©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Analysis of the amendments to the IMMEX Decree Tax considerations Tax and Legal Services / January, 2011

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C.

Analysis of the amendments to the IMMEX DecreeTax considerations

Tax and Legal Services / January, 2011


General aspects

The current Decree for the Development of the Manufacturing, Maquiladora and Services Industry («IMMEX Decree») was published in the Daily Gazette on November 1, 2006 and amended on May 16, 2008.

On December 24, 2010 a new amendment to the Decree is published.

It enters into effect 90 days after its publication = March 24, 2011.

Articles that entered into effect on January 1, 2011:

Article 33 (amended)Article 34 (created)

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General aspects

Main reasons for the amendment of the Decree

• Avoid abuse by the taxpayer that did not have the wright of the preferential tax regime of a typical maquiladora.

• Establish «locks» to access tax benefits.

• Establihs new customs rules.

• Define new products as «sensible» for customs purposes.

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©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. 4

BackgroundPE derives from a maquila operation (two taxpayers in Mexico, the maquiladora and the parent company with a PE)

Maquila(IMMEX)

Inventory

Administration and control

US

MEX1

3

PE

M&E

2

Parent company

PE


MAQUILA

100% - Foreign ownership

M&E - Provided by contractor

Inventory – Provided by contractor

Control – Provided by contractor

Background

Maquiladoras vs. Pitex – Main Differences

PITEX

51% - Mexican ownership

M&E - Owned

Inventory – Provided by contractor or owned

Control – Not necessary provided by contractor


Background

Maquiladoras vs. Pitex – Tax Benefits

VAT

Customs

Asset tax waiver

Income tax reduction

Flat Tax credit

Safe Harbor option

Transfer pricing preferential regime option

MAQUILADORA

Yes

Yes

Yes

Yes

Yes

Yes

Yes

PITEX

Yes

Yes

No

No

No

No

No


Background November, 2006

IMMEX

Maquila Pitex


Tax benefits for IMMEX companies

1. Exemption of Permanent Establishment

2. Partial or total exemption of Mexican Income Tax in accordance with the October 30, 2003 Decree («Fox Decree»)

3. Tax incentive to reduce the paymet of Flat tax IETU («Calderon Decree»)

4. Preferential tax regime in transfer pricing (article 216-BIS)

5. VAT 0% rate.

©2009 Galaz, Yamazaki, Ruiz Urquiza, S.C. Todos los derechos reservados.

Tax amendments

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Legal reasons (within the Decree)

• Strengthen the compliance with the obligations set forth in the IMMEX Decree. It is necessary to restrict the authorization of new development programs for companies that have not complied with them.

• The ITL establishes for companies that perform maquila operations a tax regime that facilitates its compliance to the maquiladora and the foreign resident.

• The ITL establishes that in order to apply the tax regime to maquiladoras, the definition established in the IMMEX Decree must be followed.

• It was considered urgent and necessary to adjust the maquila operation definition, in order to include virtual operations, as wells as the requirement that the operation is done with machinery and equipment of a foreign resident.

• The maquila operation does not restrict the incorporation of other national or foreign merchandise.

• Establish a grammatical precision of the transformation of goods and not its manufacturing by part of a maquiladora company, since the raw materials delivered are not manufactured by the company, but so transformed to a different product with a value added.

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Article 2 MITL (last paragraph)

• It is not considered that a foreign resident has a permanent establishment in the country

Derived from the juridical or economic relationships that it maintains with companies that perform maquila operations, that regularily are processed in the country, goods or merchandise maintained in the country by the foreign resident, utilizing assets provided directly or indirectly by the foreign residen or any related company.

As long as Mexico has celebrated with the host country a treaty to avoid double taxation and the requirements of the treaty are complied with, including friendly agreements negotiated in accordance with the treaty in the manner implemented by the parties involved.

In order to be considered that a foreign resident does not have a permanent establishement in the country. The set forth in this paragraph, will only be applicable when the companies have maquila operations and comply with article 216-Bis of the Law.

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Article 33 Maquila operation

Raw materi

al

• Provided by a foreign resident• Derived from a maquila agreement• Subject to a transformation or repair process• Temporary imported• Return abroad, even with virtual operations• It can be property of a foregin resident third party when there exists a commercial

relationship with the company with the maquila agreement

Transformati

on

• Dilution in water or other substances• Washing and cleaning, removal of oxide, oil, paint or other finishes• Application of preservatives, including lubricants, protective encapsulation or

paint for conservation• Adjustment, sanding or cutting• Preparation of doses, packing, re-packing, packaging, re-packaging• Tests, marking, labeling or classifications• Product development or quality improvement

In accordance with the last paragraph of art 2 of the MITL maquila operation is the one that complies with the following conditions.

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Service activities that were excluded of the transformation

definition

Provide, warehouse or distribute merchandise

Preparation of kits or material with advertising purposes that accompany the exported products

Washing and ironing of clothes

Broidery or printing of apparel

Armoring, modifications or adaptations of vehicles

Recycling and collection of waste

Software engineering and design

Services that support information technology

Subcontracting services of business processes based in information technology

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National

merchandise

or definiti

ve import

s

• When national or foreign merchandise not temporary imported is incorporated, its must be exported or returned with the merchandise temporarily imported.

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Machinery and

equipment

• Property of the foreign resident with the maquila agreement• Has not been property of the company that performs the maquila operation• Or of another Mexican related party.• It can be completed with equipment property of a non-related foreing resident

with a commercial relationship• Can be leased with a non-related party• It cannot been property of another Mexican company that is a related party

with the company doing the maquila operation.

Exceptions

• If the foreign resident is owner of at least 30% of the machinery and equipment used in the maquila operation.

• It is not applicable to companies that up to December 31, 2009 operated under a Program and have complied with their Income Tax and Transfer pricing obligations.

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Article 33 Maquila Operation

It is not considered maquila operation:

The transformation or repair of merchandise sold in Mexico and do not have an export pedimento,

Therefore article 216-Bis of the MITL will not be applicable for said operations.

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Calculation of the 30% for machinery and equipment (3rd amendment 12/28/2010)

Amount to be depreciated by the foreingner / [amount pending to depreciate (1 property of the foreigner + 2 property of third parties with commercial relationships + 3 property of the maquiladora company + 4 leased to non-related parties)]

• Amount to depreciate = MOI – depreciation on tax rates

• The MOI is determined with the customs value; or the MOI of the maquiladora company; or with the appraisal for leased goods of Mexican residents.

• The amount pending depreciation cannot be lower than 10% of the MOI.

• The balances have to be updated with the INPC (last month of the first half of the fiscal year / month of purchase)

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Article 34 Maquila operation VAT

New article

• For purposes of the VATL it is consideted maquila operation - The manufacturing operation of companies with a Program made under the Decree

• It is considered submaquila― The submanufacturing operation made in terms of the Decree.

• It is indicated that the return will not exceed 20 working days, except for Certified companies that will be in 5 days.

• It is not clarified the possible double taxation of the VAT, when a Certified maquiladora delivers in Mexico on behalf of the foreign resident.

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mailto:[email protected]

Documents

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Analysis of the amendments to the IMMEX Decree Tax considerations Tax and Legal Services / January, 2011