© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C. November 2013 Maquiladora Tax Regime 2014 Tax Reforms Maquiladora Regime Blanca Montaño Riqué CPC & MF
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Maquiladora Tax Regime 2014 Tax ReformsNovember 2013
Maquiladora Regime
Background
*
Background
The reform seems to deliver a message of increasing tax collections through:
Increase of tax rates
*
Tax reforms constitutional approval process
*
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.
Tax Reform 2014
2014 economic package
Sets the amount of income of the Federation
Reforms or modifies the tax laws relating to revenue collection
*
Current Maquila Regime
*
Export earnings are fueled by among other things, of manufacturing.
IMMEX companies represent 85% of Mexico’s manufacturing exports.
*
©2009 Galaz, Yamazaki, Ruiz Urquiza, S.C. Todos los derechos reservados.
Maquiladora general operation
*
- Sends machinery and equipment
- Pays maquila service fee
- Charges a maquila service fee on a cost plus basis
- Exports (returns to US) the processed goods
*
*
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.
*
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
*
Repealed Laws
*
Transition provisions are established to secure the rights and obligations acquired during the effective term of the law.
*
*
The Cash Deposits Tax Law is repealed
*
Income Tax Law
*
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:
*
*
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.
*
*
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).
*
*
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.
*
*
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%
*
*
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:
*
*
Income Tax Partial Exemption
On October 30, 2003, Mexican president Vicente Fox enacted a presidential decree:
To grant an income tax partial exemption to Maquiladoras
In order to continue to promote investment in Mexico
And avoid them shifting their operations to other countries.
The most likely scenario is that such presidential decree exemption will be abolished.
*
*
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
*
*
A transitory provision establishes the mechanism for calculating the opening balance of the CUCA for taxpayers who began operations before January 1, 2014.
However, there is missing regulation about initial balance of the CUFIN account. So there is no clarification of what happens to UFINES from 2000 and back.
No clarification on CUFINRE account.
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:
*
Value Added Tax Law
*
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 (?)
*
*
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:
High volumes of temporary importation
Financial cost
*
*
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.
*
*
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.
*
*
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.
*
*
VAT on sale by foreign residents of temporary imported items
*
*
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.
*
Federal Tax Code
*
Maquiladora Regime
Tax postbox
An electronic communications system is created between the tax authorities and taxpayers,
*
*
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.
*
*
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:
in the immediately previous year obtained accruable revenues in excess of about USD$7,700,000 (MXP$100,000,000)
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),
*
© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Deloitte se refiere a Deloitte Touche Tohmatsu Limited, sociedad privada de responsabilidad limitada en el Reino Unido, y a su red de firmas miembro, cada una de ellas como una entidad legal única e independiente. Conozca en www.deloitte.com/mx/conozcanos la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
Deloitte presta servicios profesionales de auditoría, impuestos, consultoría y asesoría financiera, a clientes públicos y privados de diversas industrias. Con una red global de firmas miembro en más de 150 países, Deloitte brinda capacidades de clase mundial y servicio de alta calidad a sus clientes, aportando la experiencia necesaria para hacer frente a los retos más complejos de los negocios. Los más de 195,000 profesionales de la firma están comprometidos con la visión de ser el modelo de excelencia.
Tal y como se usa en este documento, “Deloitte” significa Galaz, Yamazaki, Ruiz Urquiza, S.C., la cual tiene el derecho legal exclusivo de involucrarse en, y limita sus negocios a, la prestación de servicios de auditoría, consultoría fiscal, asesoría financiera y otros servicios profesionales en México, bajo el nombre de “Deloitte”.
Esta publicación sólo contiene información general y ni Deloitte Touche Tohmatsu Limited, ni sus firmas miembro, ni ninguna de sus respectivas afiliadas (en conjunto la “Red Deloitte”), presta asesoría o servicios por medio de esta publicación. Antes de tomar cualquier decisión o medida que pueda afectar sus finanzas o negocio, debe consultar a un asesor profesional calificado. Ninguna entidad de la Red Deloitte, será responsable de pérdidas que pudiera sufrir cualquier persona o entidad que consulte esta publicación.
Blanca Montaño Riqué
Maquiladora Regime
Background
*
Background
The reform seems to deliver a message of increasing tax collections through:
Increase of tax rates
*
Tax reforms constitutional approval process
*
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.
Tax Reform 2014
2014 economic package
Sets the amount of income of the Federation
Reforms or modifies the tax laws relating to revenue collection
*
Current Maquila Regime
*
Export earnings are fueled by among other things, of manufacturing.
IMMEX companies represent 85% of Mexico’s manufacturing exports.
*
©2009 Galaz, Yamazaki, Ruiz Urquiza, S.C. Todos los derechos reservados.
Maquiladora general operation
*
- Sends machinery and equipment
- Pays maquila service fee
- Charges a maquila service fee on a cost plus basis
- Exports (returns to US) the processed goods
*
*
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.
*
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
*
Repealed Laws
*
Transition provisions are established to secure the rights and obligations acquired during the effective term of the law.
*
*
The Cash Deposits Tax Law is repealed
*
Income Tax Law
*
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:
*
*
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.
*
*
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).
*
*
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.
*
*
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%
*
*
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:
*
*
Income Tax Partial Exemption
On October 30, 2003, Mexican president Vicente Fox enacted a presidential decree:
To grant an income tax partial exemption to Maquiladoras
In order to continue to promote investment in Mexico
And avoid them shifting their operations to other countries.
The most likely scenario is that such presidential decree exemption will be abolished.
*
*
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
*
*
A transitory provision establishes the mechanism for calculating the opening balance of the CUCA for taxpayers who began operations before January 1, 2014.
However, there is missing regulation about initial balance of the CUFIN account. So there is no clarification of what happens to UFINES from 2000 and back.
No clarification on CUFINRE account.
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:
*
Value Added Tax Law
*
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 (?)
*
*
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:
High volumes of temporary importation
Financial cost
*
*
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.
*
*
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.
*
*
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.
*
*
VAT on sale by foreign residents of temporary imported items
*
*
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.
*
Federal Tax Code
*
Maquiladora Regime
Tax postbox
An electronic communications system is created between the tax authorities and taxpayers,
*
*
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.
*
*
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:
in the immediately previous year obtained accruable revenues in excess of about USD$7,700,000 (MXP$100,000,000)
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),
*
© 2013 Galaz, Yamazaki, Ruiz Urquiza, S.C.
Deloitte se refiere a Deloitte Touche Tohmatsu Limited, sociedad privada de responsabilidad limitada en el Reino Unido, y a su red de firmas miembro, cada una de ellas como una entidad legal única e independiente. Conozca en www.deloitte.com/mx/conozcanos la descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro.
Deloitte presta servicios profesionales de auditoría, impuestos, consultoría y asesoría financiera, a clientes públicos y privados de diversas industrias. Con una red global de firmas miembro en más de 150 países, Deloitte brinda capacidades de clase mundial y servicio de alta calidad a sus clientes, aportando la experiencia necesaria para hacer frente a los retos más complejos de los negocios. Los más de 195,000 profesionales de la firma están comprometidos con la visión de ser el modelo de excelencia.
Tal y como se usa en este documento, “Deloitte” significa Galaz, Yamazaki, Ruiz Urquiza, S.C., la cual tiene el derecho legal exclusivo de involucrarse en, y limita sus negocios a, la prestación de servicios de auditoría, consultoría fiscal, asesoría financiera y otros servicios profesionales en México, bajo el nombre de “Deloitte”.
Esta publicación sólo contiene información general y ni Deloitte Touche Tohmatsu Limited, ni sus firmas miembro, ni ninguna de sus respectivas afiliadas (en conjunto la “Red Deloitte”), presta asesoría o servicios por medio de esta publicación. Antes de tomar cualquier decisión o medida que pueda afectar sus finanzas o negocio, debe consultar a un asesor profesional calificado. Ninguna entidad de la Red Deloitte, será responsable de pérdidas que pudiera sufrir cualquier persona o entidad que consulte esta publicación.
Blanca Montaño Riqué