Today, December 6 of 2013, the National Council of the Manufacturing and Export Maquiladora Industry (INDEX) summarized important achievements during the legislative process of the recent Tax Reform, that will enter into force and effect on January 1, 2014. INDEX also announced that the Ministry of Finance and Public Credit will publish within the following days a Decree granting, among others, the following benefits to mitigate some of the effects of the Tax Reform that reduce the international competitiveness of the maquiladora industry:
- To neutralize the foreseen effect of the limitation to deduct certain payments made to employees, which are exempted income for employees (i.e. fringe benefits will be deductible only in 47%), it proposes a tax incentive that would consist in the possibility to have an additional deduction against taxable profit of maquiladora companies. It should be noted that it is not intended to reduce the tax profit of maquiladora companies when determined pursuant to the so-called safe harbor methodology, as it does not imply a double taxation effect since the maquila fee would be tax deductible for the principal of the maquiladora. With respect to taxable profit determined pursuant to advanced pricing agreements (known as APAs), it is intended to reduce the corresponding taxable profit.
- Extends the protection of the so-called "grand-father clause" with respect to the obligation to have at least 30% of machinery and equipment owned by the non-resident principal with which a maquiladora agreement was entered; it also provides that the machinery and equipment should not have been owned by the maquiladora company (or from a related party of the maquiladora company resident of Mexico). On this respect, it recognizes and respects the vested rights of those maquiladoras that were authorized to operate under the terms of the Decree for the Promotion of the Manufacturing, Maquiladora and Export Services Industry (the so-called IMMEX Decree) no later than December 31, 2009, and that the maquiladora had complied with transfer pricing obligations under the terms of the special rules issued for that effect in the Income Tax Law.
Notwithstanding the above, it is expected that the Decree may include a transition term of two years to allow for all maquiladoras to operate with machinery and equipment property of their non-resident principal in at least 30%.
- With respect to Value Added Tax (VAT) to be withheld by IMMEX companies from non-residents that sell to them temporarily imported goods, the Decree would include a mechanism that will allow IMMEX companies to credit withheld VAT within the same month of the VAT withholding, rather than crediting the respective VAT in the following month to the month in which the withheld VAT is paid to the tax authority.
This mechanism would dissipate doubts related to the possibility to credit the withheld VAT by the IMMEX companies, and would also allow to continue operating the productive chains of manufacturing without incurring significant additional costs.
Once the Decree is published by the Ministry of Finance and Public Credit, we will issue an updated alert.