New U.S.-Mexico Cross Border Corporate Tax Challenges

Transcription

1 presents New U.S.-Mexico Cross Border Corporate Tax Challenges Planning and Compliance Strategies After the Latest Mexican Tax Reforms A Live 100-Minute Audio Conference with Interactive Q&A Today's panel features: Simon Somohano, Partner, Deloitte, Tijuana, B.C., Mexico Enrique Hernández-Pulido, Partner, Procopio Cory Hargreaves and Savitch, San Diego Luis C. Carbajo, Partner, Baker & McKenzie, Juarez, Mexico Wednesday, June 3, 2009 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific The audio portion of this conference will be accessible by telephone only. Please refer to the dial in instructions ed to registrants to access the audio portion of the conference. CLICK ON EACH FILE IN THE LEFT HAND COLUMN TO SEE INDIVIDUAL PRESENTATIONS. If no column is present: click Bookmarks or Pages on the left side of the window. If no icons are present: Click View, select Navigational Panels, and chose either Bookmarks or Pages. If you need assistance or to register for the audio portion, please call Strafford customer service at ext. 10

2 New U.S.-Mexico Cross-Border Corporate Tax Challenges June 3, 2009 Transfer Pricing Issues in Mexico Simón Somohano,

4 Audits Of Cross-Border Payments 3

5 Recent Developments In Mexico Beginning 2007, GAAP were replaced with International Accounting Standards MITL refers to "old" GAAP and concepts such as operating profit for the application of TNMM Are profit-based methods under IAS applicable? Should companies continue applying the "old operating profit concept? Contemporaneous documentation Recent Tax Court ruling under the 2001 MITL concluded that related party payments can be disallowed if taxpayer did not have TP documentation as of the tax return filing date (March or April) A similar interpretation under the 2002 MITL would require taxpayers to have contemporaneous documentation available as of the end of the FY Application of TNMM requirement to independently test input and output transactions Otherwise, profit-split is the preferred method Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

8 Mexico Hot Examination Issues Reviews by sector 2006 Automotive sector Transportation and comunication services Electronic services Stone, clay, glass and concrete products industry Food industry Others Hotel sector 8 10 Distributors Financial sector 8 4 Pharmaceutical - chemical Industry Maquiladora industry Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

9 Mexico Hot Examination Issues Contemporaneous documentation Observations by independent auditors SAT is requesting taxpayers to provide the date on which documentation (domestic and international) was prepared Form vs. substance? Secret comparables One known case Pharma industry TNMM rejected and replaced with CUPs obtained from customs database Business reorganizations under scrutiny Possible assessment based on disposition of business Permanent establishment VAT Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

10 Mexico Hot Examination Issues Debt push-down Interest deduction disallowed if reorganization lacks business purpose Payment of services, including headquarters costs Strictly needed? Must prove benefit: Mexican affiliate s revenue increased or costs decreased Transfer pricing Cost sharing or cost allocation Non-deductible! Potential relief via double tax treaty Payment of trademarks, trade names, patents TNMM questioned if royalty rate is excessive Residual should not be fully attributable to owner Maquiladoras Examinations of safe harbor computations and tax benefit Presidential decree Sales to Mexico Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

11 New Disclosure Requirements In Annual Tax Report 10

12 Exhibits Of The Annual Tax Report (Dictamen Fiscal) exhibits 25 exhibits - 20 New exhibits - 11 exhibit with changes - 9 exhibit unchanged Fiscal Diagnostic Questionnaire (CPR Review) Transfer Pricing Questionnaire (CPR Review) Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

13 Exhibit Of The Annual Tax Report Transfer pricing information Appendix No. Description 5 Segmented Financial Statement 34 Transactions with Related Parties 34.1 Transactions with Related Parties provided by the taxpayer Transfer Pricing Questionnaire (CPR Review) Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

14 Exhibit 5 Segmented financial statements Segmented financial statement for operations with: Domestic related parties Domestic unrelated parties Foreign related parties Foreign unrelated parties Comparison with previous years Exemption for 2007 Inconsistency with transfer pricing documentation Ignores the methodology applied (price, gross margin or operating loss) Segmented financial statements consider other accounts below the operating profit (loss) Financial statements are not segmented by each transaction (purchases or inventory for production, purchase of inventory for distribution, sale of finished products, etc.) Does not provide guidance to segregate the financial statements when purchases and sales with related parties are part of the same transaction Does not require financial information when the tested party is the counterpart in the controlled transaction (foreign affiliate) Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

15 Exhibit 34 Transactions with related parties Account ISR Income Deduction IETU Income for IETU Deduction for IETU (no investments) Investments Information Requirement ID Tax Number Transaction (Exhibit IV) Country of residence Amount of the transaction Transfer pricing method The transaction is arm s length (Yes/No) Transfer pricing adjustment Fiscal year of the transfer pricing adjustment Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

16 Exhibit 34 Transactions with related parties Account ISR Income Deduction IETU Example: Income operations Ingresos Gravados Profit (Merger /Split-off) Deducciones Autorizadas (sin inversiones) Capital reduction Capital settlement of foreign companies Inversiones Annual inflationary adjustment Foreign exchange profit Unreported liabilities (86-A MITL) Information Requirement ID Tax Number Transaction (Exhibit IV) Country of residence Amount of the transaction Example: Deductions Transfer Pricing Method Cost of sales The transaction is arm s length (Yes/No) Depreciation and amortization Transfer Pricing Adjustment Tax cost in sale of fixed assets, intangibles, stocks, bonds, land Ejercicio en el que se Registró como Ingreso, Costo, Gasto o Inversión Annual inflationary adjustment Foreign exchange loss Cost sharing Dividends Clients advances Expenses advances Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

17 Exhibit 34.1 General information APA TRANSFER PRICING DOCUMENTATION TAXPAYER OBTAINED AN APA IN THE FISCAL YEAR (YES OR NOT) TAXPAYER HAS A TRANSFER PRICING STUDY (86, SECTION XII) (YES OR NOT) DOCUMENT NUMBER DATE OF DOCUMENT DATA (DD/MM/AAAA) TAXPAYER PRESENTED A INFORMATIVE RETURN OF OPERATIONS WITH FOREIGN RELATED PARTIES (ARTÍCULO 86, SECTION XIII) (YES OR NOT) ITAXPAYER IS CURRENTLY IN NEGOTIATION FOR AN APA (YES OR NOT) DATE OF THE APA S REQUIREMENT (DD/MM/AAAA) DATE OF THE PRESENTATION (DD/MM/AAAA) TAXPAYER OBTAINED A FAVORABLE RESOLUTION FROM THE TAX AUTHORITY CONSIDERING TRANSACTIONS WITH RELATED PARTIES DOCUMENT NUMBER DATE OF DOCUMENT (YES OR NOT) DATA (DD/MM/AAAA) TAXPAYER COMPLIED WITH THE OBLIGATION OF THE ARTICLE 86, SECTION XV FOR ITS TRANSACTIONS WITH DOMESTIC RELATED PARTIES TAXPAYER COMPLIED WITH THE OBLIGATION OF THE ARTICLE 18 (IETU) FOR ITS TRANSACTIONS WITH RELATED PARTIES (YES OR NOT) (YES OR NOT) ID TAX NUMBER OF THE TRANSFER PRICING ASSESORS ID TAX NUMBER1 ID TAX NUMBER Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

18 Exhibit 34.1 Transfer pricing obligations (1) Should inform whether the transfer pricing analysis used segmented financial statements, and whether the segmented financial statements were reviewed by certified auditor Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

20 Exhibit 34.1 Cost sharing COST SHARING DEDUCTION OF COST SHARING FROM FOREIGN TRANSACTIONS AMOUNT OF THE DEDUCTION (YES OR NOT) DATA Definition of "cost sharing" Are costs incurred by the HQ considered pass through costs for the Mexican taxpayer? or Are they considered services? Is the limitation of deduction of cost sharing contrary to the "nondiscrimination" clause in the U.S.-Mexico Tax Treaty? Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

21 Exhibit 34.1 Derivates and thin capitalization TAXPAYER REGISTERED INCOME FROM DERIVATES TRANSACTIONS PROVIDE AMOUNT OF THE INCOME FROM DERIVATES TRANSACTIONS TAXPAYER REGISTERED DEDUCTION FROM DERIVATES TRANSACTIONS PROVIDE AMOUNT OF THE DEDUCTION FROM DERIVATES TRANSACTIONS DERIVATES TAXPAYER OBTAIN LOSSES FROM DERIVATES TRANSACTIONS WITH RELATED PARTIES (ARTICLE 32 SECTION XIX) PROVIDE AMOUNT OF THE TRANSACTION TAXPAYER REALIZE PAYMENTS FOR THE RIGHT TO BUY OR SALE GOODS, CURRENCY, STOCKS, OR OTHERS SECURITIES NO LISTED (ARTICLE 32 SECTION XXIII) PROVIDE AMOUNT OF THE TRANSACTION THIN CAPITALIZACION TAXPAYER REGISTERED INTEREST NON DEDUCTIBLES ACCORDING TO ARTICLE 32 SECTION XXVI AVERAGE OF THE LIABILITIES THAT BEAR INTEREST ACCORDING TO ARTICLE32 SECTION XXVI STOCKHOLDERS EQUITY AT THE BEGINING OF THE FISCAL YEAR (ARTICLE 32 SECTION XXVI) STOCKHOLDERS EQUITY AT THE END OF THE FISCAL YEAR (ARTICLE 32 SECTION XXVI) AVERAGE STOCKHOLDERS EQUITY AVERAGE STOCKHOLDERS EQUITY MULTIPLIED BY THREE AVERAGE OF THE LIABILITIES WITH RELATED PARTIES (ARTICLE 32 SECTION XXVI) AMOUNT OF THE INTEREST NON-DEDUCTIBLES CALCULATED ACCORDING TO ARTICLE 32 SECTION XXVI Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

23 Transfer Pricing Questionnaire Review of the CPR Predominant Activity Distribution Manufacturing Maquiladora Leasing Services Others (specified) The taxpayer owns the major part of the assets used in its operation Intangibles Taxpayer owns or uses intangibles assets Specify the intangibles assets used by the taxpayer Amount of the royalty Specify the intangibles assets rented by the taxpayer Amount of the royalty Specify the intangibles assets owned by the taxpayer Amount of the intangible asset Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

26 INTERNATIONAL TRANSACTIONS Transfer Pricing Questionnaire CPR review International transactions Verified compliance with (YES/NO) Study of International Operations That the study of international operations include requirements for EACH of the requirements of Art. 86 XII fraction of each type of operation That the study's findings indicate compliance with market prices If the taxpayer made a fiscal adjustment Timely submission of trail balance Matching numbers between statements and the Study of International Operations PT If not, was the exception noted in the Review Report on the fiscal situation (YES / NO) * If not, was the exception noted on the Financial statements audited (Dictamen fiscal) (YES / NO) * Others Applicable Applicable In case of failure, If not, the taxpayer deducted transactions (YES/NO) Applicable (in case of failure of any requirement) Applicable Applicable (in case of failure of any requirement) Applicable Applicable Applicable Specify the amount of adjustment, adjusted transaction, account s of trial balance. In the event of noncompliance with the adjustment, the taxpayer deducted the transactions Applicable Applicable Applicable Applicable In event of failure, the taxpayer deducted transactions (YES / NO) Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

27 Transfer Pricing Questionnaire CPR review International transactions (Cont.) DOMESTIC TRANSACTIONS Verified compliance with (YES/NO) Existence of documentation showing that the income and deductions are determined on market prices Verified the application of the methods of PT If not, was the exception noted in the Review Report on the fiscal situation (YES / NO) * If not, was the exception noted on the Financial statements audited (Dictámen fiscal) (YES / NO) * Others Applicable Applicable Specify if the deductions of operations with national related parties were made Applicable Applicable DOMESTIC AND INTERNATIONAL TRANSACTIONS That the taxpayer had attempted to apply the CUP in the first instance in EACH TRANSACTION Audited segmented financial information Accounting systems allow reasonably segment information between related and independents parties Figures of segmented accounts are consistent N/A Applicable N/A Applicable Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

29 Transfer Pricing Questionnaire CPR review Other topics (Cont.) Verified compliance with (YES/NO) With the fraction III of art. 13 of LIETU If not, was the exception noted in the Review Report on the fiscal situation (yes / no) * If not, was the exception noted on the Financial statements audited (Dictámen fiscal) (yes / no) * Others Applicable Applicable In case of failure, did the taxpayer deducted operations Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

32 Final Remarks 31

33 Final Remarks Transfer pricing is one the most audited fields in Mexico for MNE Using the right intercompany pricing is not enough if it is not documented on a timely basis New disclosure requirements put more weight on form over substance Tax authorities are transferring the burden (and costs) of examinations to taxpayers Planning in advance transfer pricing policy, and applying it consistently across affiliated entities, would help reduce exposure for adjustments and documentation costs Galaz, Yamazaki, Ruiz Urquiza, S.C. All rights reserved

34

35 New U.S.-Mexico Cross-Border Corporate Tax Challenges Teleconference Cross-Border Planning Issues And Treaty Updates June 3, 2009 Enrique Hernandez, International Tax Partner Procopio, Cory, Hargreaves & Savitch LLP

36 IRS Circular 230 Notice The information contained in this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code of applicable state or local tax provisions. 2

37 IETU Purpose of the IETU Increase the number of taxpayers and eliminate preferential regimes Simplify the calculation of the tax based on cash-flow Substitute the tax on assets as a minimum alternative tax Eventually substitute for the Mexican income tax 3

38 IETU (Cont.) Basic structure Gross cash receipts collected - Payments for appropriate deductible expenses = Basis x Rate 17% (2009) and 17.5% (2010 and thereafter) = IETU before credits - Credit for prior year s IETU losses - Credit for taxable salaries and other similar payments - Credit for income tax liability = IETU for the year 4

39 IETU (Cont.) Challenges/problems posed by the IETU Timing problems (excess FTC scenarios): Transfers of assets that might not be subject to gain recognition per U.S. tax rules (e.g. Section 721 transfers) might generate IETU with no corresponding foreign income to apply FTC Credit of NOLs that might generate IETU with no foreign income against which to apply FTC Depreciation of pre investments Certain inflows of cash (e.g. deposits) might not be subject to U.S. tax (e.g. if considered liabilities) but would be subject to IETU 5

40 IETU (Cont.) Foreign tax credit for IETU U.S. has not taken a definite position on the creditability of IETU IRS Notice : the IRS will not challenge a taxpayer s position that the IETU is an income tax that is eligible for a credit under Article 24(1) of the Treaty Transitory Article 9 of the IETU law: establishes a term that ends on June 30, 2011 for the Mexican Ministry of Finance to provide a study to the Mexican Congress as to the convenience of repealing the income tax and leaving the IETU as the main tax (or vice versa, presumably) IRS Notice The IRS and the Treasury Department believe that the provisions, design, and full operation of the IETU, including its interaction with Mexico s regular income tax, require study to determine whether the IETU is a creditable income tax 6

41 Update On Mexican Withholding System 2008 Amendments to withholding regime Clarification for the exemption of capital gains derived from the sale of public stock Exemption applies only to shares issued by Mexican entities or instruments that exclusively represent such shares Exemption applies only to sales performed through recognized stock markets IETU should not apply to payments made to foreign residents, unless they have a permanent establishment in Mexico 7

42 Income Repatriation Decree Applies to income generated outside of Mexico before Jan. 1, 2009 Amnesty/tax incentive hybrid program Requires a two-year investment of repatriated income with tag-along between qualified investments Publicly traded stocks and bonds Other financial investments Real estate Investment in Mexican companies with at least 50% of Mexican-based assets Pay debts generated before Jan. 1, 2009 Wages Taxes Tax must be paid within 15 days of repatriation Investment must be made before expiration of decree (12/31/2009) No FTC No penalties and interest Aplicable to all types of income (including phantom income), generated directly or indirectly, distributed or undistributed 8

43 Income Repatriation Decree (Cont.) Individuals: 4% flat tax rate No IETU, penalties or interest! All formal reporting obligations are deemed complied Final tax Paid anonymously through tax stamp mechanism Corporations: 7% flat tax rate Requires a tax stamp plus a report to the SAT within 15 days of paying tax 9

44 Mexican Tax Treaty Update Mexico-Barbados Treaty First treaty with a jurisdiction with recognized preferential tax regime Mexican flat tax is included in the treaty More detailed definitions for terms such as: beneficiary, resident, national, effective place of management Interest 10% withholding on interest Large definition of interest No specific back-to-back loan clause for interest New clause for interest paid by a PE Royalties 10% withholding on royalty payments New clause for royalties paid by a PE Includes an ample information exchange clause Barbados is still in the Mexican black-list Treaty applicable from Jan. 1,

45 Mexican Tax Treaty Update (Cont.) Mexico-Germany Treaty Substitutes the 1993 Mexico-Germany Treaty Mexican flat tax is included in the treaty Wage taxes paid by employer are included in the treaty More detailed definitions for terms such as: beneficiary, resident, national, effective place of management Interest withholding rate reduced from 15% to 10% New complex procedure for crediting Mexican tax in Germany The information exchange clause is enhanced Pending approval from the German government, it is expected to be in force as from 2010 Transparent entity clause Mexico-Iceland Treaty Mexican flat tax is included in the treaty 10% withholding on interest. New complex procedure for crediting Mexican tax Includes an ample information exchange clause 11

46 Mexican Tax Treaty Update (Cont.) Mexico-Netherlands Treaty Renegotiation of protocol and not of treaty Mexican flat tax is included in the treaty Provides that the benefits of the treaty are not applicable to companies or other persons that are totally or particularly tax exempt by a special regime. A special regime may be considered as such, only under a mutual agreement In determining the existence of a permanent establishment, it is provided that a person is understood to exercise the authority to conclude contracts in the name of the non-resident whenever it negotiates the essential elements of an agreement in name of the latter, even if the agreement is subject to final approval and signature by another person Interest withholding rate reduced from 15% to 10% All capital gains will be taxed at a lower rate (10%); exception made for certain transfers among related parties 12

47 New U.S.-Mexico Cross-Border Corporate Tax Challenges June 3, 2009 Issues For Maquiladoras And U.S. Manufacturers, Tax Incentives Issues Luis C. Carbajo, Baker & McKenzie, Juárez

48 Current Permanent Establishment Issues: Business Restructurings Mexico: Substance over form Main attack by tax administration is lack of substance Non-existent risks: exchange risk, consumer liability, inventory Same suppliers, same local clientele No management functions abroad No business reason 2008 Baker & McKenzie 2

49 Current Permanent Establishment Issues: Business Restructurings (Cont.) Mexico: No authority to recharacterize Audits ignore restructuring and continue to attribute all sales income to Mexican distributor. This is illegal From a transfer pricing perspective, tax administration s authority is limited to determining compensation that would be agreed by independent parties in comparable transactions There is no authority to ignore or recharacterize restructuring simulation 2008 Baker & McKenzie 3

50 Current Permanent Establishment Issues: Business Restructurings (Cont.) Mexico: Other findings Transfer pricing Payments must be made for intangibles Buyout payments should also be made Generally, transfer pricing principles must be observed Disallowance of creditable VAT for principal of commission agent 2008 Baker & McKenzie 4

51 Current Permanent Establishment Issues: Business Restructurings (Cont.) Mexico: Other findings (Cont.) Commission agent creates permanent establishment for principal Tax administration and courts had found permanent establishment exists whenever the principal had control of distributor (e.g. control of the terms of sale) This criterion was reversed in a later decision 2008 Baker & McKenzie 5

52 Benefits Of The Maquiladora Or IMMEX Program 2008 Baker & McKenzie 6

53 Typical Structure Of Maquiladora Operations Foreign Co. Foreign México Raw materials and M&E Finished goods IMMEX (Maquiladora) Maquila service fee: based on costs and expenses plus a profit percentage (mark-up) 2008 Baker & McKenzie 7

54 Trade And Customs Benefits Temporary importation of raw materials and machinery and equipment ( M&E ) A. No duties are paid upon the temporary importation of raw materials B. No VAT is paid upon the temporary importation of raw materials and M&E C. Temporary importations are not subject to certain non-duty regulations D. Customs valuation requirements are flexible 2008 Baker & McKenzie 8

55 Trade And Customs Benefits (Cont.) Customs declarations (pedimentos) can be made on a consolidated weekly or monthly basis, in order to document the importations carried out during such periods Maquiladoras are allowed to transfer temporarily imported goods to other maquiladoras, and consider such goods as exported, through the use of virtual customs declarations Purchases from Mexican vendors could be subject to the 0% VAT rate through the use of virtual customs declarations 2008 Baker & McKenzie 9

56 Benefits Of The IMMEX Program Provides several tax benefits to the maquiladora company as well as to the foreign company that provides the raw materials and the M&E to the maquiladora Allows for the temporary importation of goods used in the transformation, manufacturing and repair of products that are destined for export, as well as those used in the provision of export services provided on export products 2008 Baker & McKenzie 10

57 Tax Benefits Foreign companies providing inventory and M&E to the maquiladora are not subject to taxes in Mexico, as long as the maquiladora complies with certain rules Positive impact on global tax rate Special reduction of the maquiladora s income tax This reduction could range between 57% to 100% of the income tax of the maquiladora, depending on the transfer pricing methodology that is applied by such company Effective tax rate could be between 0% to 13%, rather than the normal 28% rate 2008 Baker & McKenzie 11

58 Tax Benefits (Cont.) Special reduction of the single rate tax Through a presidential decree, the maquiladora company ends up paying an effective combined (income tax and single rate tax) rate of 17.5% (17% in 2009) Maquiladora services fees charged by the maquiladora to the foreign company are subject to a 0% value added tax ( VAT ) rate 2008 Baker & McKenzie 12

59 First Big Tax Benefit Of Using The Maquiladora/ IMMEX Program Eliminates tax exposures for entities that arise from crossborder processing, if the Mexican company is not a maquiladora/ IMMEX company PE exemption is subject to compliance with special transfer pricing regulations 2008 Baker & McKenzie 13

60 Second Big Tax Benefit Of Using The Maquiladora/ IMMEX Program Income tax incentive decree issued in October 2003 Substantially cuts the income tax liability of maquiladoras themselves (only available for maquiladoras) Reduces income tax liability of a maquiladora by an amount calculated in accordance with the decree Result: Effective Mexican income tax rate from 0% to 13% for the maquiladora Available to maquiladoras that engage in some cross-border processing with some U.S.-owned M&E That requirement results from a cross-reference to income tax law 2008 Baker & McKenzie 14

61 Third Big Tax Benefit Of Using The Maquiladora/ IMMEX Program Single-rate tax incentive decree issued Nov. 5, 2007 Substantially cuts the single-rate tax liability (only available to maquiladoras) Effect of the decree: Total combined income tax and IETU equal to an effective tax rate of 17.5% of taxable income calculated for income tax purposes With one modification: Those who choose transfer pricing alternative under Article 216-BIS must add 1.5% x value of foreign owned M&E (rather than 1%) Benefit calculated through a special credit mechanism Confusing wording in the decree 2008 Baker & McKenzie 15

62 Getting The Tax Benefits Of Using The Maquiladora/ IMMEX Program Required actions depend on several factors: Current structure of the transactions between Mexican company and foreign affiliates The importation status of any M&E owned by Mexican company The parent company s global tax position The characteristics of the company s business in Mexico Customer issues 2008 Baker & McKenzie 16

63 Getting The Tax Benefits Of Using The Maquiladora/ IMMEX Program (Cont.) Taking into account the company s global tax position Is it profitable? Will it be profitable in the future? How/where are its other foreign operations held? What are its cash needs in other countries? 2008 Baker & McKenzie 17

64 Getting The Tax Benefits Of Using The Maquiladora/ IMMEX Program (Cont.) Taking into account the characteristics of the manufacturing activity in Mexico Is it (and will it be) labor-intensive or capital-intensive? Consider ratio of operating costs to value of assets used in the business What are the plans for expansion in Mexico? What has been its past profit history? Have the Mexican operations been financed? Outstanding debt obligations, etc Baker & McKenzie 18

65 Getting The Tax Benefits Of Using The Maquiladora/ IMMEX Program (Cont.) Which affiliate has the customer relationships? Origin of the customer relationship Which affiliate has the ongoing marketing activity and relationship? What company employs the marketing personnel? 2008 Baker & McKenzie 19

66 Getting The Tax Benefits Of Using The Maquiladora/ IMMEX Program (Cont.) Customer issues Where are the customers located? Where are the products to be delivered? If to a party in Mexico, is it a maquiladora? What will the customers do with the products? Will they incorporate them into exports? What is the current structure of customer transactions? What are the customer preferences/demands for structuring future transactions? 2008 Baker & McKenzie 20

67 Tax Incentives 2008 Baker & McKenzie 21

68 Tax Incentives - Background Tax incentives have been granted by the Mexican government in order to promote investment and development of certain type of industries or projects Technology research and development Maquiladoras Accelerated depreciation Hiring of handicapped employees, among others 2008 Baker & McKenzie 22

69 Tax Incentives - Background The Mexican income tax law provides that corporate entities have the obligation to recognize all income (taxable revenues), whether in cash, in kind, in services, in credit or otherwise, obtained during a given tax year Our tax laws don t define each type of income Our courts have stated that income, for tax purposes, refers to those acts or activities that increase the net worth of an individual or entity The broad definition of income has raised ongoing legal discussions about the inclusion of tax incentives as taxable revenue, for income tax purposes 2008 Baker & McKenzie 23

70 Tax Incentive For Technology Research And Development Tax credit = 30% of the expenses and investments made in the tax year for technological research and development in the projects Taxpayers may apply the resulting difference against the tax due in the following 10 tax years, until depleted Are those expenses and investments incurred in national territory, allocated directly and exclusively to the execution of the taxpayer s own projects, aimed at the development of products, materials or production processes, representing a scientific or technological advance? New rules from Baker & McKenzie 24

71 Accelerated Depreciation For Purchase Of Fixed Assets Individual and entities carrying out business activities Accelerated depreciation of investment in new fixed assets during the year they were acquired: A. The investment of the new fixed assets B. In the year in which they are used C. Or, in the following year 2008 Baker & McKenzie 25

72 Accelerated Depreciation For Purchase Of Fixed Assets (Cont.) Deduction of the original Investment amount of the following percentages: Construction - 57% vs. 5% Machinery and equipment used in construction industry - 87% vs. 25% New goods are considered as those that have been used for first time in Mexico Only goods that are located in national territory, except Mexico City, Guadalajara or Monterrey, unless: They do not require intensive use of water Use clean technologies and obtain a certificate in this regard 2008 Baker & McKenzie 26

73 Tax Incentives For Investment In Renewable Energy Accelerated depreciation of assets used in to reduce pollution Accelerated depreciation of investments in assets that convert fuels to natural gas The assets must be used at least for five years following their acquisition 2008 Baker & McKenzie 27

74 Tax Credit For Hybrid Vehicle Purchase Tax exemption on the purchase of new cars to be propelled by rechargeable electric batteries, which also have an internal combustion or hydrogen engine Substantial reduction in the vehicle ownership tax 2008 Baker & McKenzie 28

75 Audits By Tax Authorities The most common approach has been for taxpayers to take the position that the benefit obtained from a tax incentive is not taxable, unless expressly stated The Tax Administration Service has started to review if taxpayers have included tax incentives as part of their taxable income Audit procedures Inquiries arising from refund or compensation procedures Review of the calculation methodology and the application of tax incentives by taxpayers 2008 Baker & McKenzie 29

76 Recent Developments On Dec. 12, 2008, the tax authorities issued an internal criterion stating that tax benefits are considered as taxable income, for income tax purposes Internal criterion needs to be followed by all local and central audit departments Internal criterion issued by SAT is not mandatory for taxpayers 2008 Baker & McKenzie 30

77 Mexican Inbound Considerations And Opportunities 2008 Baker & McKenzie 31

78 First Structure US Company Sale or Sale Mr. Perez Mx Co Sale & Delivery Importer of record More profits in Mexico Income tax at 28% rate VAT fully recoverable 10% or 15% Mx Retailer (customer) 2008 Baker & McKenzie 32

79 Second Structure US Company Sale Importation or Importation Mr. Perez Mx Co Delivery Importer of record (Mx Co or Mr. Yanar [Individual]) No income tax on the sale No flat tax on the sale Mx Retailer (customer) VAT at a 10% or 15% rate, may not be recoverable. Litigation needed 2008 Baker & McKenzie 33

80 OECD Working Documents 2008 Baker & McKenzie 34

81 Document On Restructuring Business restructurings involve transfers of functions, assets and/or risks with associated profit/loss potential between associated enterprises Important to understand the restructuring; how it has affected the functional analysis of the parties; and the business reasons for, and anticipated benefits of, the restructuring 2008 Baker & McKenzie 35

82 Document On Attribution Of Profits The profits to be attributed to a PE are the profits that the PE would have earned at arm s length, if it were a legally distinct and separate enterprise performing the same or similar functions under similar conditions The right to tax does not extend to profits that the enterprise may derive from that state, other than through the permanent establishment 2008 Baker & McKenzie 36