The Tax Reform approved by the Mexican Congress presents several changes to the taxpayers, including the manufacturing sector, since it brings up a new Income Tax Law (ISR). The following concepts are amended, which we consider of great impact and relevance to the Maquiladora industry, considering that today they have not issued regulations or decrees that might reduce or mitigate the impact of the reform:
- A new process and diverse concepts are established in order to obtain the taxable income to compute the employees profit sharing (PTU). This process does not allow the reduction of the PTU paid during the fiscal year nor the reduction of the non-deductible portion of the contributions made to the pension and retirement funds.
- Likewise, it is established, as a requirement for the deduction of social welfare expenses, that its granting does not exceed the maximum limits established by said Income Tax Law. Additionally, when the taxpayer has unionized and non-unionized employees, the deduction is conditioned to the fact that those disbursements -social security contributions excluded- be in arithmetical average for each non-unionized worker, in an equal or minor amount that the deductible expenses for the same concept made by each unionized worker.
- In the event that the payments which in turn are exempt income for the workers, it establishes that they will be deductible only up to 47%. Additionally, this percentage can be increased to 53% if the same benefits of the prior fiscal year are kept.
- With respect to the contributions for the creation or increase of the pension funds reserve, complementary to those established in the Social Security Law and seniority premium, these will be deductible only up to 47%. However, if the benefits paid in a certain year do not decrease with respect to those granted in the previous fiscal year, they will be deductible up to 53%.
- The possibility to deduct the employee's social security contributions paid by the employer is eliminated.
- It establishes that the maquila regime can only be applied by those maquiladora companies whose activities are exclusively the exportation of transformed or repaired products, excluding from said regime the Maquiladoras dedicated only to providing services.
- A new requirement is added, that a minimum a 30% of the machinery and equipment value used in the manufacturing process must be owned by the resident abroad. However, the machinery and equipment must not have been previously owned by the maquiladora or a related party residing in Mexico.
- A minimum amount of export of at least 90% of the total annual billing to be taxed under the maquila regime is eliminated. Instead it establishes a requirement that all of its productive activity income is derived exclusively from the maquila operation.
I. Aspects of the Unconstitutionality of the Law.
In our opinion, the 2014 Tax Reform presents flaws that may provoke a violation of the human and constitutional rights of the taxpayers, for the following reasons:
1. Unconstitutionality of the changes in authorized deductions.
As indicated, the 2014 Tax Reform limits and conditions, amongst other things, the deduction of the social welfare that the employer grants to its employees, that is, the deduction of the benefits that are totally or partially exempt for the employees. Also, it only allows the partial deducibility of the contributions made to the pension and retirement plans complementary to those established by the Social Security Law, and it also eliminates the possibility to deduct the social security contributions of the employee paid by the employer.
Likewise, it establishes as a condition for the deduction of the social welfare expenses, that its granting does not exceed the maximum limits established by the new Income Tax Law. Additionally, it says that when the taxpayer has unionized and non-unionized employees, the deduction is conditioned to the fact that said disbursements -social security contributions excluded- be in arithmetical average for each non-unionized worker, in an equal or minor amount that the deductible disbursements for the same concept made for each unionized worker.
In this sense, the limitations for the deduction of the social welfare payments increase the taxable base of the companies in order to determine its fiscal year income tax and consequently, the payable tax amount will be increased since they will not be allowed to deduct the 47% of said payments only because they are an exempt income for the worker.
We consider that under this 2014 Tax Reform several constitutional principles are violated by not allowing the companies the deduction of the 100% of the referred concept. Its authentic contributive capacity is not reflected because it imposes the determination of a profit that does not report its real operation, and there is no legal justification that explains why no deduction of the exempt portion for the worker is not allowed, and it is evident that it serves non tax related aspects, even though it has already been sustained by the Supreme Court, through diverse jurisprudential criteria.
Likewise, it is unconstitutional the fact to establish as a requirement for the deduction of the social welfare benefits, that the granting does not exceed a determined percentage or a determined number of minimum wages which does not reflect their real contributive capacity.
Likewise, for companies with unionized and non-unionized workers, it’s unconstitutional the fact that they are conditioned to granting the social welfare benefits to be in arithmetical average for each non-unionized worker, in an equal or minor amount to the deductible disbursements for the same concept, made for each unionized worker.
2. Unconstitutionality of the proceeding for the computation of the PTU base.
The 2014 Tax Reform establishes that, for purposes to determine the taxable income referred to in item e) of fraction IX of Article 123, paragraph A of the Constitution of the United Mexican States, the taxpayers shall deduct from the accruable income those amounts that have not been deductible pursuant to the terms of section XXX of article 28 of the new Income Tax Law. However, in said section, the complementary nondeductible portion of the employer's contributions to the pension and retirement funds of the Social Security Law are not considered, and this would be unconstitutional by having two taxable basis.
3. Definition of Maquila Operation.
- By setting the tax reform in question, that the maquila regime can only be applied by those maquiladoras dedicated exclusively to the export of processed or repaired products and excluding service maquiladoras, we consider that the principle of tax equity is violated because it gives a different treatment to similar situations. The exclusion of the service maquiladora unables it to determine its Income Tax applying the Safe Harbor methods, thereby also being at risk of creating a permanent establishment in the country to a resident abroad, even though that diverse decrees for the Manufacturing Maquiladora and Service Export Industries (IMMEX) in force until 2010 did include the service maquiladoras.
- Additionally, the reform establishes that for purposes of determining if a company qualifies as a maquiladora operation and not consider that a resident abroad has a permanent establishment in the country for providing directly or indirectly raw materials, machinery and equipment, it must comply with the requirement that at least a 30% minimum of the value of the machinery and equipment used in the manufacturing process must be owned by the resident abroad and it also states that such machinery and equipment must not have been previously owned by the maquiladora or of a related party residing in Mexico. We consider that for the maquiladora companies that obtained their IMMEX program before 2010, these two conditions violate diverse human and constitutional rights, such as, the principle of non retroactivity of the law and of legitimate trust protection, because they pretend to modify situations that occurred before the enforcement of the new Income Tax Law, and there are no transitory measures established to avoid surprising the taxpayers and to avoid damage with the enforcement of said modification.
- Likewise, the reform eliminates the minimum exportation amount of at least 90% of the total annual billing to be able to contribute under the maquila regime and in its place it requires that the total income of its productive activity come exclusively from the maquila operation. Said wording generates legal uncertainty and the tax authorities might interpret this as if the maquiladora companies cannot perform a different activity than that of the maquila, situation that would violate the constitutional principle of freedom of work, that is the right to perform an industrial or a work activity that they deem convenient, as long as they are legal. For this reason we consider that an Amparo petition against article 181 of the Income Tax Law would proceed, in order that the Federal Judicial Authority confirms if there is a limitation or not, and thus establish evidence in the event of a tax revision.
II. Legal Defense Strategy
Based on the above and taking into account that up to this date no rules or decrees have been issued that might lessen the impact of the tax reform aforementioned, we consider that there are sufficient elements to claim the unconstitutionality of the reformed concepts of the Income Tax Law, as indicated in this alert, through an Amparo to be filed before the District Courts.
In general, the Amparo is filed within 30 days after the new Income Tax Law takes effect (February 2014). However, there is a second chance, 15 working days after the first application of the norms, so we recommend analyzing each particular case to define the moment.