As mentioned in our newsletter dated November 9, 2021 Transfer Pricing Regime Change for Maquiladora Companies | KYJ, LLP (kyjcpa.com), revisions to the Mexican Income Tax Law (IT Law) in 2022 removed the option to request an Advance Pricing Agreement (APA). However, there was a provision in the IT Law allowing for APA requests for the tax year 2021, which will remain effective until 2024. Consequently, Maquiladora companies that submitted an APA request in 2021 will be obligated to adopt the Safe Harbor method from 2025 onwards.
Under the Safe Harbor rules, the taxable base for Maquiladoras must be calculated as either 6.9% of their total asset value or 6.5% of their operating costs, whichever is greater. Application of the Safe Harbor method instead of an APA will likely result in a higher taxable income for Maquiladoras, leading to increased corporate tax and employee profit sharing (PTU). This, in turn, translates to higher expenses for foreign enterprises operating Maquiladoras in Mexico.
The impact of this change will be particularly significant for Maquiladoras with substantial capital assets, such as real estate. It is therefore advisable for Maquiladoras to seek guidance from their Mexico tax advisor in advance to explore planning ideas and strategies aimed at mitigating the adverse effects of the mandatory Safe Harbor rule. Some potential considerations include restructuring operations in Mexico, such as spinning off or transferring real estate to a Mexican entity and entering into a fair rental agreement. Additionally, reviewing the language of the U.S.-Mexico income tax treaty is crucial to determine what should be included in the asset pool subject to the safe harbor tax. It is vital to carefully model, review, and analyze all such planning measures before implementation.
We understand that many businesses are currently navigating through a challenging period of time due to the uncertainties in the global economy. To achieve financial stability, it is crucial for companies to take proactive steps and adapt to changes in both foreign and domestic legislation. At our firm, we fully recognize the importance of this and are actively collaborating with our alliance firms in Mexico to gather and share pertinent information on the matter with our clients. We are committed to keeping you informed and will promptly share the information as it becomes available.