Maquiladoras and NAFTA Beyond Y2K Mexico's Tax Rules Effective January 1, 1999 tax has been imposed on imported equipment and components. As of January 2, 2000, profit taxes of approximately 40% have taken effect. Under the maquila program, U.S. assembly plants were not considered permanent. Under new rules, U.S. companies determined as "permanent" will pay taxes on fixed assets and inventory. There is a possibility of a 75% double taxation. The changes in Mexico's tax laws are only part of a general trend occurring since the mid-90's. Before 1995, the maquila program paid little or no taxes in Mexico. Consideration was given to the fixed assets and technological know-now that the companies provided to the development of Mexico's border manufacturing. After 1995, there have been a steady series of constraints placed on the maquila program beginning with the "gringo tax," which required U.S. citizens to pay Mexico an income tax. Americans were given a credit for any portion of paid Mexican income tax. In 1996, Mexico adopted transfer-pricing rules, which provided a special set of considerations for the maquila. U.S. companies were offered two methods to pay taxes. (1) cost plus 4.7%; and (2) cost plus 10 - 15% (safe labor). If the second option was not followed, the corporation would fall under Mexico's asset tax law, which levies a 1.8% tax on U.S. assets in Mexico, or a determination is made that the U.S. company is established as a temporary establishment. Because of the transfer pricing rules introduced in 1995 and the current tax changes, U.S. companies producing goods in Mexico would more than likely be given permanent establishment status, which means U.S. companies will be required to pay (1) profit tax at a 40 - 60% rate; (2) file Mexico tax return; and (3) will result cost increases in administration.

NAFTA Frame Article 5, Clause 5 of the International Treaty between Mexico and U.S. states that Mexico will have the prerogative to tax those foreign companies that manufacture goods in Mexico and have their headquarters located out of Mexico. (Hacienda at that time create a "transitory" article in law, which protected Maquiladoras from paying taxes.) Effective January 1, 2000, Maquiladoras will pay taxes as permanent establishments. Article 5 also provides that a U.S. company will have a permanent establishment in Mexico, if it owns goods in Mexico that are processed by a dependant agent using assets supplied by the U.S. company. Most U.S. companies organized their maquiladora or PITEX operation in that way.

Maquiladroas 2001 Effective November 1, 2000 the maquiladora industry will begin paying import duties in Mexico on both primary material and machinery and equipment. This will apply to primary materials originating from non-NAFTA countries and exported to a NAFTA country. For machinery and equipment, the duty payment will apply to all imports depending on country of origin.

Payment of the Import Taxes Payments are different for primary material and machinery and equipment. Primary Material: Import tax will be paid in accordance with the Duty Deferral program established in Article 303 of the NAFTA Agreement: The primary materials will be temporarily imported to Mexico for its transformation. The primary material will be transformed and sent to the destination country (with NAFTA region); the import tax that corresponds in the destination country will be paid in that destination country. Once the import tax has been paid in the destination country, there will be a period of 60 days after the export date to calculate that duty which will be paid in Mexico. For purposes of this calculation, the amount of tax paid in the destination country can be subtracted form the tax amount to be paid in Mexico.

Machinery and Equipment Import tax will be paid at the time of entering Mexico and is independent to the origin of the machinery and equipment. The import tax will be paid as if the import were definitive regardless of temporary or definitive status.