The amendment proposal presented to the Mexican Chamber of
Deputies on September 8, 2013 by the head of the Executive Branch
contains important amendments to the tax regime of maquila
authorization holders. If approved as it stands by the Legislative
Branch, the proposal would radically change the treatment of the
value-added tax ("VAT") within transactions between
maquila companies (a factory run by a U.S. company in
Mexico), as well as those between maquila companies and
foreign residents, and would also radically change the treatment of
the income tax for those maquila companies.
From the argument within the proposal's statement of
purpose—specifically, the Mexican tax authorities'
mention of a series of abuses by some maquila
authorization holders and the recognition by these same tax
authorities of their own incapacity to properly audit and survey
the use of VAT in connection with other tax benefits under
different foreign trade-promotion schemes—it can be concluded
that these amendments are aimed primarily at controlling, and
eventually excluding from the benefits of the program, companies
that only look to fulfill the formal requirements of
maquila programs in order to enjoy their tax benefits,
without successfully carrying out exportations. However, such
amendments are likely to affect the operation and cash flow of
maquila holders who do comply with their obligations in
form and substance. This could result in the pulling of investments
from the manufacturing sector, which is highly sensitive to any
change in its utility gap.
Even though the proposal refers to an alleged financial-support
program for the affected maquila holders, the fact that
the scope and details of this program are not specified will create
uncertainty in the maquila-company sector.
Value-Added Tax
The VAT amendments, if approved as presented, will have a
profound impact with respect to: (i) temporary imports; and (ii)
sales between maquila companies, sales between these and
their national suppliers, and sales in which both maquila
holders and foreign residents participate.
In accordance with the proposal's text, all temporary imports
made by the maquila authorization holder will be subject
to VAT payments at the moment of entry into Mexican territory, and
the VAT will be accredited (set off) only after the
maquila authorization holder has either returned or sold
the final manufactured goods abroad or else sold those final goods
in Mexico.
With respect to the sale of temporarily imported machinery and raw
materials between maquila companies and those transactions
in which a foreigner sells goods physically present in Mexico to a
third party (who may be another foreign resident or another
maquila holder), an investor must bear in mind two
important points. First, the amendments to the VAT law eliminate
the exemption for sales entered into between foreign
residents(although at this point it is unclear how VAT will be
collected and paid in transactions between two non-Mexican
residents) and between a resident and a maquila company.
Second, some of the transactions between maquila companies
and foreign suppliers who are currently exempt from VAT and/or
subject to a VAT rate of zero percent are provided for in the
General Rules for Foreign Trade (a compendium of administrative
criteria), which may be amended at any time without congressional
intervention.
The proposal clarifies that maquila companies shall not
withhold VAT transferred to them as a result of the sales of their
Mexican suppliers, which will benefit those suppliers' cash
flow but will affect the cash flow of some of the maquila
holders.
It is important to note that the proposal will also affect VAT in
temporary importations and transactions with suppliers in the
automobile industry.
Income Tax
The reduced income tax rate of 17.5 percent of maquila
holders' taxable income, as currently provided in a
presidential decree, will be raised to the status of law. However,
this benefit will apply only to maquila holders who export
at least 90 percent of their total annual invoicing.
Bearing in mind that this is only an amendment proposal, subject
to discussion and approval by Congress, the impact that this will
have on "service" maquiladoras will have to be
carefully analyzed once the proposal is enacted.
In addition, the amendment proposal limits to a three-year period
certain income tax benefits (including the assurance that
foreign-resident clients will not be considered permanent
establishments) in the case of "shelter"
maquiladoras (i.e., those who render transformation
services to a variety of maquila clients under a single
maquila authorization).
Therefore, it is important for transactions between
maquila companies or investment schemes intended to create
new maquila companies in Mexico to take into consideration
the fact that although these rules are subject to discussion by
Congress and if approved will enter into force in January 2014, the
specific tax treatment of clients' maquila
transactions or intended transactions under this program may change
significantly in the near future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.