Mexico’s maquiladora industry got a last-minute reprieve from several new tax reform provisions that were scheduled to go into effect on January 1st.
Mexico’s president, Enrique Peña Nieto, issued a decree in late December that ameliorates some of the effects of the new reform law. And in early January the Servicio de Administración Tributaria (SAT), the Mexican tax authority, issued guidance intended to clarify the effect of the new law on maquiladoras.
The changes came after discussions between National Council of the Maquiladora and Export Manufacturing Industry (known as INDEX), the maquiladora industry association, and SAT.
The presidential decree includes the following:
Reducing the impact of nondeductibilty of social welfare benefits. Under the reform law, companies are limited to a 53% deduction for social welfare benefits paid on behalf of workers. The decree allows maquiladoras an additional deduction amounting to 47% of nondeductible payroll expenses. Maquiladoras must file an information return reporting the amount of tax benefit under this provision.
Postponing the machinery and equipment ownership rules. Under the reform law, a 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. The presidential decree institutes a two-year period to allow foreign owners to meet this requirement.
Changing value-added tax (VAT) credit timing. Under the reform law, maquiladoras are required to withhold 16% VAT on goods temporarily imported into Mexico, but they can claim a credit against the VAT in the month following the month the VAT is paid to the government. The presidential decree allows maquiladoras to claim the credit in the month the VAT is paid.
Abolishing income tax exemption. The presidential decree also abolishes a partial income tax exemption that maquiladoras were given in a 2003 presidential decree. Maquiladoras will have to pay tax at the normal 30% Mexican corporate tax rate instead of the lower 17.5% rate in the 2003 decree.
The SAT’s guidance included a provision clarifying that all maquiladora “productive activity” income must come from the export of maquila services to foreign related parties. Productive activity does not include income from the sale or distribution of finished products. This rule will take effect July 1st 2014, to give maquiladoras that, for example, sell to the Mexican market time to restructure their activities to comply.
The SAT also clarified that maquiladoras can obtain advance-pricing agreements to fulfil their transfer-pricing obligations under Mexican law and obtain permanent establishment protection for their foreign owners. However, they must do so by June 30th 2014.
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—Alistair Nevius (email@example.com) is editor-in-chief, tax for CGMA Magazine.