Transcript Maquiladora Tax Regime 2014 Tax Reforms

Maquiladora Tax Regime
2014 Tax Reforms
Maquiladora Regime
Blanca Montaño Riqué
CPC & MF
November 2013
© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Background
Tax Reform 2014
Maquiladora Regime
Background
The reform seems to deliver a message of increasing tax collections through:
 Increase of tax rates
 Elimination of many tax benefits
 Elimination of preferential tax regimes
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Tax Reform 2014
Maquiladora Regime
Tax reforms constitutional approval process
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September 8
The Mexican president Enrique Peña
Nieto presented to Congress the
economic package for the 2014 fiscal
year.
October 18
Congress approval by the house of
representatives.
October 31
Congress approval by the senate.
© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Tax Reform 2014
Maquiladora Regime
2014 economic package
Strategies,
objectives and
targets of income,
expenses, debt
and public rates
Economic
Policy Guidelines
Initiative of the
Income Law
2014
Economic
Package
Sets public
expenditure
according to their
nature and
amount
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Federal
Expenditure
Budget Project
Sets the amount
of income of the
Federation
Reforms or
modifies the tax
laws relating to
revenue collection
Tax Laws
Initiatives
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Current Maquila Regime
Tax Reform 2014
Maquiladora Regime
Introduction
 Mexico’s economy is driven by external trade.
 Export earnings are fueled by among other things, of manufacturing.
 IMMEX companies represent 85% of Mexico’s manufacturing exports.
 The US remains Mexico’s largest trading partner, due to its geographical proximity and
the benefits of the North American Free Trade Agreement (NAFTA).
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Tax Reform 2014
Maquiladora Regime
Maquiladora general operation
USA
US
COMPANY
- Sends raw material or processing
- Sends machinery and equipment
- Pays maquila service fee
MAQUILA AGREEMENT
- Processes the raw material
- Charges a maquila service fee on a cost plus basis
- Exports (returns to US) the processed goods
MEX
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MX
COMPANY
© 2013 S.C.
Galaz,
Yamazaki,
Ruiz Urquiza,
S.C.
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©2013
Todos
los derechos
reservados.
Tax Reform 2014
Maquiladora Regime
Maquiladora’s up to 2013
 IMMEX companies currently operate under a preferential tax and customs regime.
 They are allowed to import raw materials, parts, components and other assets on a
temporary basis, a transaction that is exempt for VAT purposes.
Maquiladoras have a Permanent Establishment protection, provided they comply with
transfer pricing issues trough:
- Transfer pricing study.
- Safe harbor.
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Tax Reform 2014
Maquiladora Regime
Maquiladora’s up to 2013 (2)
These companies have special benefits concerning income tax and flat tax that allows
them:
 Partial exemption of income tax, equal to 3% of base that is higher between:
- 6.5% over expenses or
- 6.9% over assets
 Tax Credit for flat tax purposes, so that the flat tax never goes higher than 17.5% of the
taxable base for income tax.
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Repealed Laws
Tax Reform 2014
Maquiladora Regime
Business Flat Tax (IETU)
 The Business Flat Tax Law is repealed.
- Transition provisions are established to secure the rights and obligations acquired during the
effective term of the law.
- Under a transitory provision, the receivables from activities performed up to December 31, 2013
collected after the law is repealed could continue to have IETU effects.
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Tax Reform 2014
Maquiladora Regime
Cash Deposits Tax Law (IDE)
 The Cash Deposits Tax Law is repealed
- Transition provisions are established to uphold the rights and obligations acquired during the
effective term of the law.
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Income Tax Law
Tax Reform 2014
Maquiladora Regime
Main reasons to reform the Income Tax Law regarding Maquiladoras
 The tax benefits granted to the maquiladoras in the nineties, through time got
generalized, therefore causing distortions and abuses.
 A review of the maquila regime shows that the requirements for a program have been
made ​flexible and the maquila tax scheme has not been adjusted:
 For those maquiladoras that also have domestic sales (national operation), the current
regime makes them possible to manipulate its tax base.
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Tax Reform 2014
Maquiladora Regime
Main reasons to reform the Income Tax Law regarding Maquiladoras (2)
 In some cases, companies other than maquiladoras get disguised as one, in order of
applying unlawfully the tax benefits.
 The reform tries to differentiate those taxed as maquiladoras for Income Tax purposes
from those that solely apply the benefits for customs purposes.
 Proposal according to the recommendations by the OECD regarding the elimination of
special tax regimes.
- The maquila regime establishes a preferential treatment that complicates the administration of
tax laws and facilitates base erosion.
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Tax Reform 2014
Maquiladora Regime
Maquila new definition
Maquila operations will be those that fulfill the following requirements:
 Under a maquila agreement, a non-mexican resident must provide to the maquiladora
goods:
- That are temporally imported into Mexico
- Subject to a transformation process (the law incorporates a definition of transformation).
- The Maquiladora should export the manufactured products, either physically or through a virtual
export under the terms of the customs law and corresponding regulation.
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Tax Reform 2014
Maquiladora Regime
Maquila new definition (2)
 That Maquiladora’s revenue associated with productive activities must be derived solely
from its maquila activities.
- Some uncertainty about what a Maquiladora should understand as “productive activities”.
 That the transformation process is performed using machinery and equipment property of
the foreign resident that has signed a maquila agreement.
- The foreign resident must provide at least 30% of the M&E used in the maquila process.
- A serious concern has been created in the approved reform due to the fact that, it doesn’t
consider current maquiladoras that are below the 30% threshold.
- Therefore all maquiladoras would have to satisfy the 30% M&E requirement or risk being in a
position to lose the PE protection.
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Tax Reform 2014
Maquiladora Regime
Transfer pricing compliance
 To protect against permanent establishment of the foreign resident, the maquiladora still
needs to satisfy the obligations of using the arm’s length principle for the maquila
services.
 The maquiladora that is required to obtain PE protection for its non-resident party would
only have available the following options:
- Applying the Safe Harbor, requiring to report as the minimum taxable profit, the higher between
6.5% over expenses and 6.9%
- Obtaining an Advanced Price Agreement (hereinafter “APA”) with Mexican tax authorities.
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Tax Reform 2014
Maquiladora Regime
Transfer pricing compliance (2)
 The tax reform eliminates the transfer pricing study, option that had been available since
2003 for a Maquiladora to comply with the arm’s length principle:
- Largely used by Maquiladoras when the Safe Harbor resulted in profit margins that were not
appropriate to a Maquiladora’s specific circumstances or consistent with the economic
performance of its respective industry.
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Tax Reform 2014
Maquiladora Regime
Income Tax Partial Exemption
 On October 30, 2003, Mexican president Vicente Fox enacted a presidential decree:
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To grant an income tax partial exemption to Maquiladoras
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In order to continue to promote investment in Mexico
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And avoid them shifting their operations to other countries.
 The most likely scenario is that such presidential decree exemption will be abolished.
 Considering these changes, Maquiladoras would be expected to pay Income
tax at the regular corporate tax rate of 30%, thus increasing their current 17.5%
rate paid, combining both Income tax and IETU together.
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Tax Reform 2014
Maquiladora Regime
Getting ready for 2014
Maquiladoras may perform a series of evaluations in order to try to reduce the exposure to
a serious economic impact from the tax reform:
 Evaluate if their operations in fact create a PE in Mexico to the foreign resident.
 Perform a feasibility analysis to define requesting an APA option
 When a maquila has also domestic sales, it is advisable to study alternatives for 2014.
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Tax Reform 2014
Maquiladora Regime
Other important dispositions for 2014
 A transitory provision establishes the mechanism for calculating the opening balance of
the CUCA for taxpayers who began operations before January 1, 2014.
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However, there is missing regulation about initial balance of the CUFIN account.
no clarification of what happens to UFINES from 2000 and back.
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No clarification on CUFINRE account.
So there is
 Worker remunerations that represent an exempt item of income for the employee, such
as fringe benefits, employees’ savings and loan funds, severance payments, annual
bonus, overtime, vacation premium, Sunday premium and exempt portion of PTU:
- May only be deducted up to 53%. If an employer decreases such items of employee
compensation the deductibility threshold shall be reduced to 47%.
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Value Added Tax Law
Tax Reform 2014
Maquiladora Regime
Main reasons to reform the Value Added Tax Law regarding Maquiladoras
 The temporary imports, that are currently VAT exempt, presents control problems that can
lead to practices of tax evasion and tax avoidance.
 The control problem got more difficult when the temporary import could be transferred to
other maquiladoras instead of exporting them directly.
 Unequal treatment of domestic manufacturing companies (?)
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Tax Reform 2014
Maquiladora Regime
VAT on temporary imports
 Elimination of exemption on VAT on the temporary importations of materials and M&E by
maquiladoras.
- This measure created a serious concern due to:
1. High volumes of temporary importation
2. Financial cost
3. Administrative burdens to recover the VAT with the tax authorities.
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Tax Reform 2014
Maquiladora Regime
VAT on temporary imports (2)
 Applicable VAT credit to certified maquilas.
- The VAT credit will be equal to the VAT liability in importation
- That will reduce payment in such a way that they don’t have a cash VAT liability.
 A maquiladora that does not obtain certification status may guarantee the contingency of
the tax liability via a bond with an authorized entity.
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Tax Reform 2014
Maquiladora Regime
Maquiladora certification for VAT purposes
 A Maquiladora may obtain a certification status from the tax authorities that validates that
they are properly operating the maquila program in compliance with the purposes it was
designed for.
 The certification is on a one-year basis and the maquiladora may renew certification up to
30 days prior to expiration.
 The requirements for certification have not yet been published.
 The payment of VAT, when applicable, will start one year from the date the tax authorities
publish the requirements to obtain certification status in order to give proper time to
Maquiladoras to achieve certification.
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Tax Reform 2014
Maquiladora Regime
VAT on change of importation status
 The VAT on a change of regime from temporary to definitive will not be subject to such
taxes again, only if:
- The temporary importation is already subject to taxes, such as the case where the maquiladora
was not certified or did not elect to use the bond option.
- If at the time of the temporary importation VAT is not paid, the taxes will be paid on the change
of regime from temporary to definitive.
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Tax Reform 2014
Maquiladora Regime
VAT on sale by foreign residents of temporary imported items
 The sale by foreign residents to an IMMEX company will be taxable and the VAT will be
collected by the Mexican resident via a VAT withholding.
 The VAT withheld will be creditable to the Mexican resident in the VAT return of the
following month.
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Tax Reform 2014
Maquiladora Regime
VAT increase in Border States
 The Mexican Congress approved the Executive Proposal to generalize the VAT in all
Mexico to 16%
- Eliminating the preferential 11% VAT regime along Mexico’s borders and other strategic zones.
 Maquiladoras located in these zones will have to consider a 5% budget increase for
payments to local vendors.
- Their average favorable VAT balance is likely to increase as well.
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Federal Tax Code
Tax Reform 2014
Maquiladora Regime
Tax postbox
 An electronic communications system is created between the tax authorities and
taxpayers,
- For notification of different administrative documents and acts and the latter may file petitions,
requests (including refunds), notices, responses to requests from the authorities,
consultations about their tax situation and file administrative appeals against acts of authority.
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Tax Reform 2014
Maquiladora Regime
Tax postbox (2)
 An electronic audit procedure is established so that the authorities can exercise their
official inspection through the tax postbox,
- The taxpayer will be required to provide the necessary documentation and information for
such purpose and also respond to official requests. It is established that this type of reviews
will last for up to three months.
 Will go into effect for business corporations as of June 30, 2014 and for individuals on
January 1, 2015.
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© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Tax Reform 2014
Maquiladora Regime
Auditor's statutory report (dictamen)
 The filing of an auditor's tax opinion shall now be optional
- Only individuals with business activities and corporations can choose to file the dictamen if:
1. in the immediately previous year obtained accruable revenues in excess of about
USD$7,700,000 (MXP$100,000,000)
2. Or the value of their assets determined under general rules issued for such purpose by the
SAT, exceeds about USD $6,000,000 (MXP $79’000,000),
3. or at least 300 of their workers rendered services in each of the months of the immediately
previous year.
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© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Blanca Montaño Riqué
Tax Manager
011 52 (664) 622 7974
[email protected]
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