On December 26th, 2013 the decree which grants tax incentives to the manufacturing, maquiladora and export services industry was published in the Official Gazette. Below are the main aspects of this decree. Additional Deductions An additional deduction, for Income Tax purposes, is established which will reduce the maquiladoras’ tax profit. Derived from the 2014 tax reform, companies or individuals that make payments to employees that are tax exempt for the employees will only be 53% deductible, in order to reduce this cost, maquiladoras will be able to deduct the additional 47%. Deadline for Machinery Belonging to the Foreign Tax Resident The protection regarding machinery that has to be property of the foreign tax resident is maintained, that is to say that maquiladoras that on December 31st, 2009 were up to date with their tax obligations regarding Income Tax based on Safe Harbour (6.5% expenses or 6.9% assets and inventory), will have 2 years as of January 1st, 2014 to transfer at least 30% of the machinery and equipment used for the maquila operation to the foreign tax resident, as long as it has not been the property of the Mexican tax resident or any other related party. Not complying with the deadline and percentage would mean that maquiladoras would no longer be able to continue paying taxes under the benefits of Safe Harbour and could constitute a permanent establishment. It is important to mention that the mechanism to determine the 30% of the machinery property of the foreign tax resident has not been established nor whether the remaining 70% will have to be property or the maquiladora or a third party (whether related or not), each case will therefore have to be analyzed and a transition plan over the two-year period will have to be determined. VAT Withholdings for Sales by Foreign Tax Residents When goods are sold by a foreign tax residents, that does not have a permanent establishment in Mexico, to a maquiladora and/or automotive assembly company or an auto parts or auto transportation vehicle manufacture, to be introduced to a tax warehouse (deposito fiscal), as long as these goods have been exported or introduced to domestic soil under an authorized program in accordance with the Maquiladora Decree or a similar tax regime under customs legislation, the buyer (maquiladora) will be able to credit the VAT withheld for the operation against the payment of the withholding, that is to say that with this decree, maquiladoras’ cash flow will not be effected by the payment of the 16% VAT that would apply for buying goods from foreign tax resident, as this tax will be withheld and credited at the same time by the maquiladora at the time of payment. It is important to mention this will only apply to goods that are part of the supply chain for products destined to be exported and these must be documented with virtual operations, which is why inventory and accounting registry controls will be needed in order to identify them. This will only apply for 2014, as of 2015 this will only apply to sales carried out by a foreign tax resident that does not have a permanent establishment in Mexico to certified maquiladoras that comply with the rules that the Government will published throughout 2014. Although this decree has allowed to clarify some of the doubts that maquiladora taxpayers had on certain benefits that would be lost due to the 2014 Tax Reform, there are still matters that are pending to be clarified by the Authorities: • Benefits which apply to companies operating under the Shelter system as these were ruled by the Income Law, however with the 2014 Tax Reform being able to pay taxes through this system has been limited to 4 years, and it is unclear as to whether this period is counted as of the date of start of operations or the date the law came into effect. • No benefits are mentioned for IMMEX service companies. It will be very important to review each specific case in order to determine whether or not the benefits set forth by this decree will apply, and review the possible impacts of the lack of definition by the Authorities for certain sectors that were not included in this decree. If you have any doubts or questions, please do not hesitate to contact us.