Changes in Mexican tax law that will affect almost every maquiladora operation are scheduled to take effect January 1st, but lobbying by the industry appears to have convinced the government to ameliorate some of the new law’s effects.
Mexico officially published new tax rules on December 11th, and the new rules include numerous changes affecting taxation of maquiladoras.
Maquiladoras, mostly located along Mexico’s border with the United States, manufacture goods for export, and, according to the Mexican government, they account for 85% of Mexico’s manufacturing exports. Until now, they have received large tax breaks, including the ability to import materials without paying duty or value-added tax (VAT), provided the finished product produced by the maquiladora is exported to a foreign parent company that sells the product and realises profit outside of Mexico. Maquiladoras have also benefited from a partial income tax exemption, a business flat tax credit, exemption from permanent establishment status for the foreign parent company, and a special transfer-pricing safe harbour.
The new tax law eliminates the business flat tax, which was enacted in 2008, and the credit against the tax that maquiladoras could claim. It also eliminates the maquiladoras’ partial income tax exemption.
The maquiladoras’ exemption from VAT on imported materials is also going away and being replaced by a credit against VAT. The credit should eliminate a maquiladora’s VAT liability on imported materials, but it will require annual certification from the tax authorities that the maquiladora qualifies for the credit.
The new law also modifies the definition of what qualifies as a maquiladora. The definition of what is a maquiladora has changed over the years (before 2006, they were designated by presidential decree), and under the new rules, a maquiladora must meet the following requirements to qualify for permanent establishment protection and to qualify for the transfer-pricing safe harbour:
- All of the maquiladora’s income must come from designated maquila operations;
- The maquiladora must re-export all imported materials; and
- The maquiladora’s foreign parent must provide at least 30% of the machinery and equipment for the maquila operations, and the maquiladora (or a Mexican-related party) cannot own the machinery and equipment.
Current maquiladoras are not grandfathered in under the 30% rule—so, as the law is written, they must meet the 30% threshold by the end of 2014 or risk losing their maquiladora status. However, this is one area that may change under an agreement announced between the Mexican government and the maquiladora industry.
The new law also reduces the ways in which a maquiladora can avoid permanent establishment status.
In another change affecting maquiladoras, the VAT rate in Mexico’s border states, which has been 11%, will rise to 16%, matching the rate in the rest of the country.
Possible changes to the new rules
The maquiladora industry has been lobbying the Mexican government to make changes to the law, especially to reinstate the VAT exemption. The National Council of the Maquiladora and Export Manufacturing Industry (known as INDEX) announced last week that it has reached an agreement with the Mexican Tax Administration Service to reduce the effects of some of the changes.
Under the agreement, maquiladoras would be able to deduct 100% of social welfare benefits paid on behalf of workers (instead of 53%, which is scheduled to go into effect in January). The agreement would also grandfather in existing maquiladoras under the 30% rule, and change the timing of the VAT credit. However, as of this writing, the decree making these changes has not been issued.
—Alistair Nevius (firstname.lastname@example.org) is editor-in-chief, tax for CGMA Magazine.