Article 181 of the Income Tax Law ("ITL") establishes
the requirements that must be met in order to consider that
taxpayers are performing maquila operations eligible for the
transfer pricing safe harbor. Among these requirements, the ITL
states that the maquiladora's entire productive activity must
derive exclusively from maquila transactions, without providing
Rule I.3.19.1 of the General Administrative Guidelines for 2014 (the "Rule"), initially provided ambiguous guidelines which caused significant confusion regarding the activities that would be deemed compliant maquila activities. To avoid this confusion, on July 4, 2014 the Second Amendments to such Rulings were published, establishing a list of the activities which would be construed as active maquila activities, thus clarifying such safe harbor maquila concept.
The list of eligible activities deemed maquila related productive activities are:
a) Personnel services, provided by the maquiladora to its related entities.
b) Leasing of movable and real property;
c) Selling waste & shrinkage of material used in its productive activities;
d) Sale of movable assets (excluding inventory and finished products) and real property;
e) Interests; and
f) Other income related to its productive activity, provided these are different from the ones obtained from the sale and distribution of finished products for its further resale.
The foregoing activities are subject to the following requirements:
1. That the amount of income for performing personnel services; leasing movable and real property; selling waste; interests received and other income related to its productive activity, cannot jointly exceed 10% of the total amount of income received for the maquila operations.
2. That accounting records that correspond to maquila operations must be segregated from the rest of the transactions related with such operations, and the companies that enter into such transactions must be clearly identified.
3. That the aforementioned income must be at arm's length and a transfer pricing study evidencing such arm's length pricing must be produced pursuant to the Income Tax Law.
4. The informative return of manufacturing and maquiladoras entities, as well as companies performing export services (DIEMSE), contains the corresponding information to this type of income, identifiable by each type of income.
Regarding income for the sale of movable and real property, the Maquiladora entity will submit a writ detailing the business reason that gave rise to such transaction and identifying the amount and percentage that this transaction represents from the total of income received for maquila operations, among other requirements.
If income from the lease of movable and real property is obtained from non-related parties, the maquiladora entity shall have a maximum term of three years to conclude this transaction. Such term shall be computed since the date of lease established in the agreement and may not be extended beyond three years, except in the case of "Force Majeure and Acts of God". This term is not applicable to the maquiladora entity that entered into lease agreements before January 1st, 2014 in which a longer term is established therein. In any case, the term of these agreements may not be extended.
The maquiladora entities cannot benefit from the safe harbor options set forth in Article 182 of the FITL (i.e. 6.9% of assets, 6.5% of expenses or APA), nor the benefit of the 100% deduction for fringe benefit payments which are considered an exempt item of income, set forth in the First Article of the Decree published on December 26, 2013, to the income related to maquila transactions listed hereinafter.
Originally published July 05, 2014
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.