Mexican Authorities continue to use the old “throw it against the wall and see if it sticks” method of changing rules for Maquilas. Exciting new proposals for the border region of Mexico were promulgated upon new President Andrés Manuel López Obrador (AMLO) Morena Party’s taking power. Income Taxes for qualifying companies were dropped by 30% to 20%. Value Added Taxes (IVA) dropped 50% to 8%. Gas prices were to be dropped to be competitive with US prices. Sounds great!
However, as it turns out, Maquiladoras, or IMMEX companies are exempt from the Income tax reduction. This is not a huge concern, since most Maquilas are run as cost centers, utilizing “Safe harbor” transfer pricing formulas that allow the company to report a “profit” of 6.5% of Mexican expenses and pay income tax and mandatory profit sharing of 10%. Effectively, Maquilas are taxed at about $2.6% of expenses (Including payroll, raw materials, electricity, rent, etc…), including profit sharing.
Value added taxes:
Value added tax (IVA) is a cash flow hit, but as exporters, maquiladoras get a refund. The IVA has dropped for many vendors in Mexico to 8%. But this only applies to border businesses. If your landlord resides in Mexico city, for example, you will pay the 16% rate over your rents. A change in 2019 is the requirement that Maquiladoras request a refund from the Mexican government for any IVA paid. In the past, these excess IVA accounts could be applied to other taxes due, like Payroll taxes. No more! The problem is that it can take months to get your refund, and if there is a a peso devaluation in the mean time, you will lose money upon converting to dollars.
Another issue is that if any of the vendors from which a maquila would like to receive an IVA refund is found on a “black list” of vendors who are not in good standing with the tax authorities, the entire refund is disallowed.
A rigorous certification process or a bond is needed for maquilas to avoid IVA and tariffs (If any) upon Importation. Lately, it has become a requirement to make extensive reports to get the certifications including customers and processes. Steel and textiles are particularly affect, because they have been identified as “sensitive” industries. Cuotas are once again the norm for Textiles, which are based on previous years exports, so new players find they must either acquire an existing business, or use a shelter, in order to handle textiles.
So in general, AMLO talks a good game, but the implementation is not well executed. As usual, mexico is more concerned with punishing cheaters than allowing honest companies to benefit from its new rules. As has been the case before, these rules will like change again soon. So keep up to speed!