By Baker & McKenzie

As you may know, a Decree granting several tax benefits to the taxpayers indicated therein was published in the Federal Official Gazette on October 30, 2003. This Decree grants some benefits to the Export Maquiladora Industry; specifically, Article Eleven establishes that those maquila companies referred to in article 2 of the Mexican Income Tax Law (the MITL) may reduce the payment of income tax in an amount equal to the difference of Income Tax resulting from calculating the income under the Safe Harbor option (the larger of 6.9% ROA and 6.5% over costs and expenses) and the calculation of Safe Harbor at a rate of 3% (the larger of 3% ROA and 3% over costs and expenses), provided that the requirements set forth in article 216-Bis of the MITL have been met.

This Income Tax reduction for the year 2003 was calculated in accordance with Transitory Article Four of the Decree, proportionately to the number of days during which the Decree was in effect during that year, that is, almost 17%. However, there were several interpretations regarding the application of the Decree for the year 2004 and thereafter. Some sustained that the benefits of such Decree were not applicable after 2003, while others indicated that the benefits thereof were 100% applicable during 2004 and even up to 2007.

As a consequence of the uncertainty created in the Export Maquiladora Industry, the National Council of the Export Maquiladora Industry (Consejo Nacional de la Industria Maquiladora de Exportación or CNIME) filed a request for confirmation of criterion as to the application of the Decree for the years 2004 through 2007 with the Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público or SHCP).

In response to the request from CNIME and in order to maintain the incentive and competitiveness in the Maquila Sector, on September 29, 2004, the Ministry of Finance and Public Credit issued Official Communication Number 101-1264, whereby the tax authorities inform that the application of Article Eleven of the Decree referred to above has an indefinite term, that is, maquila companies may continue to apply it until such Decree is repealed or amended through another Decree published in the Federal Official Gazette; and that, for the time being, the tax authorities do not intend to amend or revoke the benefit contained in the aforementioned Decree.

The foregoing clearly shows that the SHCP intends to continue to promote the investment in the Maquila Sector and support maquila companies through these incentives, in order to create a stable environment in the tax field. This will enable the maquiladoras to plan their investments for longer periods of time.