Mexico issues new tax rules for Maquiladoras
TAX ALERT |
The Mexican tax reform bill that became effective Jan. 1, 2014, (the 2014 Act) includes a series of provisions that adversely affect the way Maquiladoras pay Mexican taxes. In response to petitions and negotiations from the National Maquiladora Council and other groups, two separate packages of executive regulations and guidance were recently enacted, both of which became effective Jan. 1, 2014:
- A Presidential Decree providing certain tax benefits for Maquiladoras (published Dec. 26, 2013)
- Miscellaneous rules providing guidance with respect to the value-added tax (VAT) certification for Maquiladoras (Published Jan. 1, 2014 by Mexico's Tax Administration Service (SAT))
This article summarizes the provisions of these two packages. Taxpayers with Maquiladora operations should immediately review the Presidential Decree and miscellaneous rules.
Income tax stimulus
The Presidential Decree repeals the Maquiladora income tax stimulus enacted in October 2003 (commonly known as the 2003 Decree). This stimulus reduced a Maquiladora's effective income tax rate by half. In addition, the 2014 Act includes provisions that severely limit the deduction for compensation that is not includable in an employee's taxable income.
However, the Presidential Decree mitigates the adverse effects of repealing the 2003 Decree and limiting compensation deductions by allowing a qualifying Maquiladora to reduce its net taxable income by applying the following formula:
A = B ÷ 2 – (3% of B)
A = amount of additional reduction in the Maquiladora's net taxable income, per Mexican income tax provisions
B = total amount of compensation paid to employees engaged in Maquiladora activities that is not includable in the employees' taxable income
The income tax stimulus contained in the Presidential Decree applies only to qualifying Maquiladoras, which are those that meet the tests established by the 2014 Act and that satisfy Mexican transfer pricing requirements. Maquiladoras that wish to apply the stimulus should make sure they are in fact qualifying Maquiladoras.
Moreover, the stimulus provisions contained in the Presidential Decree apply only with respect to compensation paid to employees engaged in the Maquiladora activities. If the Maquiladora has employees who are engaged in activities other than Maquiladora activities, compensation paid to such employees cannot be included in the formula.
Maquiladoras that claim benefits under the Presidential Decree must keep separate records of their Maquiladora and non-Maquiladora activities. The amount of stimulus claimed and the method used to calculate the benefit must be reported to the SAT by March 31 of the following calendar year.
Taxpayers may first claim the stimulus for the tax year ending Dec. 31, 2014, for which returns are due on March 31, 2015.
Thirty-percent test with respect to machinery and equipment
The 2014 Act allows a Maquiladora to claim certain benefits even though it uses equipment it owns directly as well as equipment owned by a foreign related party. However, before a Maquiladora may claim benefits, the net value (calculated under Mexican tax rules) of the machinery and equipment owned by the foreign related party has to represent at least 30 percent of the aggregate net value of all the machinery and equipment used by the Maquiladora.
Under the Presidential Decree, Maquiladoras that began operations prior to Dec. 31, 2009, and that do not meet the 30-percent test as of Jan. 1, 2014, have two years to satisfy the test. Only those Maquiladoras that are compliant with Mexican transfer pricing requirements may take advantage of this grace period.
After the two-year period expires, a Maquiladora that fails the 30 percent test will constitute a permanent establishment for any foreign related party for which it performs Maquiladora activities. Permanent establishment status will begin in the third calendar year beginning after Dec. 31, 2014, but not before.
Maquiladoras that began operations prior to Dec. 31, 2009, should determine whether they meet the 30-percent test. If a Maquiladora does not meet the test, it should develop a compliance plan before the two-year period expires. Appropriate strategies may include physically moving additional pieces of machinery and equipment from a foreign related party to the Maquiladora's location in Mexico. In addition, the Maquiladora could avoid direct acquisitions of additional pieces of machinery and equipment.
Revenue from non-Maquiladora activities
The 2014 Act establishes that a Maquiladora cannot earn revenue from any activities other than Maquiladora activities. Based on this rule, Maquiladoras that earn revenue from other activities (local sales, distribution, services, etc.) may create a permanent establishment in Mexico for their foreign related parties.
Under the 2014 Act, the “Maquiladora activity-only” revenue test was scheduled to become effective Jan. 1, 2014. However, the Presidential Decree grants Maquiladoras an extension through July 1, 2014, to meet said test. This allows Maquiladoras that have revenue from non-Maquiladora activities a reasonable amount of time to reorganize or restructure their operations in order to satisfy this revenue test.
Value-added tax on sales by foreign parties to Maquiladoras
Historically, sales by a foreign party to a Maquiladora had been exempt from the VAT. The 2014 Act eliminated this exemption and imposed a 16 percent VAT on such sales. However, under the 2014 Act, Maquiladoras may request a refund of the VAT paid on these sales.
The Presidential Decree allows Maquiladoras that meet certain requirements to credit any VAT paid on purchases from a foreign party against the VAT due by the Maquiladora, resulting in zero net tax due and eliminating the need to file a refund claim. This mechanism applies (1) only to the sale of goods that are part of a supply chain of products destined for exportation outside of Mexico, and (2) only if all applicable customs declarations and paperwork are filed with the SAT's customs division.
Those Maquiladoras that choose not to use the above mechanism will pay the VAT and will still be entitled to file a refund claim with the SAT.
This VAT relief will apply throughout 2014. However, beginning in 2015, only those Maquiladoras that obtain a VAT certification may take advantage of this relief provision. Additional details on the VAT certification are set forth below.
Miscellaneous rules–VAT certification
The SAT added new Miscellaneous Tax Rules for Foreign Trade to establish the process for applying for and obtaining a VAT certification.
The rules provide for three types of certification: (1) A (valid for one year); (2) AA (valid for two years); and (3) AAA (valid for three years). Each type of certification has specific requirements and procedures. However, Maquiladoras that wish to apply for any type of certification must:
- Have an existing and valid IMMEX Program issued by the Ministry of Economy (having an IMMEX Program is one of the fundamental requirements that a Maquiladora must have).
- Receive a statement from the SAT certifying current compliance with all tax and Maquiladora filing requirements. The Maquiladora's officers and representatives must also obtain a compliance certificate from the SAT if they are Mexican tax residents.
- Have appropriate inventory management and accounting internal controls with respect to the goods and merchandise they import, handle and ship during the performance of the Maquiladora activities.
- Be current on all tax payment obligations.
- Undergo a satisfactory physical inspection of the Maquiladora's facilities by SAT agents.
- Submit proof that the Maquiladora has registered all its employees with Mexico's Social Security Administration and that it has paid all payroll and social security taxes due.
Maquiladoras in certain specific industries (textile, footwear and metallurgic) have additional requirements.
The Maquiladora must submit its application electronically through a specific website the SAT intends to launch on March 4, 2014. The due dates for the initial submission are as follows:
Certain large Maquiladoras and those qualifying as in-bond warehouses for the automotive industry
April 1 through April 30, 2014
Maquiladoras located in the North Pacific jurisdiction of the SAT's customs division
April 15 through May 15, 2014
Maquiladoras located in the Northeastern jurisdiction of the SAT's customs division
June 3 through July 3, 2014
Maquiladoras located in the North Central jurisdiction of the SAT's customs division
July 7 through Aug. 7, 2014
Maquiladoras located in the Central jurisdiction of the SAT's customs division
Aug. 7 through Sept. 7, 2014
Maquiladoras located in the Western and Southern central jurisdictions of the SAT's customs division
Sept. 22 through Oct. 22, 2014
Upon receipt of a complete submission, the SAT has 40 business days to respond to the Maquiladora. During the 40-day period, the SAT may request additional information or seek clarification of items contained in the application, and the Maquiladora must reply within 15 business days. If the SAT does not respond within the 40-day period, the Maquiladora must presume that the SAT has denied its certification request. It is unclear whether a rejected Maquiladora may reapply.
Maquiladoras must renew A-type certifications within 30 business days of expiration of the certification using the same procedure used to apply for an initial certification. AA- and AAA-type certifications will renew automatically provided the Maquiladora files a notice of renewal within 30 days of the expiration of the certification. The SAT may at any time inspect A, AA and AAA Maquiladoras and may revoke a certification if a Maquiladora fails to comply with any applicable requirements.
Because obtaining a certification provides significant benefits for Maquiladoras (no VAT on imports and purchases from foreign parties), owners of Maquiladoras should ensure that their Maquiladoras meet all requirements necessary to file a VAT certification request.
Because of the important benefits offered by the Presidential Decree and the Miscellaneous Tax Rules discussed above, U.S. companies that have Maquiladoras in Mexico should evaluate the impact of this new guidance. In addition, U.S. companies should start assembling and organizing the package of documentation that needs to be submitted to the SAT in order to obtain the VAT certification.
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