New Decree to Reduce the IETU Impact on Mexico’s Maquiladora Export Industry
A new Tax Subsidy Decree was published in Mexico’s Official Journal of the Federation (Diario Oficial de la Federación) on November 5, 2007 and provides the maquiladora industry with a tax incentive in the form of a tax credit against final accumulated Flat Rate Tax (IETU) and income tax due. This tax credit has been implemented to buffer the negative effects of the recently enacted IETU. Such tax incentive will apply from 2008 through the end of 2011. Please keep in mind that it is quite likely that the Mexican government will amend the Tax Subsidy Decree and the rules by which it will be implemented.
The tax incentive will work as follows:
a. There will be a tax credit against a taxpayer’s final accumulated IETU and income tax due equal to 16.5%, based on the net taxable income resulting from one of the three authorized transfer pricing methods available to maquiladoras pursuant to Article 216 Bis of the Income Tax Law. During 2009 the tax incentive rate will be 17%, and during 2010 and 2011 the tax incentive rate will be 17.5%.
b. The tax credit will be offset against the final accumulated IETU and income tax due to the extent the net tax credit is lower than such accumulated IETU and income tax obligations.
c. In order to compute the tax credit, taxpayers that use safe harbor rules may not reduce their net taxable income by applying the tax subsidy granted to the maquiladora industry by President Fox in 2003.
d. In the case of taxpayers using the machinery and equipment book value plus a 1% mark-up transfer pricing method provided by Section I of Article 216 Bis of the Income Tax Law, in order to compute the tax incentive, such taxpayers must use the percentage of 1.5% based on the book value of machinery and equipment used for the assembly of the maquiladora products, instead of the 1% figure contained in the Income Tax Law.
e. Taxpayers will be able to take a proportional credit of the tax incentive while computing their IETU and income tax advance payments. The Tax Subsidy Decree provides special rules to make this computation.
f. The tax credit will apply only to maquila activities carried out by the maquiladora, so in cases where these entities engage in domestic sales or other non-maquila activities, the tax credit will apply only to the percentage of income that relates to the maquila activities. There are also special rules to make this computation.
g. Taxpayers must file an information return along with the annual tax return due each March, in which they must determine their maquila and non-maquila activities, their final IETU and income tax burdens, the amount of taxable income and authorized deductions, the value of assets used by the maquiladora, the amounts of operating costs and expenses and the tax base resulting from the use of either one of the transfer pricing methods contained in Article 216 Bis of the Income Tax Law.
It is important to mention that the new tax incentive contained in the Tax Subsidy Decree applies only to those maquila entities that comply with their transfer pricing obligations by using the maquiladora transfer pricing methods set forth in Article 216 Bis of the Income Tax Law. If the maquila entity does not use these methods, or has an advance pricing agreement (APA) with the Mexican government that uses a different transfer pricing method, such maquila entity may not receive the benefits afforded by the new tax incentive.
A new Tax Subsidy Decree was published in Mexico’s Official Journal of the Federation (Diario Oficial de la Federación) on November 5, 2007 and provides the maquiladora industry with a tax incentive in the form of a tax credit against final accumulated Flat Rate Tax (IETU) and income tax due. This tax credit has been implemented to buffer the negative effects of the recently enacted IETU. Such tax incentive will apply from 2008 through the end of 2011. Please keep in mind that it is quite likely that the Mexican government will amend the Tax Subsidy Decree and the rules by which it will be implemented.
The tax incentive will work as follows:
a. There will be a tax credit against a taxpayer’s final accumulated IETU and income tax due equal to 16.5%, based on the net taxable income resulting from one of the three authorized transfer pricing methods available to maquiladoras pursuant to Article 216 Bis of the Income Tax Law. During 2009 the tax incentive rate will be 17%, and during 2010 and 2011 the tax incentive rate will be 17.5%.
b. The tax credit will be offset against the final accumulated IETU and income tax due to the extent the net tax credit is lower than such accumulated IETU and income tax obligations.
c. In order to compute the tax credit, taxpayers that use safe harbor rules may not reduce their net taxable income by applying the tax subsidy granted to the maquiladora industry by President Fox in 2003.
d. In the case of taxpayers using the machinery and equipment book value plus a 1% mark-up transfer pricing method provided by Section I of Article 216 Bis of the Income Tax Law, in order to compute the tax incentive, such taxpayers must use the percentage of 1.5% based on the book value of machinery and equipment used for the assembly of the maquiladora products, instead of the 1% figure contained in the Income Tax Law.
e. Taxpayers will be able to take a proportional credit of the tax incentive while computing their IETU and income tax advance payments. The Tax Subsidy Decree provides special rules to make this computation.
f. The tax credit will apply only to maquila activities carried out by the maquiladora, so in cases where these entities engage in domestic sales or other non-maquila activities, the tax credit will apply only to the percentage of income that relates to the maquila activities. There are also special rules to make this computation.
g. Taxpayers must file an information return along with the annual tax return due each March, in which they must determine their maquila and non-maquila activities, their final IETU and income tax burdens, the amount of taxable income and authorized deductions, the value of assets used by the maquiladora, the amounts of operating costs and expenses and the tax base resulting from the use of either one of the transfer pricing methods contained in Article 216 Bis of the Income Tax Law.
It is important to mention that the new tax incentive contained in the Tax Subsidy Decree applies only to those maquila entities that comply with their transfer pricing obligations by using the maquiladora transfer pricing methods set forth in Article 216 Bis of the Income Tax Law. If the maquila entity does not use these methods, or has an advance pricing agreement (APA) with the Mexican government that uses a different transfer pricing method, such maquila entity may not receive the benefits afforded by the new tax incentive.