Copyright 1999 Journal of Commerce, Inc.
Journal of
Commerce
June 1, 1999, Tuesday
SECTION: WORLD TRADE; Pg. 6
LENGTH: 974 words
HEADLINE:
Maquiladoras face higher taxes
BYLINE: DANIEL J. MCCOSH
DATELINE: MEXICO CITY
BODY:
For more than a decade, U.S. companies have helped fuel the growth of the
maquiladora sector, taking advantage of special tax treatment to build thriving
border manufacturing plants that produce goods for export.
The
maquiladora industry, which dates back to 1966, now totals about 4,000 plants,
which generated nearly half of Mexico's $118 billion in exports last year.
Mexico forgoes duty revenue on components and raw materials in order to create
jobs and reap other benefits. The maquiladoras employ about 1 million people.
Now the Mexican government sees another benefit from the maquilas: tax revenue.
DIVERGENT AGENDAS
A recent decision to increase the tax
liability of maquiladoras is revealing the divergent agendas of Mexico's
commerce and finance agencies. The plan, though not finalized, is also making
U.S. manufacturers concerned about their future in Mexico.
Mexico's
commerce agency, known as Secofi, touts the maquiladora industry as a critical
source of foreign investment, jobs and exports. But Hacienda, the finance
ministry, sees a mother lode of tax potential.
Hacienda wants to treat
maquiladoras as ""permanent establishments'' under Mexican law. That designation
would disallow maquiladoras from taking advantage of current tax benefits.
""The permanent establishment is an extremely broad concept,'' said
Jaime Gonzalez Bendiksen, a partner at Baker & McKenzie. He heads the tax
department for the law firm's clients in the Mexican border-area cities of
Tijuana, Ciudad Juarez and Monterrey.
Mexican tax law says that income
corresponding to the assets and activities of the permanent establishment is
subject to income tax.
However, the exact interpretation of the law has
yet to be defined. "" Exactly what will be attributed to the regimen is not
clear and is a matter of concern,'' Bendiksen said.
""That's the big
uncertainty, and that's why multinational companies are not willing to have
permanent establishments in foreign countries,'' Bendiksen said. ""They don't
know how it will be taxed.''
In addition, the tax treatment would
apparently only apply to U.S. companies with maquiladora operations in Mexico.
The pending tax change would discriminate against U.S. companies because
Mexico's tax treaty with the United States is different from treaties with other
countries, said Don Michie, vice president of maquiladora consulting group Nafta
Ventures Inc., El Paso.
""This does not apply to Canadian, Asian and
European investment,'' Michie said. ""Only to U.S. companies.''
Although
not enforced previously, the classification of permanent establishment has
loomed as a potential issue for several years.
""The permanent
establishment regimen has always been like a ghost lurking in Mexican companies
that could be exorcised with instruments like transfer pricing or safe
harbors,'' said Carlos Angulo, another partner at Baker & McKenzie in Ciudad
Juarez, who represents the trade advocacy group Border Trade Alliance in
Mexico's National Maquiladora Council.
DOUBLE TAXATION
Under the
rule change, maquiladoras could face double taxation because the new taxes would
not be eligible for a foreign tax credit from the Internal Revenue Service. U.S.
companies would therefore be taxed in Mexico and then again in the United
States.
Industry representatives continue to negotiate with Hacienda but
there are complaints that the agency is not serious about discussing the tax
change, which would be effective Jan. 1.
""It's as if someone has a
loaded gun pointed at your head and says, "Let's negotiate,' '' Angulo said.
A Hacienda spokesman said agency officials are not willing to discuss
the new tax obligations with the media because the issue is currently being
negotiated with industry.
""This would have a tremendous impact on the
industry,'' Nafta Ventures' Michie said.
The change in tax rules is not
the only issue clouding the future for maquiladoras. On Jan. 1, 2001, the United
States and Mexico will be required under the North American Free Trade Agreement
to cease paying duty drawbacks on components and raw materials imported for
maquiladora production. The change will mean that many foreign inputs will no
longer be profitable. Plants will have to find other, cheaper sources within
North America or possibly relocate.
MISINTERPRETING US CODE?
Tax
attorneys say that the Mexican authorities appear to be misinterpreting U.S. tax
code. Tax credit possibilities seem limited since a U.S. foreign tax credit
applies only to foreign-earned income. Most maquiladoras, for tax purposes, are
considered extensions of U.S. operations.
""The Mexican government has
taken the attitude that it will not be a problem "if we can get the U.S.
government to make the payments creditable in the U.S,' '' said Tony Ramirez,
executive vice president of Made in Mexico Inc., Chula Vista, Calif., which
lobbies on behalf of maquiladoras in Mexico. ""However, it is a problem. New
taxes are always a problem.''
Most maquiladoras manufacture exclusively
to export to the United States and other foreign markets, and therefore would
not be eligible for the foreign tax credit from the Internal Revenue Service.
""The United States has made it clear that it will not issue a tax
credit, '' said Michie, who added that industry insiders and the Border Trade
Alliance are in talks with Hacienda, the Internal Revenue Service and Canadian
tax authorities.
""The expectation is that the industry tax committee
and Hacienda will continue in talks through June and maybe beyond,'' he said.
""A reasonable outcome would be to have the idea taken off the board
completely.''
Baker & McKenzie's Angulo, however, is less optimistic
that the decision will be completely overturned, and thinks the government will
instead look for a temporary compromise.
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