Business restructuring and alternatives in operating models for maquiladoras in Mexico

The maquiladora regime in Mexico refers to an export-oriented manufacturing programme that allows foreign multinationals to establish factories (maquiladoras) in Mexico. Under Mexican Income Tax Law (MITL) regulations, maquiladoras operate in Mexico as manufacturers and import, on consignment, machinery, equipment, and inventory duty and VAT free; provide assembly services; then export the finished products to a principal operating company (POC) abroad. Due to the nature of the legal and economic relationships under a maquiladora agreement, foreign POCs are deemed to have a permanent establishment (PE) in Mexico.

The 2022 tax reform in Mexico introduced changes to the maquiladora transfer pricing (TP) and PE compliance regime included in Article 182 of the MITL. This tax reform eliminated the advance pricing agreement as a compliance option for maquiladoras, leaving the safe harbour as the only framework for a maquiladora to comply with TP and PE exemption requirements and maintain the benefits of this operating structure for income tax purposes.

Considering the uncertainty of maquiladora TP compliance derived from the latest tax reform, multinational companies (MNCs) are revising the benefits and challenges of scenarios that maquiladoras could encounter from FY 2025.

The Mexican Maquiladora Export Sector (IMMEX) programme provides an authorisation that allows a company to import, under a temporary customs regime, the necessary goods to be utilised in an industrial process, which mainly represents a benefit related to duty deferral and an exemption of VAT payment on imports.

The IMMEX programme has several modalities, and will be effective while the title holder continues to fulfil the requirements for its granting and the settled obligations:

• Industrial authorisation – applicable for an industrial process to manufacture or transform products intended to be exported;

• Services authorisation – applies to services rendered in association with exported goods; and

• Shelter programme authorisation – applies to one or several foreign companies that provide technology and productive materials without directly operating under the IMMEX programme.

As regards VAT, the Mexican tax authority will authorise IMMEX companies to obtain a certification by which they shall apply a tax credit corresponding to the VAT that should be paid for the temporarily imported goods. With this credit, the companies shall not wait for the refund of such taxes, which will reduce the cash flow impact. The certification is effective for one, two, or three years, renewable as long as the company keeps complying with internal VAT controls.

Although the IMMEX programme basically refers to a customs and VAT regime, for several years the MITL has included certain benefits for maquiladora companies operating under an IMMEX programme, which included safe harbour rules for TP and a PE exemption. Specifically, the definition of maquiladora incorporated in the MITL includes the following requirements, which must be met to qualify for benefits:

• A non-Mexican resident, according to a maquiladora agreement, must provide to the maquiladora goods that:

  • Are temporally imported into Mexico; and

  • Are subject to a transformation process (the MITL incorporates a definition of transformation):

    • The maquiladora should export the manufactured products, either physically or virtually under the terms of the customs law and corresponding regulation;

    • The machinery and equipment used in the transformation process could be the property of a third foreign resident, but only when the foreign resident has a manufacturing commercial relationship with the foreign resident whom at the same time has a maquiladora agreement in Mexico in relation to the former commercial relationship; and

    • The machinery and equipment used in the manufacturing process, either owned by the foreign resident with the maquiladora agreement or the maquiladora itself, must never have been the property of a Mexican related party of the maquiladora.

• The total revenue from the productive activity derives exclusively from maquiladora activities (the MITL incorporates a definition and a 10% threshold of additional revenues).

• Merchandise imported on a definitive basis may still be used in a maquiladora process in addition to temporally-imported items, as long as it is exported together after the manufacturing process.

• The transformation process must be performed using machinery and equipment property of the foreign resident that has signed a maquiladora agreement, of at least 30%.

If the above requirements are met, Article 181 of the MITL provides that no PE exposure in Mexico would be created for the POC, notwithstanding that the maquiladora habitually processes merchandise provided by the foreign principal using machinery and equipment provided directly or indirectly by it as well. This PE exemption is available provided that the foreign principal is resident in a country that has a tax treaty with Mexico, the above-mentioned requirements concerning the maquiladora definition are met, and the maquiladora complies with Mexico’s safe harbour rules for TP.

While there is no clear definition of a ‘business restructuring’ in the MITL, the term is described in Mexico’s Federal Tax Code in a similar manner to that provided in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations; that is, as a cross-border redeployment of functions, assets, and/or risks by an MNC.

Considering that the current uncertainty regarding maquiladora TP compliance after 2024 may have an adverse impact on the competitiveness of MNCs, conversations are focusing on alternatives to optimise their current way of doing business in Mexico. One of the paths is the effective reorganisation of the maquiladora operating model through business restructuring. Alternatives in different operating models include the following:

• Fully fledged manufacturer – the operational functions include the manufacturing or assembly activities necessary to complete the product and the daily administrative tasks required to maintain a viable production facility. A fully fledged manufacturer typically undertakes all the entrepreneurial and operational activities associated with a company in its respective industry. Consequently, fully fledged manufacturers incur risks that are typically associated with these activities (e.g., inventory shrinkage risk and market risk) and enjoy the benefits of intangibles that are developed (e.g., trademarks and trade names) from pursuing these actions.

• Contract manufacturer – typically undertakes the operational functions required to manufacture a product. A contract manufacturer usually utilises the production technology, product specifications, quality assurance and quality control procedures, and production schedules established by the customer. Contract manufacturers are typically compensated in one of three ways:

  • A set price per unit of production;

  • A mark-up on direct manufacturing costs incurred; or

  • A service fee.

• Toll manufacturer – is functionally equivalent to a contract manufacturer, except that a consignment/bailment manufacturer does not own raw materials, works in progress, or finished goods inventory. Consequently, its remuneration format differs, and it is usually based strictly on a value-added formula (i.e., a service fee, which serves as a fully loaded cost reimbursement).

In the case of the PE assessment under a business restructuring of a maquiladora operation, it is extremely important to carry out the functional and factual analysis in the most thorough and detailed manner possible, given that it is the key factor in determining what functions, risks, assets, ‘free’ capital, income, and expenses should be reviewed that may trigger PE exposure for the POC.

The alternative for Mexican subsidiaries of MNCs to remain under the maquiladora income tax regime and apply the safe harbour rules is to have a business restructuring of the company into an IMMEX programme manufacturer under a different operating model – e.g., a toll manufacturer or a contract manufacturer – thus exiting the maquiladora MITL regime.

Evaluations of the potential tax liabilities under the safe harbour rules and how they compare with other manufacturing business models are allowing maquiladoras (and MNCs) to identify the best option to be implemented in terms of financial results, taxes, customs regulations, business operations, value chain alignment, and group processes and competitiveness.