International Business