What Are the Tax Benefits of a Maquiladora?
Understand the structured tax environment for maquiladoras, detailing the rules for calculating taxable income and the compliance needed to maintain benefits.
A maquiladora is a factory in Mexico, owned by a foreign entity, that produces goods for export to markets like the United States and Canada. These facilities operate under the IMMEX program (Maquiladora, Manufacturing, and Export Services Industry). This government initiative is designed to attract foreign investment by offering tax and customs advantages.
Customs Duties and VAT Benefits
An advantage of the IMMEX program is the ability to temporarily import goods. This allows a company to bring raw materials, components, and equipment into Mexico without paying the general import tax (IGI) or customs processing fees. The condition for this benefit is that these imported items must be used in the manufacturing process. The resulting finished products must then be exported from Mexico within a specified timeframe.
The program also provides a benefit related to the Value-Added Tax (VAT). In Mexico, VAT is typically applied to imported goods at a rate of 16%. However, companies that obtain a special VAT certification can receive a tax credit that effectively reduces this rate to 0% on their temporary importations. This certification is a separate process from the initial IMMEX authorization and is granted by Mexico’s tax authority.
Different tiers of VAT certification are available, each with its own requirements and administrative advantages. To qualify for higher levels, a company must show a strong history of tax compliance and meet certain investment or export thresholds. A higher certification status can streamline customs processing and reduce the frequency of audits.
Income Tax Safe Harbor Rules
A consideration for a foreign company in Mexico is the risk of creating a “Permanent Establishment” (PE). A PE is a tax concept that could subject the foreign parent company’s worldwide income to Mexican taxation. To prevent this, the IMMEX program mandates that maquiladoras use a “safe harbor” methodology. Adherence to these rules is the only way for a maquiladora to comply with transfer pricing regulations and avoid a PE designation.
The safe harbor rules require a maquiladora to calculate its taxable income based on two separate methods and then declare the higher of the two results. The first option is an asset-based calculation. Under this method, the company’s minimum taxable income must be at least 6.9% of the total value of all assets used in the operation. This includes assets owned by the Mexican entity and any inventory or equipment owned by the foreign parent company but used by the maquiladora.
The second option is a cost-based calculation, where taxable income must be at least 6.5% of the total operating costs and expenses incurred by the maquiladora. This includes all local operational spending, such as labor, rent, and utilities. By using the greater of these two calculations, the maquiladora is deemed to be operating at “arm’s length” and satisfies Mexican transfer pricing regulations.
For example, if a maquiladora uses assets valued at $10 million and has total operating costs of $8 million, it would calculate both figures. The asset-based taxable income would be $690,000 (6.9% of $10 million), while the cost-based taxable income would be $520,000 (6.5% of $8 million). In this scenario, the company must declare the higher amount, $690,000, as its taxable base for the year to remain within the safe harbor.
IMMEX Program and Compliance Requirements
Securing the tax benefits of a maquiladora is contingent upon obtaining and maintaining authorization under the IMMEX program. This status requires adherence to ongoing compliance obligations. Failure to meet these requirements can result in the loss of IMMEX status and its tax advantages, with the foundation of compliance being inventory and tax credit tracking.
A requirement is the use of an Automated Inventory Control System, known as Annex 24. This software is mandated by Mexican customs law to track all temporarily imported goods. The system records the entry of materials and equipment, monitors their use in production, and documents their final disposition, such as being exported in a finished product or returned abroad.
Maquiladoras with VAT certification must also use a separate system to manage their tax credits. This system, known as Annex 31, reports to the tax authority how VAT credits from temporary imports are applied against exported goods. Companies must regularly upload data that reconciles their import and export volumes to justify the 0% VAT benefit.