RE:Tax
regime of the Maquiladoras in Mexico. What a foreign investor should
know about it?
I.
Income Tax
Income
Tax (IT) rate applicable to all Mexican corporations (including maquiladoras)
is 28% applicable to its tax result.
Tax result
is obtained diminishing to the accruable income the authorized deductions,
profit sharing and carry forward NOL’s.
According
to the Rules issued by the Ministry of Economy a pure maquiladora activity
will exist when a Mexican corporation transforms, elaborates or repairs
the inventory provided by a foreign resident using for said process
assets provided directly or indirectly by the foreign resident or any
of its related parties.
From
the Treaty to Avoid Double Taxation and Prevent the Tax Evasion executed
between Mexico and several foreign investors (the “Treaty”) and
also, applying the Commentaries on the Articles of the Model tax Convention
issued by the OECD, maquiladora activities performed by the Mexican
corporation may create a Permanent Establishment (“PE”) to foreign
residents.
Nevertheless,
Article 2 of the Income Tax Law (“ITL”) provides that a foreign
resident will not create a PE if the country of residence had executed
a Double Taxation Agreement with Mexico and, the Mexican corporation
complies with the arm’s length rules applicable to the consideration
that it is entitled to obtain from its contractor (foreign resident).
Based
on that, Mexican corporation (hereinafter “Maquiladora”) must determine
its Income Tax (IT) complying with only one of the following
three methods:
1. The
amount of its income and deductions with related parties results from
the sum of the following values: (i) prices determined under the principles
set forth in Articles 215 and 216 of the ITL according with the Transfer
Pricing Guidelines for Multinational Enterprises and Tax Administrations
approved by the OCDE, without considering asset not owned by the Maquiladora;
(ii) an amount equivalent to 1% of the foreign resident’s net accounting
value of the M&E owned by said resident that the Maquiladora is
permitted to use in conditions different than fair market value.
2. Maquiladora
may obtain a tax profit (in the given tax year) that represents, at
least, the largest amount obtained by applying (a) or (b) below1:
(a) 6.9%
on the total value of the assets used in the in-bond operations during
the fiscal year, including those owned by the Maquiladora, foreign resident
and any of their related parties, even when the temporary use or enjoyment
of the assets had been granted to the Maquiladora.
Maquiladora
can exclude from the calculations the assets leased by a Mexican related
party or foreign non related parties.
(b) 6.5%
on the total operating expenses and costs of operation in question incurred
by the Maquiladora, determined in accordance with generally accounting
principles, including those incurred by foreign resident.
Maquiladora
may exclude from the calculations among other concepts, the acquisition
value of inventories owned by the foreign resident; (ii) inflationary
effects; (iii) financial expenses; (iv) extraordinary expenses or non
recurrent operational expenses according generally accounting principles.
3. Maquiladora
must be able to demonstrate that the amount of its income and deductions
derived from transactions carried out with related parties has been
determined applying the Transactional Net Margin Method based on the
investment and M&E owned by either by the Maquiladora and the foreign
resident (“Return on Assets”).
During
the last years some Maquiladoras did not have IT tax to pay; even more
they obtained refunds from tax authorities. This situation was produced
in some cases by the abuse of Maquiladoras of the proceedings explained
in Sections 1 and 3 above.
Finally,
it is important to remark that the relief granted to foreign residents
in connection with the non existence of a PE is applicable only
to maquiladora activities. In other words, said relief is not applicable
to other entrepreneurial activities like the allocation of the production
into the Mexican market.
Strategies
may be implemented to allocate the Maquiladora’s production into the
Mexican market by the same Maquiladora.
II.
Flat Tax
Since
January 1st, 2008 a new “complementary” and “minimum”
tax of the IT entered in force (“Flat Tax”).
Flat
Tax is a comprehensive IT with a broader taxable base and lesser tax
rate. If the IT is lower than the Flat Tax in a given tax year the difference
must be paid as Flat Tax. Flat Tax rate during 2008 will be 16.5%.
Flat
tax does not allow the deduction of salaries, wages and any other consideration
earned and paid by the rendering of personal services.
However,
an employee tax credit can be taken against the Flat Tax (monthly or
annually). Employee tax credit will be determined with all the salaries
and wages paid by the taxpayer as long as they had been taxed with the
IT.
Therefore,
they leave out from the calculations of said credit all the income exempted
to the employee (i.e.: fringe benefits; social welfare expenses).
The enacting
of the Flat Tax as is generates that Maquiladoras pay IT effective rates
above 28%.
Due to
this situation, on November 5, 2007 Mexican President enacted a Decree
establishing a relief to Mexican corporations that perform pure maquiladora
activities.
The Decree
will achieve the following outcome:
a) Maquiladoras
will be paying as Flat Tax (if any) 16.5% over the IT taxable base.
In other words, Maquiladoras will be paying an effective rate of 16.5%
based on their IT taxable base.
b) Maquiladoras
that had been using the “Safe Harbor” will increase the IT effective
rate from 12.9% to 16.5%.
Finally,
it is important to mention that many countries have recognized that
the Flat Tax is a tax covered by their Treaties therefore; it can be
creditable by these countries investors’ against its own income tax.
April
20, 2008
1
This method is known in the jargon as “safe harbor”.