• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 9/18/2013

Mexico - Tax reform proposals specific to maquiladoras 

September 18: The Mexican government’s tax reform package contains provisions that, if enacted as proposed, would specifically affect taxpayers operating in the maquila industry sector.

New definition

For instance, the proposals include a new definition of “maquila operations” that requires that exports must equal a minimum of 90% of the maquila entity’s total income (and not related to a minimum percentage of use of machinery and equipment of the foreign resident, as under current provisions).

This change could result in increased income tax liabilities for maquila entities and present possible permanent establishment issues.

Other proposals

Another proposal could affect foreign residents that maintain business relationships with “shelter maquilas” relating to manufacturing operation and logistics services.

Entities that comply with the proposed definition of maquila operations would need to comply with transfer pricing rules, by means of a “safe harbor” or request an advanced pricing agreement (APA) from the Mexican tax authorities.

Other measures would repeal certain tax incentives and tax exemptions.

In addition, there would be an additional 10% income tax imposed on profits and dividends distributed to Mexican individuals and foreign residents (this would not be a withholding tax but an additional tax to the companies’ current taxation). This new tax would apply to all Mexican entities, not only to maquilas.

Other changes would revise deductions currently available—e.g., deductions for salaries and employee benefits.

VAT changes

A proposal would repeal the value added tax (VAT) exemption on the temporary importation of goods (raw materials and fixed assets) into Mexico involving sales between foreign residents and physical transfers / deliveries with entities operating under the maquila program. If this proposal is enacted, there would be increased financial costs for the maquila sector—i.e., more working capital would need to be devoted to paying VAT upfront before a refund could be requested from the tax authorities.

Read a September 2013 report prepared by the KPMG member firm in Mexico: Effects to the Mexican Maquiladora Industry related with the Tax Reform Proposal for 2014

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