Mexico: 2014 tax reform rules for Maquiladoras (IMMEX) are relaxed

David Cuellar		Francisco J Zamora

The 2014 tax reform impacted the Maquiladora industry in Mexico with several rules that increased the tax burden and limited the benefits of this regime. However, new rules have been enacted relaxing the application of the tax reform.

As from 2014, the effective tax rate on profits derived from Maquila operations increased from 17.5% to 30% and the definition of Maquila operation changed (so now revenues associated with productive activities obtained by a Maquiladora must be derived solely from Maquiladora activities). In addition, the new limitation on the deductibility of only 53% of tax-exempt benefits paid to employees affected the sector. Furthermore, other transfer pricing (the methodology to determine the profit margin) and VAT rules (regarding the alienation of goods located in Mexico and withholding VAT in transactions between domestic suppliers and Maquila companies) were enacted affecting cash flows and the way in which Maquiladoras should compute their taxable income. Lastly, the lack of grandfathering rules within the new Income Tax Law created uncertainty for old Maquiladoras incorporated before 2010.

Notwithstanding the above, on December 26 2013, a Presidential Decree was published in the Mexican Official Gazette granting the following benefits to the Maquiladora industry:

• An additional deduction for 47% of tax-exempt benefits paid to employees involved in the Maquila operation, fulfilling specific requirements.
• The grandfathering rule for Maquiladoras established before 2010 regarding the requirement that 30% or more of the machinery and equipment used in the Maquila operation should be owned by the foreign principal is maintained for a two-year period, in which Maquiladoras have to comply with this requirement on a prospective basis.
• For sales of goods that are located in Mexico between a foreign resident and a Maquiladora that are taxed at the 16% VAT rate; if certain requirements are met, the Maquiladora may credit the VAT in the same month of the sale. Starting in 2015, this benefit would apply provided a certification is secured.

Also, in the Miscellaneous Tax Resolution published in the Mexican Official Gazette on December 30 2013, further guidance was included in connection with the Maquiladora industry, as follows:

• Clarification to the general description of revenues associated with productive activities deriving from Maquiladora activities, establishing that such revenues may also include those obtained for other Maquila services rendered to related parties resident abroad and other miscellaneous income, provided that the Maquila's books clearly identify every type of income and related expenses.
• Income relating to the manufacture and distribution of finished goods for resale cannot be considered as solely derived from Maquila manufacturing activities, but enforcement of this rule will be deferred until July 1 2014.
• A foreign principal may still apply safe harbour protection related to permanent establishment immunity when the foreign principal is resident in a country with which Mexico has a double tax treaty and the principal is fully compliant with any treaty requirements.

In addition, on January 1 2014, new foreign trade rules were published in the Official Gazette establishing regulations to have a certification for Maquiladoras to avoid the payment of VAT for products imported under the temporally importation regime, if certain conditions are met.

Maquiladora entities should review the above-mentioned rules to determine the applicable tax consequences on a case by case basis.

David Cuellar (david.cuellar@mx.pwc.com) and Francisco J Zamora (francisco.zamora@mx.pwc.com)
PwC
Tel: +52 55 5263 5816
Fax: +52 55 5263 6010
Website: www.pwc.com

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