The Tax Administration Service (“SAT”) has now published the Second Amendment of the Miscellaneous Tax Rules for 2014, containing rules defining the types of income that companies with maquila operations may continue to generate without jeopardizing the statutory protection of their foreign principal from a permanent establishment exposure in Mexico. The new rules also set forth a new deadline of October 1, 2014 for complying with the remaining limitations on a maquiladora’s receipt of income other than income arising from it the manufacturing activity itself.
As established in the Income Tax Law, in full force and effect as of January 1, 2014, among other requirements to qualify for the maquila operation concept required to exempt the foreign principal of a maquiladora company from a permanent establishment exposure in Mexico, all the revenue from productive activities of the maquiladora shall derive exclusively from its maquila operation (i.e. from transformation activities). In addition to establishing the new deadline for complying with those limitations, the rules published on July 4, 2014 provide that a maquiladora may continue to receive revenue from the following activities after September 30 without calling into question their status as a maquila operation for Mexican income tax purposes:
- Rendering certain services (“servicios de personal”) to a related party.
- Lease of fixed assets (“bienes muebles e inmuebles”), provided that leasing of such assets to an unrelated party is limited to a term of three years. The three year term shall not apply for a lease agreement entered into prior to January 2014, therefore the initial term of the lease agreement entered into prior to January 2014 shall apply. Once the agreement is terminated, the term of such agreement shall not be extended.
- Sale of fixed assets that were utilized in the maquiladora operation.
- Sale of scrap materials generated during the productive process.
- Interest income.
- Other income directly related to the maquila operation.
The revenue generated each year by the maquiladora from the activities indicated in items 1, 2, 4, 5, and 6 (excluding sales described in item 3), shall not exceed in the aggregate more than 10% of the total revenue generated by the maquiladora’s manufacturing activity
In order for a maquiladora to receive income from the sale of fixed assets without adverse consequences, it must file a notice before the Transfer Pricing Auditing Central Administration containing a detailed explanation of the business reasons for such sales transaction, as well as an indication of the amount of revenue from such sales and percentage that income from such transaction constitutes of the total revenue of the maquiladora company, and attaching documents demonstrating that the fixed assets in question were used in the maquiladora operation.
The taxable income from each such non-maquila activity must be calculated separately and duly segregated separately in the accounting and financial information of the company, apart from the income derived from of the maquila services. Moreover, calculation of the taxable income from such non-maquila activities may not take advantage of any tax benefit granted to the maquila operation, such as the ability to deduct the cost of elements of employee compensation that are tax free to the employees.
Similarly, please note that all payments between or among related parties shall be determined at arm's-length, following the corresponding transfer pricing methodologies.
The new rules continue to specify that a maquiladora will not qualify as a maquila operation for income tax purposes if it undertakes any trading or commercialization activities. Therefore, if a company with a maquila operation engages in the sale of finished goods (other than fixed assets previously utilized in the manufacturing activities) after September 30, 2014, the tax authority may attempt to disregard the statutory protection of its foreign principal from a permanent establishment in Mexico.
These new rules give companies more time to restructure their Mexican operations to remove activities generating other types of revenue, such as income from the purchase and sale of finished goods, from their maquiladora companies or their related parties. We are prepared to discuss any questions that arise in applying or interpreting these rules in particular circumstances.
The main concern in that regard, which requires clarification from the tax authorities, has to do with the reference to the non-maquila services income that a maquiladora may continue to receive after September 30 as income from “servicios de personal.” That appears to be the wrong term for defining the categories of services income that a maquiladora should be able to receive without jeopardizing the statutory protection of their foreign principal from a permanent establishment exposure in Mexico.
In order to solve the major practical business problems created by the new limitations on maquiladora income, it is essential that the maquiladora be allowed to receive income from related parties for a broad range of services, on the condition that the maquiladora segregates the income and expenses of such activities from those of the maquiladora activity, excludes those operations from the benefit of the special rules on deductions for maquiladora operations, and satisfies normal transfer pricing rules and the abovementioned formalities.