The Miscellaneous Tax Rules for Fiscal Year 2016 ("Tax Rules") were published in the Federal Official Gazette, on December 23, 2015. The Tax Rules shall be in full force and effect as of January 1, 2016. This alert, is limited to highlight the new rules relevant for companies that operate under an authorization issued pursuant to the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industries (“IMMEX Decree”) and which are subject to Articles 181, 182 and 183 of the Income Tax Law ("ITL").
Below, you may find a summary of the most relevant topics:
- Extension of the deadline to file the DIEMSE of Fiscal Year 2014
Companies that operate under the terms of an IMMEX program are obliged to file each year the Informative Return of Maquila Operations and Exportation of Services ("DIEMSE").
The obligation of filing the DIEMSE for fiscal year 2014 had been deferred until December 31, 2015. However, the Tax Rules, in its Article Transitory Twenty First, include a new extension of such term, in order to file the DIEMSE of 2014. The new deadline is between February 15 and March 15, 2016.
The due date for filing the DIEMSE of fiscal year 2015 remains the last day of June 2016, in accordance with second paragraph of Article 182 of the Income Tax Law.
The Filing of the DIEMSE is required in order for companies to continue to be entitled to apply the benefits granted for maquiladora companies, including the following:
- Relief granted toIMMEX companies from the obligation of filing, on a yearly basis, a letter informing the Tax Authority about the taxable profit assessed by following the methodology resulting from the application of Sections I and II of Article 182 of the ITL. Compliance with this requirement is necessary to continue fulfilling the legal conditions provided in order to consider that the foreign related party does not have a permanent establishment in Mexico as a consequence of the maquila operation carried out through an IMMEX company.
- Continue to have the benefit consistent in an additional deduction equivalent to47% of the fringe benefits paid to the employees (Under the terms of Article First, Section II, of the Decree that grants tax benefits to the IMME industry, published in the Federal Official Gazette on December 26, 2013, maquiladoras shall inform the Tax Authority regarding the determination of the applied benefit).
- Greater legal certainty to companies that operate through Shelters
As of January 1, 2014, pursuant to a Mexican tax reform, a foreign resident shall not be deemed to have a permanent establishment in Mexico derived from the undertaking of manufacturing activities through an IMMEX company authorized under a Shelter modality. However, said legal exemption is limited to a term of four consecutive years as of the initiation of the contractual relationship with the Shelter company, or January 1, 2014.
Therefore, in principle, it shall be considered that upon the end of the initial four years, the foreign residents that undertake operations through a Shelter, will have to formally register a permanent establishment in Mexico for the compliance with their tax obligations (or incorporate a maquiladora subsidiary in order to conduct its manufacturing activities).
In this regard, rule 3.20.6 of the Tax Rules provide that foreign residents that operate through a Shelter may comply with their tax obligations through the Shelter company, and will be exempt from formally registering in Mexico, regarding the manufacturing operations, for an additional term of four years, provided that the following conditions are met (among other):
- The foreign client of the Shelter shall be a tax resident of a country that entered with Mexico a tax treaty, that includes a clause for the exchange of tax information, or that has in force an agreement for the exchange of tax information with Mexico.
- File before the Tax Authorities a notice of the election to be subject to the option set forth under rule 3.20.6, and request a tax identification number without inclusion or indication of specific tax obligations for the foreign resident.
- The Shelter contractor will be responsible to asses the taxable profit that would correspond to each of its foreign clients in order to calculate and pay the corresponding income tax and to issue in their favor, a tax withholding certificate. The Shelter entity will be jointly liable with its foreign clients for the correct assessment and payment of the corresponding income tax in Mexico;
- The tax profit of the foreign clients of the Shelter companies shall be determined as the higher of :i) 6.5% of all cost and expenses incurred in the operation; and, ii) 6.9% of all the assets utilized in the manufacturing operation (please note that the rule does not provide for the possibility of requesting and obtaining an advanced pricing agreement for transfer pricing and it may questionable whether or not such alternative would be available).
- The Shelter shall retain the services of an international firm in order to certify the amount of cost and expenses incurred in the manufacturing operation, as well as the value of the assets utilized for such purpose.
- The Shelter shall allow, at any time, any visit from the tax authorities in order to inspect and verify the information concerning the cost and expenses incurred in the manufacturing operation, as well as the value of the assets utilized for such purpose.
- The Mexican Shelter shall be in full compliance with its own tax obligations, and secure from the tax authority its certification for value added tax and excise tax purposes, and such certification shall be secured with the highest available modality pursuant to the years of operation of the company. In this respect, there are concerns as to whether or not a downgrade on the certification modality (i.e. from AAA to AA) may trigger an event of default with the terms of the rule 3.20.6, subjecting the foreign client to the obligation of formalizing the registration of its permanent establishment in Mexico.
- The Shelter shall participate in the program for real time verification of the Tax Authority.
- The Shelter must only derive income from the rendering of services to its foreign clients, and in no event it may be allowed to derive income from the sale or distribution of finished products in Mexico. Considering that the rule does not create a legal fiction to consider that the foreign client would not have a permanent establishment in Mexico (as the rule only exempts the obligation of a formal registration and gives certainty with respect to the attribution of a taxable income, resulting from the undertaking of manufacturing operation), there might be concerns as to the attribution of income to the permanent establishment of the foreign entity in the event that it has other Mexican source of income (from the sale of goods or services). Therefore, it is strongly recommended to review in detail all the sales and supply chain operations of the foreigncompanies prior to the expiration of the original term of four years of operations in which the foreign resident is deemed not to have a taxable presence in Mexico, and prior to the start of the use of the option established in rule 3.20.6that grants and additional term of four years.
- In the event that a foreign resident wishes to change a Shelter contractor in order to continue the undertaking of its manufacturing operation, the option established in rule 3.20.6 may continue (exempting the formal registration) only for the remaining of the four years related with the original option (not being possible to extent or reset the term of exemption in the event that there is a change of Shelter contractor).