SAT clarifies miscellaneous tax issues for 2014, including revenue rules for maquiladoras
On July 4th, 2014, Mexico’s Tax Administration Service (“SAT”) published their Second Amendment of the Miscellaneous Tax Rules for 2014 to define the types of income that companies with maquiladora operations may continue to generate without their foreign principal becoming classified as a Permanent Establishment in Mexico.
The one hundred percent productive income test that went into effect on July 1st initially required maquiladora services to be the sole revenue source for an organization to qualify. This inflexibility resulted in many maquiladoras with non-maquiladora sources of revenue to restructure their operations. However, the new Revenue Rule for maquiladoras has made this test more open and flexible.
After the recent publication of the Second Amendment to the revenue rule for maquiladoras, in addition to moving the compliance deadline out to October 1st, 2014, a maquiladora may earn revenue from certain exempted non-maquiladora activities, providing said revenue does not exceed ten percent of income generated through maquiladora activities. This new Revenue Rule was established by amending rule I.3.19.1 and Transitory Article Six. Exempted revenue sources include the following:
- Rendering personnel services to related parties.
- Lease of fixed assets; assets leased to an unrelated party must be limited to a term of three years, unless lease was in effect prior to January of 2014, in which case, the lease is grandfathered in and remains subject to the original terms.
- Revenues from the sale or transfer of property such as real estate, equipment, etc. are considered related to maquiladora operations as long as a notice is filed with the SAT listing the specific business reason for the sale or transfer and the percentage of total revenues represented by the revenue from such a transaction.
- Sale of scrap materials generated as byproducts of the manufacturing process.
- Interest and other income directly related to the maquila operation.
Taxable income from each of these non-maquila activities must be calculated separately, as well as be distinguished from maquiladora-related income in the company’s accounting information. Additionally, non-maquiladora income is not eligible for any tax benefits granted to the maquiladora operation, since such benefits are intended for export-related activites. Furthermore, production plants related to firms undertaking any trading or commercialization activities will not qualify as a maquila operation for income tax purposes under the new Revenue rule for maquiladoras.
This new rule gives maquiladoras more time to comply with these standards, and also more flexibility in designating revenue streams. However, there are still a few concerns that will need to be clarified. For example, what constitutes “personnel services?” And on what basis is the ten percent test determined – annually, monthly, or other? Regardless, these grey areas notwithstanding, Mexico’s new Revenue Rule provides companies with more certainty and additional time to meet the new requirements for operating as a maquiladora for income tax purposes and to protect their foreign principal from counting as a Permanent Establishment in Mexico.