Module II: Corporate Tax Planning Update: Mexico

Transcription

1 Module II: Corporate Tax Planning Update: Mexico 11th Annual Latin American Tax Conference Miami, Florida March 2010 Leobardo Tenorio Tijuana Luis Adrian Jimenez Mexico City Jaime Gonzalez-Bendicksen Cd. Juarez John McLees Chicago Hector Reyes Mexico City

2 Agenda Defining the Mexican Vehicle Financing Mexican Operations / Interest Payments Tax Consolidation Single Rate Tax (IETU) Maquiladora Structure, a good option for manufacturing operations in Mexico 2

3 Defining the Mexican Vehicle 3

4 Type of Vehicles Mexican corporation (S.A. de C.V.) or (S. de R.L. de C.V.) Permanent Establishment Business Trust Silent Partnership (AenP) 4

5 Mexican Corporations Presence in Mexico Mexican corporation (S.A. de C.V.) Mexican LLC. (S. de R.L. de C.V.) From a tax perspective, a Mexican Corporation and a Mexican LLC., are taxed the same way. An S. de R.L de C.V. is chosen for those who checked the box in the U.S. 5

6 Permanent Establishment Establish one: Corporate formalities (registration of a branch) and issues. Subject to all taxes in Mexico. Legal issues in general / Legal exposure for partners or shareholders of the foreign entity. Registration formalities. 6

7 Use of Trust Business trust is not fully viewed as a pass-trough entity Profits are taxed at Trustee level Losses can only be used by the trust Other issues PE issues VAT issues Tax compliance & reporting 7

8 Silent Partnership Asociación en participación (AenP) are defined as corporate taxpayers Special and broad definition for tax purposes Taxed at the AenP level Parties considered as stockholders No withholding on dividends Planning opportunities to PE 8

9 Financing Mexican Operations Interest Payments 9

10 To Cover Issues to Consider when dealing with loans. Re-characterization of interest as dividends. SOFOM: A Viable Alternative. 10

11 Issues to Consider when dealing with loans Thin capitalization limitations (3 to 1 ratio). Re-characterization of interest as dividends. Rates subject to transfer pricing rules. 11

12 Re-characterization of Interest as Dividends. Deductibility issues. Broad definition of back to back. Provisions dealing with back-to-back loans were amended during 2007 making them quite broad in how such loans are defined. If re-characterized, the applicable tax may be 42.86% (for ; 40.85% for 2013). Use of the CUFIN account? 12

13 SOFOM: A Viable Alternative Establish a non-regulated Mexican financial entity, Sociedad Financiera de Objeto Múltiple or SOFOM. Minimal regulatory requirements. A SOFOM may be used as the entity to a conduit for the loan. 13

14 SOFOM: A Viable Alternative An advantage to using a SOFOME is that there would be no thin cap requirements on loans. Preferential 4.9% interest withholding on payments made by the SOFOM to the U.S. company. There would be no VAT on the interest charged to the loans that it grants. 14

15 SOFOM: A Viable Alternative In respect of the IETU, a SOFOM is entitled to deduct the interest, because their taxable revenue should be the operational financial margin the have (active interest less passive interest). 15

16 Tax Consolidation 16

17 With the recent reforms Is the tax consolidation regime still a planning toll? Five years deferral benefit. Alternatives against the recent changes? To avoid the recapture of benefits To avoid the double payment 17

18 Single Rate Tax (IETU) 18

19 IETU Issues Sale of real estate or relevant fixed assets acquired prior to FY It is not possible to claim the remainder of the balance of the tax credit; therefore, the total consideration (sales price) is taxable for IETU purposes. Alternative: Migration of the Mexican which is the owner of the real estate/assets would trigger a deemed liquidation for income tax purposes but not for IETU purposes. The subsequent sale of the assets will not be taxable for IETU purposes. 19

20 IETU Issues Differences in the timing of the recognition of revenues for Income tax and IETU purposes. In several cases, there is double taxation on revenues. This is mainly for revenues that are invoiced in one year (taxable for income tax purposes) and collected in the next year (taxable for IETU purposes). Alternative: It is possible to voluntarily anticipate the recognition of revenues for IETU purposes. This means to tax revenues for IETU purposes on an accrual basis (as for income tax purposes) rather than on a cash basis. 20

21 IETU Issues Expiration of excess in IETU credits, except those generated for having a negative IETU base (when deductions are higher than revenues). It is not possible to carry forward IETU credits (mainly those related to salaries, social security and fixed assets credits) when: i) there is no IETU in any given year; ii) the IETU of the year is covered with the income tax paid; iii) the IETU of the year is covered with the credit generated by a negative base for IETU purposes; or iv) the IETU of the year is covered with salaries, social security and fixed assets credits, but there is an amount left of those credits. Alternative: Increase the amount of IETU triggered in any given year. This can be done anticipating revenues or delaying deductions. 21

22 IETU Issues No reduction in IETU prepayments. The income tax law allows to reduce prepayments in the second half of the year, even without a ruling or a written authorization. - Alternative: Although there is not an express provision in the IETU law allowing taxpayers to request reduction in IETU prepayments during a fiscal year, given the linkage between the income tax law and the IETU law, it would be possible to request a reduction in IETU prepayments. 22

23 IETU Issues IETU does not create balance in the net after tax profit account (CUFIN). Income tax payments related to the taxable profits increase the CUFIN balance. This balance controls profits for which taxes have been already paid; therefore, they can be distributed without having to pay income tax. However, the IETU payments do not increase the CUFIN balance and thus it is not possible to pay dividends without triggering income tax. - Alternative: If a taxpayer anticipates to trigger IETU at the end of the year, it would be possible to distribute dividends out the CUFIN balance and pay income tax voluntarily. This income tax paid would be creditable against the annual IETU. 23

24 IETU IETU Issues Payments of interest on loans granted are not deductible for IETU purposes. - Alternative: Avoid loan transactions as much as possible. Use another financial structure, for instance: acquiring assets being financed directly by suppliers. In this case the interest charged by the supplier is deemed part of the consideration, therefore, deductible for IETU purposes. 24

25 IETU Issues Payments of royalties to related parties are not deductible for IETU purposes. - Alternative: Review the nature of the payments. If there were royalty payments derived from technical assistance or know how, subject to a further- detailed analysis, those payments can be considered deductible for IETU purposes. In case of acquisition of inventories or services and payment of royalties, check if the amount of royalties can be embedded in the consideration paid for the inventories or services (subject to an analysis from a customs standpoint). 25

26 Maquiladora Structure A good option for manufacturing operations in Mexico 26

27 Maquiladora Typical Flow of Goods Customers Parent Company WORLD / US MEX Materials and M&E Finished Goods MAQUILADORA 27

28 Alternative Contractual Structures for Using a Mexican Affiliate to Manufacture in Mexico Buy/Sell MexCo manufactures for its own account MexCo buys raw materials and components and the M&E (often from its U.S. affiliate) MexCo also must pay royalties and technical assistance fees to USCo for know-how/assistance. Consignment Manufacturing USCo owns some M&E, materials, finished goods USCo contracts with MexCo to produce the products USCo can sell finished products to a Mexican OEM or first tier supplier in Mexico OR to MexCo for resale to the Mexican OEM or first tier supplier MexCo as importer of Record In any case MexCo is the importer of materials, components and the M&E 28

29 Advantages of Consignment Manufacturing With USCo Owning the Inventory and M&E Economic return on M&E is in USCo Especially useful if USCo has losses for tax purposes MexCo earns a return on M&E that it owns (taxed in Mexico) Reflected in its profit on purchase and sale of goods or in its cost-plus markup Moving asset ownership to USCo normally reduces taxable income in Mexico Another US tax benefit Enables USCo to generate foreign source income on sales of products received from MexCo Can increase ability of USCo to get a credit for its foreign income taxes against its U.S. income tax liability 29

30 First Big Tax Benefit of Using a Maquiladora / IMMEX Program VAT Exemptions / 0% Rate Zero VAT on Temporary Importation By a Maquila Zero VAT on Maquiladora Transfers (i.e. sales of the maquiladora s finished product in connection with a delivery of that product) Delivery in Mexico to another maquiladora Delivery in Mexico to an automotive OEM Physical export of the products from Mexico Direct delivery to a party in Mexico accomplished using virtual pedimentos a deemed export and reimportation 30

31 First Big Tax Benefit of Using a Maquiladora / IMMEX Program VAT Exemptions / 0% VAT Zero VAT on Maquiladora Invoices for the Processing Fee for Consignment Manufacturing Applies only to processing services provided under a maquiladora program Issue Does exemption apply if some of maquiladora s production is delivered directly in Mexico with a change of customs regime Not an issue with use of virtual pedimentos cause direct delivery in Mexico to be treated as an export for all purposes. 31

32 Second Big Tax Benefit of Using a Maquiladora / IMMEX Program Using Consignment Mfg. A Maquiladora Can Engage in Consignment Manufacturing of USowned Inventory (Using M&E Owned by USCo made available on free bailment) Usually minimizes total global income tax liability But this results in Mexican tax exposures for USCo from owning M&E in Mexico if MexCo is not a Maquiladora - Risk of a Permanent establishment (a PE ) in Mexico i.e. Mexico taxes USCo on part of USCo s net income that Mexico determines is attributable to a PE of USCo in Mexico Not a conversation that USCo wants to have with Mexico This would prevent use of consignment manufacturing 32

33 Second Big Tax Benefit of Using a Maquiladora / IMMEX Program Using Consignment Mfg. Only a Maquiladora Can Protect USCo from PE Liability Arising from Consignment Mfg. Mexican legislation implements the U.S.-Mexico Mutual Agreement on Maquiladora Taxation Mexican Law and the Mutual Agreement provide for PE exemption for USCo contracting with a maquiladora for consignment manufacturing IF the maquiladora meets defined standards for giving the maquiladora a defined portion of the return on the U.S.-owned assets 33

34 Second Big Tax Benefit of Using a Maquiladora / IMMEX Program Using Consignment Mfg. Requirements for PE Protection for USCo Maintain Maquiladora program and comply with regulations for temporary importation. Satisfy one of the following special pricing rules each year: Special transfer price for maquiladora processing TP = OECD compliant transfer price + 1% of value of the value of foreign owned M&E or Requirements for PE Protection for USCo 34

35 Second Big Tax Benefit of Using a Maquiladora / IMMEX Program Using Consignment Mfg. or TP is sufficient to cause maquiladora to satisfy taxable income Safe Harbor taxable income = the greater of: 6.9% of asset base, including US-owned M&E, or 6.5% of the maquiladora s operating costs [note - safe harbor is a threshold for taxable income, not a TP rule] 35

36 Third Big Tax Benefit of Using a Maquiladora / IMMEX Program Lower Mexican Income Tax 2003 Decree Cuts the Income Tax Liability of Maquiladoras Themselves to 13% of Taxable Income or Less Reduces maquila s income tax liability by amount calculated under the decree Eliminates Mexican income tax altogether for many capital intensive maquiladoras Available for maquiladoras that engage in cross-border processing with some foreign owned M&E Including former PITEX companies Including automotive OEMs that become Maquilas 36

37 Third Big Tax Benefit of Using a Maquiladora / IMMEX Program Lower Income Tax Calculating the Maquiladora income tax incentive: First calculate the maquila s income tax liability Applying normal tax rates to income determined under normal maquiladora transfer pricing or safe harbor rules Then reduce that income tax by an amount = ( the income tax rate ) x ( greater of 3.5% of the operating costs of the maquiladora / IMMEX company and 3.9% of the total value of the assets of USCo and Maquila used by the maquila) 37

38 Fourth Big Tax Benefit of Using a Maquiladora / IMMEX Program Flexible Rules Unusual Flexibility In Minimizing the Global Tax Burden as a Result of Participating in the Maquiladora Program For a USCo with losses or low taxable income: Choose to transfer pricing alternative Minimizes or eliminates Mexican income tax For profitable USCo (esp. w/ a capital intensive maquila): Choose the safe harbor alternative US approves deduction of higher payment to Mexico Maximizes amounts to be deducted in the US (at roughly 40% effective tax rate) and taxed in Mexico at 17.5% Maximize those benefits by owning the maquiladora off-shore to facilitate redeployment of low-taxed earnings 38

39 Fifth Big Tax Benefit of Using a Maquiladora / IMMEX Program Control of IETU Liability Maquiladora Exposure to Mexico s New Single-Rate Tax ( IETU ) Is Limited Under 2007 Decree Maquiladoras (only maquiladoras) can apply IETU rate to their ordinary income tax base (under 11/5/07 decree) Limits IETU liability of a maquiladora to 17.5% of its income tax base (less maquila s income tax payments) Greatly reduces IETU burden for company with consignment manufacturing (i.e. that does not own its own inventory) Result combined income tax and Single-Rate Tax burden of 17.5% of the income tax base preserves tax advantage for maquiladoras 39

40 Fifth Big Tax Benefit of Using a Maquiladora / IMMEX Program Control of IETU Liability Remaining Issues and Concerns for Maquiladoras under the 2007 Decree Relief is limited to the period What happens next? Errors in decree in calculating the benefit for a Maquila that also conducts non-maquila activities (e.g. purchase of finished products for resale in Mexico) Decree may not eliminate the PE risk for US companies under the IETU (i.e. IETU exposure for USCo) Note This Relief Is Not Applicable to Employee Services Companies 40

41 Transforming Former PITEX (or OEM) Operations to Consignment Manufacturing Many Former PITEX Companies Are Restructuring Transactions with USCo or other Foreign Affiliates to Consignment Manufacturing (from Buy/Sell) Shift ownership for inventory and economic return to USCo or other foreign company Sale of inventory currently owned by the Maquila to USCo (to make available for use by the Maquila) Major potential tax savings available in almost all cases: If group is highly profitable or unprofitable If operation is capital intensive or labor intensive OEMs Could Also Restructure in This Way with Similar Savings 41

42 Transforming Former PITEX (or OEM) Ops. to Consignment Manufacturing - Dealing with M&E USCo also needs to own or lease at least some of the M&E and make it available to the Maquiladora on free bailment USCo should own equipment being sent to Mexico Possible sale of M&E by Maquila to USCo (or to US leasing company that leases M&E to USCo) Note potential IETU liability for Maquila on such sales Former PITEX need not transfer M&E to USCo if there is other USCo owned M&E made available to Maquiladora Recent proposal to eliminate most Maquiladora tax benefits to maquila and USCo if Maquila has transferred M&E to USCo 42

43 Transforming Former PITEX Operations to Consignment Manufacturing Customer Issues Can Maintain Transactions with the OEMs as Presently Structured Some Mexican OEMs may want to buy from a Mexican co. That doesn t interfere with using cross-border processing: USCo can sell maquila output to other MexCo for resale to OEM Note the VAT advantages for Mexican OEM if: OEM buys parts made by the maquila from USCo and OEM acts as the importer of record of the parts 43

44 Transforming Former PITEX Operations to Consignment Manufacturing Other Issues Communication with customers Relationship with customers need not change Advantage to Mexican OEM by allowing to purchase from FCo without VAT Changes to management reporting Changes to financial and other related systems Labor Notifying workforce Profit sharing Not necessary if an employee service company is already in place 44

45 Recommendations for Export Manufacturing: Almost always operate under the Maquiladora Program Use the typical consignment manufacturing contract Requires a transformation for most former PITEX companies Comply with special maquiladora tax rules to provide protection for the foreign company TP rule or safe harbor for maquila s taxable income) Take care in combining a Maquila contract with sales of the products to Mexican OEMs or distributors 45

46 Current Status of Proposed Amendments to the Maquiladora Decree Proposed limits on which maquiladoras would qualify for maquiladora tax regime Foreign-owned equipment could not be imported definitively or previously owned by the maquiladora Materials used to manufacture products majority would have to be owned by foreign party and imported from abroad Service maquiladoras and foreign affiliates would no longer qualify for maquiladora tax regime Proposals reviews by regulatory review agency ( COFEMER ) Further consideration by Ministries of Finance and Economy 46

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