In 1964, the Mexican government introduced Maquiladoras as a strategy to attract foreign investment and increase industrialization on the Mexican border. Maquiladora’s process, produce, transform, or repair goods owned by non-Mexican residents (foreign residents). Currently, foreign companies incorporate maquiladoras to take advantage of less expensive labor and tax incentives.
On November 1, 2006, the Mexican government issued a Federal Decree to Promote Manufacturing, Maquila and Export Service Industry (IMMEX Decree) in an effort to spur the Mexican economy, and to reduce administrative and logistical costs. The IMMEX program includes the Development and Operation of the Maquila Export Industry and the Temporary Import Programs to Produce Export Goods (PITEX).
The IMMEX Program allows Mexican companies to temporarily import goods owned by foreign residents in order to process, transform, or repair them to be exported outside of Mexico or to provide the foreign resident export services. Generally, if certain requirements are met, the Maquila program provides the following benefits: (1) no permanent establishment is created by the foreign resident in Mexico, (2) imported goods are free of import tax and value added tax, and (3) in certain cases the foreign resident is relieved from complying with certain customs and tax obligations.
The goods are classified as (1) raw materials, (2) shipping containers and boxes, (3) machinery, equipment, tools, spare parts, among others.
The Mexican Ministry of Economy maintains the right to authorize Mexican companies to act as Maquiladoras under the IMMEX Program. Maquiladoras under the IMMEX program must commit to annual sales of at least USD $500,000.00 (or its equivalent in Mexican pesos), or to invoice exports for at least 10% of its total turnover.
The Maquila process involves the following:
- The foreign resident provides all the necessary raw materials, machinery, and equipment in order for the Maquiladora to carry out the manufacturing process in Mexico.
- Under the IMMEX Program, custom duties and VAT tax are not paid on the temporary import of the goods.
- The Maquiladora manufactures the product with the goods owned by the foreign resident.
- The Maquiladora invoices the total costs and expenses regarding the “maquila” process plus a mark-up to the foreign resident.
- The finished product is returned (exported) to the foreign resident. The export of the goods and services is subject to a 0% VAT.
Maquiladoras are subject to a specific tax regime and must comply with several requirements to access the benefits under the IMMEX Program.
This article provides a general overview of the Mexican Income Tax implications that should be considered by foreign investors engaged in the Maquila industry.
Maquiladora – Mexican Income Tax implications
As of 2014, Maquiladoras had two alternatives to comply with their transfer pricing obligations and avoid creating a permanent establishment in Mexico:
- To determine taxable income by considering the highest amount obtained from the 6.9% over the assets used in the tax year and the 6.5% over the costs and operating expenses of the tax year (Safe Harbor) for Mexican income tax purposes.
- To request to the tax authorities a special ruling regarding the transfer pricing methodology used by the Maquiladora with its related parties in terms of article 34-A of the Federal fiscal Code.
The tax authorities in the APA ruling confirm whether the transfer pricing procedure used to determine Maquila’s taxable income complies with the transfer pricing rules under Sections 179 and 180 of the Mexican Income Tax Law, or not. In other words, if the consideration agreed between the Maquiladora and its related parties would have been agreed by third parties (Advance Pricing Agreement or APA).
To continue applying the APA, a Maquiladora must comply with all of the requirements necessary to demonstrate that transactions carried out with a related party are at fair market value and comply with the applicable transfer pricing rules.
The APA reduces the risk of a transfer pricing audit. Additionally, an APA ruling has a statute of limitations of 5 years of its issuance. The APA provides an alternative to applying a lower taxable income in comparison with the Safe Harbor methodology. Therefore, the majority of the Maquiladoras in Mexico opted to apply APA instead of the Safe Harbor.
Most of the foreign residents with Maquiladoras in Mexico are based in the United States of America (U.S.) due to the proximity between the two countries. The Mexican Tax Administration Service (SAT) and the IRS agreed that the income tax paid in Mexico attributable to the business of the foreign company in Mexico regarding the Maquila would be creditable in the U.S. for tax purposes under the Mexico-U.S. tax treaty to avoid double taxation (Qualified Maquila Approach or fast track).
In 2022, the Mexican Income Tax Law (IT Law) was reformed and the option to request an APA was repealed. Nonetheless, the IT Law provided an alternative to request for an APA for the tax year 2021, which will be in force as of 2024. Therefore, the Maquila companies that requested an APA in 2021 will have to apply the Safe Harbor method as of 2025.
A Maquiladora that applies the Safe Harbor method instead of the APA will have a higher taxable income and the profit sharing for the employees (PTU) will be increased. This means that this will represent a higher cost for the foreign residents that have a Maquila in Mexico.
Therefore, foreign residents should analyze the following alternatives: (1) restructuring operations in Mexico, (2) creating a permanent establishment in Mexico (e.g., pay as a Mexican company), or (3) applying the Safe Harbor Method. The best alternative will depend on which is more beneficial for the foreign resident investing in Mexico on a case-by-case basis.
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