©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Analysis of the amendments to the IMMEX Decree Tax considerations Tax and Legal Services / January, 2011

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. General aspects The current Decree for the Development of the Manufacturing, Maquiladora and Services Industry («IMMEX Decree») was published in the Daily Gazette on November 1, 2006 and amended on May 16, On December 24, 2010 a new amendment to the Decree is published. It enters into effect 90 days after its publication = March 24, Articles that entered into effect on January 1, 2011: Article 33 (amended) Article 34 (created) 2

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. General aspects Main reasons for the amendment of the Decree Avoid abuse by the taxpayer that did not have the wright of the preferential tax regime of a typical maquiladora. Establish «locks» to access tax benefits. Establihs new customs rules. Define new products as «sensible» for customs purposes. 3

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. 4 Background PE derives from a maquila operation (two taxpayers in Mexico, the maquiladora and the parent company with a PE) Maquila (IMMEX) Inventory Administration and control US MEX 1 3 PE M&E 2 Parent company PE

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. MAQUILA 100% - Foreign ownership M&E - Provided by contractor Inventory – Provided by contractor Control – Provided by contractor Background Maquiladoras vs. Pitex – Main Differences PITEX 51% - Mexican ownership M&E - Owned Inventory – Provided by contractor or owned Control – Not necessary provided by contractor 5

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Background Maquiladoras vs. Pitex – Tax Benefits VAT Customs Asset tax waiver Income tax reduction Flat Tax credit Safe Harbor option Transfer pricing preferential regime option MAQUILADORA Yes PITEX Yes No 6

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. 7 Background November, 2006 IMMEX Maquila Pitex

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Tax benefits for IMMEX companies 1.Exemption of Permanent Establishment 2.Partial or total exemption of Mexican Income Tax in accordance with the October 30, 2003 Decree («Fox Decree») 3.Tax incentive to reduce the paymet of Flat tax IETU («Calderon Decree») 4.Preferential tax regime in transfer pricing (article 216-BIS) 5.VAT 0% rate. 8

©2009 Galaz, Yamazaki, Ruiz Urquiza, S.C. Todos los derechos reservados. Tax amendments 99

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Legal reasons (within the Decree) Strengthen the compliance with the obligations set forth in the IMMEX Decree. It is necessary to restrict the authorization of new development programs for companies that have not complied with them. The ITL establishes for companies that perform maquila operations a tax regime that facilitates its compliance to the maquiladora and the foreign resident. The ITL establishes that in order to apply the tax regime to maquiladoras, the definition established in the IMMEX Decree must be followed. It was considered urgent and necessary to adjust the maquila operation definition, in order to include virtual operations, as wells as the requirement that the operation is done with machinery and equipment of a foreign resident. The maquila operation does not restrict the incorporation of other national or foreign merchandise. Establish a grammatical precision of the transformation of goods and not its manufacturing by part of a maquiladora company, since the raw materials delivered are not manufactured by the company, but so transformed to a different product with a value added. 10

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 2 MITL (last paragraph) It is not considered that a foreign resident has a permanent establishment in the country Derived from the juridical or economic relationships that it maintains with companies that perform maquila operations, that regularily are processed in the country, goods or merchandise maintained in the country by the foreign resident, utilizing assets provided directly or indirectly by the foreign residen or any related company. As long as Mexico has celebrated with the host country a treaty to avoid double taxation and the requirements of the treaty are complied with, including friendly agreements negotiated in accordance with the treaty in the manner implemented by the parties involved. In order to be considered that a foreign resident does not have a permanent establishement in the country. The set forth in this paragraph, will only be applicable when the companies have maquila operations and comply with article 216-Bis of the Law. 11

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Maquila operation Raw material Provided by a foreign resident Derived from a maquila agreement Subject to a transformation or repair process Temporary imported Return abroad, even with virtual operations It can be property of a foregin resident third party when there exists a commercial relationship with the company with the maquila agreement Transformation Dilution in water or other substances Washing and cleaning, removal of oxide, oil, paint or other finishes Application of preservatives, including lubricants, protective encapsulation or paint for conservation Adjustment, sanding or cutting Preparation of doses, packing, re-packing, packaging, re-packaging Tests, marking, labeling or classifications Product development or quality improvement In accordance with the last paragraph of art 2 of the MITL maquila operation is the one that complies with the following conditions. 12

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Service activities that were excluded of the transformation definition Provide, warehouse or distribute merchandise Preparation of kits or material with advertising purposes that accompany the exported products Washing and ironing of clothes Broidery or printing of apparel Armoring, modifications or adaptations of vehicles Recycling and collection of waste Software engineering and design Services that support information technology Subcontracting services of business processes based in information technology 13

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Maquila operation National merchandise or definitive imports When national or foreign merchandise not temporary imported is incorporated, its must be exported or returned with the merchandise temporarily imported. 14 In accordance with the last paragraph of art 2 of the MITL maquila operation is the one that complies with the following conditions.

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Maquila operation Machinery and equipment Property of the foreign resident with the maquila agreement Has not been property of the company that performs the maquila operation Or of another Mexican related party. It can be completed with equipment property of a non-related foreing resident with a commercial relationship Can be leased with a non-related party It cannot been property of another Mexican company that is a related party with the company doing the maquila operation. Exceptions If the foreign resident is owner of at least 30% of the machinery and equipment used in the maquila operation. It is not applicable to companies that up to December 31, 2009 operated under a Program and have complied with their Income Tax and Transfer pricing obligations. 15 In accordance with the last paragraph of art 2 of the MITL maquila operation is the one that complies with the following conditions.

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Maquila Operation It is not considered maquila operation: The transformation or repair of merchandise sold in Mexico and do not have an export pedimento, Therefore article 216-Bis of the MITL will not be applicable for said operations. 16

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Maquila operation Calculation of the 30% for machinery and equipment (3rd amendment 12/28/2010) Amount to be depreciated by the foreingner / [amount pending to depreciate (1 property of the foreigner + 2 property of third parties with commercial relationships + 3 property of the maquiladora company + 4 leased to non-related parties)] Amount to depreciate = MOI – depreciation on tax rates The MOI is determined with the customs value; or the MOI of the maquiladora company; or with the appraisal for leased goods of Mexican residents. The amount pending depreciation cannot be lower than 10% of the MOI. The balances have to be updated with the INPC (last month of the first half of the fiscal year / month of purchase) 17

©2011 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 34 Maquila operation VAT New article For purposes of the VATL it is consideted maquila operation - The manufacturing operation of companies with a Program made under the Decree It is considered submaquila ―The submanufacturing operation made in terms of the Decree. It is indicated that the return will not exceed 20 working days, except for Certified companies that will be in 5 days. It is not clarified the possible double taxation of the VAT, when a Certified maquiladora delivers in Mexico on behalf of the foreign resident. 18

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