New Mexican Tax Law Poses Significant Challenges to Maquila Operations
Mexican maquiladoras are now required to pay value-added tax on their imports under a tax reform law that took effect Jan. 1, 2014. This law also eliminated some tax breaks for maquilas and established strict new requirements for such factories to qualify for others. Affected companies should take a close look at how the new law will impact their operations and make the changes necessary to continue receiving available tax benefits.
The statutory changes were enacted to combat what Mexican tax authorities believe was an abuse by maquiladoras of the IMMEX tax breaks, which provided for VAT-free temporary imports of goods, parts and components, as well as machinery and equipment; a lower VAT (11%) in Mexico’s border states; flat income and corporate tax rates; and “permanent establishment” protection.
Most significantly, the new law eliminated the VAT exemption for temporary imports of goods, machinery and equipment, and increased the VAT in the border states from 11% to 16%. As a result, imported goods are now subject to VAT payment at the moment of import and will be accredited a set-off only after the maquila exports the final goods from Mexico, which could create a difficult cash-flow problem. However, the Mexican government will allow for a 100% VAT tax credit at import and return any VAT payments within 10-20 days if the maquila obtains certification through the Mexican tax authority.
The law includes other notable changes as well. First, the new definition of maquilas for income tax law purposes requires all imported goods to be exported, physically or virtually. Second, revenue associated with production must be derived solely from maquila activities, a requirement that is problematic for maquilas whose goods are sold domestically in addition to being exported. Third, a foreign resident must own at least 30% of the machinery and equipment used in the maquila and cannot simply transfer those assets to its books to meet this requirement.
Fourth, Mexico will no longer accept transfer pricing studies to demonstrate arms-length transactions required for “permanent establishment” protection. Instead, companies must use a safe harbor or create an advanced price agreement (APA) with the Mexican tax authority. Fifth, the partial exemption from the income tax has been eliminated, subjecting maquilas to the corporate tax rate of 30%.
Sandler, Travis & Rosenberg P.A., through the Mexico City office of its affiliated company, Sandler & Travis Trade Advisory Services Inc., offers a number of services to help companies comply with the new maquila requirements. These include internally auditing the maquila’s operations to make sure it is in compliance with the current laws, performing a feasibility analysis to determine the applicability of an APA with the Mexican government, providing advice on restructuring maquilas that have domestic sales and exports, and assisting in obtaining certification from Mexican tax authorities so that the company can receive the VAT tax credit and expedited tax reimbursement.