In the waning days of 2013, the Mexico’s president, Enrique Pena Nieto, issued a presidential decree which grants Mexican maquiladora manufacturers several benefits related to income tax, value-added tax, as well other issues of importance to them. The intent of this executive action is to mitigate some of the potentially adverse effects of the 2013 tax reform.
This special decree consists of the implementation of the following measures, most of which are effective as of January 1, 2014:
- Neutralization of the adverse impact of non-deductible payroll expenses
The presidential decree provides that companies that perform maquila operations will be allowed to take an additional deduction on their tax return equal to 47% of non-deductible payroll expenses, thus partially offsetting the limit on the deduction for the provision of tax-exempt benefits to employees.
- Grandfather provisions for maquiladoras manufacturers operating through end of 2009
According to the Income Tax Law, or ITL, all maquiladoras were required to satisfy the 30% machinery and equipment, or M&E, requirement by the end of 2014 or risk losing Permanent establishment protection for their Mexican manufacturing operations. The presidential decree temporarily reinstates the grandfather clause formerly in place under the old system by granting foreign principals two years in which to provide at least 30% of the M&E to the maquiladora.
- Partial income tax exemption eliminated
Maquiladoras will now pay the normal corporate income tax rate of 30%, rather than an effective tax rate of 17.5% or less.
- Automatic VAT credit on acquisition of goods from a nonresident
The 2013 reform eliminated the 0% VAT rate, requiring a maquiladora manufacturers to withhold 16% VAT on behalf of a nonresident for the acquisition of goods temporarily imported into Mexico. The reform allowed a maquiladora to fully credit the VAT so withheld in the month following the month in which the VAT was paid. The presidential decree now permits maquiladoras to credit the VAT in the month in which it is paid, thus eliminating the financial burden of paying the VAT to the tax authorities.
Other pertinent items addressed within the presidential decree apply to maquiladoras include:
- Definition of “productive activities”
One of the stated purposes of the tax reform is to limit the concept of maquiladora manufacturing activity to the export of goods outside of Mexico. The new ITL requires that all income from a maquiladora’s productive activities must be derived 100% from exports. The Miscellaneous Rules clarify that income from productive activities does not include income from the sale and distribution of finished products. This will apply from 1 July 2014 to give maquiladoras with non-maquiladora income from sales to the Mexican market time to restructure or separate their activities.
- Clarification that an APA, or an “advanced pricing agreement” is a transfer pricing and PE option
The Miscellaneous Rules clarify that an APA can be used by a maquila company to fulfill its transfer pricing obligations and obtain PE protection for its nonresident related party, so long as all other ITL requirements are met and the methodology used takes into account all assets located in Mexico destined for the maquila operation.
Those requiring clarification regarding any of the information above are invited to contact the author, or to refer to the Deloitte source document of this blog post.