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TAX IMPACT OF THE MODIFICATIONS TO IMMEX PROGRAM Héctor Silva. Meeting - Breakfast February 17 2010. TWO DEFINITIONS . FOR CUSTOMS AND OPERATIONAL PURPOSES

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tax impact of the modifications to immex program h ctor silva

TAX IMPACT OF THE MODIFICATIONS TO IMMEX PROGRAMHéctor Silva

Meeting - Breakfast

February 17 2010

two definitions
TWO DEFINITIONS

FOR CUSTOMS AND OPERATIONAL PURPOSES

  • Industrial or service process to elaborate, transform or repair foreign temporary imported goods for its subsequent exportation including the rendering of services for exportation

FOR TAX PURPOSES

  • For purposes of article 2 of the MITL (PE waiver)
  • Processed inventory provided by the foreigner to be exported
  • Value of inventory must be mainly provided by the foreigner
  • Industrial process must be carried out with THE M&E provided by the foreigner
  • M&E should not be property of the maquiladora or any other Mexican related party.

2

article 33
Article 33
  • Various communications from CNIME, Maquila Associations and firms since October 2009.
  • Publication @ COFEMER's web page but still no official communication.
  • From the tax point of view, the initial goal is to eliminate maquila benefits to former PITEX companies, although may affect other maquiladoras.

2

maquila vs pitex in the past
MAQUILA vs. PITEX (IN THE PAST)
  • MAQUILA
  • 100% - Foreign ownership
  • M&E - Provided by contractor
  • Inventory – Provided by contractor
  • Control – Provided by contractor
  • PITEX
  • 51% - Mexican ownership
  • M&E - Owned
  • Inventory – Provided by contractor or owned
  • Control – Not necessary provided by contractor

3

tax benefits for maquiladoras and pitex
TAX BENEFITS FOR MAQUILADORAS AND PITEX

VAT

Customs

Asset tax waiver

Fox tax reduction

Calderon Flat Tax credit

Safe Harbor compliance

MAQUILADORA

Yes

Yes

Yes

Yes

Yes

Yes

PITEX

Yes

Yes

No

No

No

No

4

the immex program
THE IMMEX PROGRAM

PE waiver

Income tax reduction

Flat Tax reduction

Safe Harbor option

Available to former PITEX companies provided that M&E is provided by the contractor.

5

possible changes to the maquila decree
POSSIBLE CHANGES TO THE MAQUILA DECREE

MODIFICATION TO THE MAQUILA DEFINITION

  • Exclude those that owned M&E.
  • Limit the manufacturing with THE M&E
  • Exclude those which inputs are sourced “mainly” from Mexico.
  • Include service maquiladoras for water dilution, cleaning (oxide, oil and paint) packaging, tests, labeling, etc. (storage, distribution, design, call center are not included)

5

commentaries on changes in definition
COMMENTARIES ON CHANGES IN DEFINITION

PERMANENT ESTABLISHMENT

  • A commercial Decree regulating a tax structure? – the lax law, regulations or tax Decrees should have been considered.
  • Inventory “mainly” coming from abroad – lack of definition and against NAFTA goal of developing suppliers within the Region.
  • Coming from abroad is very different than foreign origin, same lack of definition
  • According to the Law inventory processing must be done with M&E provided by the foreigner while the Decree requires that THE inventory processing has to be done with THE M&E provided by the foreigner. The Law implies the use of foreign and local M&E and the Decree implies the use only of M&E provided by the foreigner.

5

commentaries on changes in definition9
COMMENTARIES ON CHANGES IN DEFINITION

PERMANENT ESTABLISHMENT

  • Should the maquila operation does not fit within the definition of article 33, the foreign contractor will be deemed to have a PE in México.
  • Nowadays the maquiladora complying with 216-bis is in theory paying the income tax on behalf of the maquiladora and on behalf of the PE of the foreigner without the bothersome of the tax compliance for the non resident.
  • Income tax paid by maquiladoras (the combined tax) is enough for both taxpayers. If two taxpayers have to be registered:
          • What is the income attributable to the PE in México?
          • Is the foreign entity entitled to a credit of tax paid in México?

5

slide10

Since no foreignsourceincome, US Corpcannotclaim a foreigntaxcreditagainst US taxes.

  • Theonlyreasonforthischangeistoallow a taxcreditwheninventoryissourcedfrom Mexico. US adviseisnecessary.
slide11
New Electronic Report for Maquiladoras complying with Transfer Pricing regulations stated in article 216-bis of the Mexican Income Tax Law.
  • Last January 19, 2010 a new software was displayed in the Mexican Tax authorities’ web page (no official publication yet)
  • Same information for the SH computation as normally provided by maquiladoras opting for the safe harbor, additionally:
        • Computation of the President Fox reduction of income tax
        • Maquiladoras using any accelerated depreciation
        • Facilites manufacturing in a bonded warehouse (RecintoFiscalizadoEstratégico)
  • It all indicates that this new report will substitute the yearly reporting that Maquiladoras opting for the safe harbor election (section II of article 216-bis) were filing along with their annual tax return. We will be following up to report once the format is officially published.

5

slide12

Héctor Silva

hsilva@deloittemx.com

+52 (664) 622 7840