In recent years, new players have affected the Mexican Maquiladoras. Due to that situation, the Federal and State Governments, by means of Executive Decrees, changed laws and tax rules, reacted to maintain the competitiveness of the industry. Main changes and benefits are described in the following:
Simplified rules to comply with Permanent Establishment and Transfer Pricing provisions.
Until 2002, Maquiladoras were obligated to compute and report a taxable income that includes a return on assets if a TP ruling was requested on a red tape negotiation lengthy process. If the option of save harbour was elected, the rules to compute values were confuse and originated legal uncertainty.
By changes in the Income Tax Law since 2003, new options to comply with these rules were included, that decreases taxing the return on investment and excluded inventories. On the other hand, no longer was required the TP resolution sanctioned by the tax authorities and the safe harbour (administrative facility for the fulfillment of rules of transfer pricing) calculation was simplified.
All of this resulted on important decrease on administrative cost for calculating taxes, provide legal certainty and in most cases, reduced the taxable income, and as a consequence, the cost of income tax and the profit sharing to employees.
Reduction up to 67% of Maquiladoras’ income tax.
On October 2003, by means of an Executive Presidential Decree, a tax benefit for Maquiladoras was established consisting in the reduction up to 67% of their income tax. This can be lower, depending on the option that the company elected to comply with the PE and TP rules, but in the majority of the cases, still will be higher than 50%.
This places Mexico in a very competitive position with an effective tax rate of around 15%.
To calculate this benefit, companies must compute the tax for values, to a safe harbour option (the highest taxable income between the 6.5% of the operational cost and the 6.9% of the next fiscal value of the assets) and apply 3% to calculate by difference the tax benefit. For safe harbour companies, this will mean that instead of paying the highest of 6.5% or 6.9%; will compute the minimum taxable income applying 3%.
Reduction in the income tax advances.
The income tax reduction that is described was not having any immediate effect in Maquiladoras because they needed to compute their income tax advances based on prior years profit factors. The authority issued a rule by which Maquiladoras can reduce these advances in proportion to the expected income tax once the benefit is applied.
Reduction of the taxable income if exportations decline.
By means of a fiscal rule, Maquiladoras are permitted to reduce their taxable income for years 2003 and 2004 by a factor that is determined comparing the current year exportation with the average of the 3 prior years, or less in case of new companies. Per example, if the current year is 500 and the average of the three years is 1,000, then the reduction factor will be 50%.
Accelerated Depreciation of Assets
The Income Tax Law and an Executive Decree establish an accelerated depreciation incentive for income tax on new investments that could represented an immediate deduction of approximately 85%, deferring the payment of income tax and profit sharing to employees. Maquiladoras that elected safe harbour will not be benefited from this incentive, because it implies to report a minimum taxable income.
There are special provisions for Maquiladoras to apply accelerated depreciation that include not owned machinery and equipment used on their operation but the immediate tax reduction will reverse in short term on a higher income tax payment.
Income Tax Reduction for Disabled Employees
On article 222 of the Income Tax Law there is a tax incentive consisting on deducting 100% of the income tax on salaries paid to disabled employees from the Corporate Income Tax revenues, if they are properly registered in the Social Security Institute.
