TAX NEWS - DECEMber 2009

Mexico Tax: Maquiladora regime being amended

Mexico's Departments of the Economy and Treasury are negotiating a draft amendment to the maquiladora regime rules to limit the income tax and flat tax benefits. According to the government, a loophole in the IMMEX Decree ("Decree to Promote the Manufacturing, Maquiladora and Export Services Industries Program") has allowed certain companies with prior operations in Mexico to convert to maquila status and derive benefits under the decree. Although the final scope of the amendments is not yet clear, it appears that the proposed changes could affect all maquiladora structures, not just those considered to be abusing the regime. Once finalized, the changes to the maquiladora regime will become effective when they are published in the Federal Official Gazette.

Maquiladoras are companies that process or assemble imported materials and parts for export from Mexico. The IMMEX Decree currently grants a VAT exemption and a deferral of customs duty to qualifying maquiladora companies, as well as significant income tax and flat tax benefits. The proposed changes target the latter two benefits, which consist mainly of protection from creating a permanent establishment for foreign residents participating in manufacturing operations with a maquiladora and safe harbor rules to determine the profitability of the maquiladora.

PE status in Mexico can be triggered because a foreign entity owns the machinery and equipment, as well as the raw materials and inventory, used in a maquiladora company, and continues to employ non-Mexican employees who are responsible for making the major decisions for the maquiladora and supervising the operation. On the other hand, as regards the special transfer pricing rules under this regime, article 216-Bis of Mexico's Income Tax Law provides three methods for determining the profitability of the maquiladora company, that in general terms allow the maquiladora company the benefit of recognizing a relatively low level of profitability.


Materials provided directly by foreign entity

Under current rules, materials can be imported into Mexico directly or indirectly by the foreign entity either on a temporary or permanent basis. Materials also may be considered imported on a "virtual" basis, when they are supplied by local vendors; that is, a maquila acquires raw materials or other goods directly in the local market, but the materials/goods are deemed to be exported by the local supplier and imported by the maquiladora.

The draft amendment establishes that materials that are supplied directly by the foreign entity are to be regarded as owned by that entity and then imported on a temporary basis by the maquila company. Notwithstanding this provision, the use of Mexican materials or permanently imported foreign goods would be allowed if they represent only a "minimal percentage" (this being currently undefined) of the temporarily imported goods owned by the foreign entity and incorporated into the product generated by the maquila process. Similarly, virtual imports would only be considered as foreign materials for these purposes if they are mostly composed of materials of foreign origin.


Limit on maquila services

Maquiladoras that mainly perform services instead of a manufacturing activity would no longer qualify for the income tax and flat tax benefits unless they involve manufacturing or transformation processes and/or the repair of exported goods. Goods would be deemed to be "transformed" for purposes of the maquiladora regime when they are: diluted in water or other substances; washed or cleaned (including the removal of rust, grease, paint or other coverings); subject to the application of conservation agents, such as lubricants, protective coverings or paint, or adjusted, sanded, cut or conditioned; packed or repacked; or tested, marked, labeled or classified.


Fixed assets owned by foreign entity

According to the proposed changes, fixed assets (including tools and computer equipment) used for maquila operations would be limited to the following:

- Assets owned by the foreign entity and temporarily imported by the maquiladora company;
- If the supply of goods involves assets already located in Mexico under the permanent import regime, the assets must initially be imported under the temporary regime. Additionally, the goods cannot be owned or have been owned by the maquiladora company using them or any other entity resident in Mexico.

According to the draft amendment, provisions related to fixed assets would not be applicable to companies operating under the maquila program before 13 November 2006 (the date on which the PITEX and IMMEX regimes were consolidated).


Summary

Considering the scope of the proposed changes limitations, all maquiladora structures should be evaluated to determine whether their fixed assets qualify under the new provisions and whether the changes could affect their ability to continue to receive the tax benefits under the regime.