Proposed changes to the IMMEX Decree Héctor Silva Tax Deloitte WMTA meeting/breakfast November 17, 2010

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Sundry modifications 2

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Sundry modifications Goods made of steel as described in annex I TER must be returned in nine months (artícle 4) Note: Not applicable to Certified Maquiladoras Dry milk, tablets, corn and other milk formulas are excluded from annex II, the only remaining in this annex are tires. Service Maquila for products made of steel can only be carried out by Certified Maquiladoras (artícle 5). Sugar, Steel, Tires and Textiles must amend their Maquila program excep for Certified Maquiladoras whom no longer need to apply for these modifications. Requirements regardng tariff clasiffication of imported goods (raw materials) and exported goods (finished products) applyes only to sugar, steel, tires and textiles under the approved tariff codes. 3

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Sundry modifications New requirements for IMMEX applications Service Maquiladoras and those importing sugar, steel, tires and textiles must provide additional detail on the locations where services will be rendered, personnel hired, direct and indirect and estimated value of the production or services. Upon the review of the authority if there is no machinery and equipment other than the building, a three month program will be granted to import M&E and a second inspection will be required to allow the import of raw materials Providing the geographical coordinatess is no longer required. 4

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Sundry modifications Annex IV is deleted from the Decree due to similar requirement to comply with import- export controls already exists in the miscellaneous tax rules in annex 24 These are no longer reasons to cancel the program. -Not import or export in the last twelve month period -No maintaining accounting books -Facing an administrative tax trial for tax differences -For filing notice of suspension of activites -File the annual tax return showing ‘zeros’ Any suspension of the maquila program will be reported by the authority in three months (current term is four months) 5

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Sundry modifications Certified maquiladoras or maquiladoras operating for five years or more will not be suspended if: -They are required for the first time on a tax ommision. -In the event of administratives failures and the fail is corrected 6

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 (Income Tax) 7

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 As defined in the current Decree 1.Maquila operation is the one carried out by a IMMEX company with inventory and M&E provided directly or indirectly by a foreign resident with whom a maquila agreement was signed for the transformation, elaboration or repair of goods. 2.Maquila operation includes various services. 3.The possibility of using National or Foreign goods not temporary imported is allowed (there are no conditions for subsequent export) 4.Companies complying with these requirements are allowed to some tax benefits (not deeming a PE for the foreign contractor, Transfer Pricing compliance, etc.) 5.There are no limitations as to the ownership of the inventory and equipment. 8Proyecto de modificaciones al Decreto IMMEX

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 New conditions 1.Raw matrials must be ‘provided’ by the foreign contractor and: ‒ Temporary imported ‒ Returned abroad (with virtual pedimentos inclusive) – Not for waste. Alternatively M&E can be provided by a third party resident abroad, as long as the third party has a commercial relationship with the foreign contractor. Domestic goods and definitive imports Any domestic sourced good or definitive imported can be included in the production, provided that such goods are exported along with the temporary imported goods. 9Proyecto de modificaciones al Decreto IMMEX

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 New conditions 2.A maquila agreement must exist beween the IMMEX company and the foreign contractor. 3.Maquila services must be carried out with M&E owned by the foreign resident and considering: ‒ That were not the property of the IMMEX before ‒ That were not the property of a third Mexican company related with the foreign contractor Alternatively  M&E provided by a third party commercial related with the foreing contractor.  M&E can be the property of the IMMEX company (partialy) or leased by the foreign resident. 10Proyecto de modificaciones al Decreto IMMEX

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 New conditions Limitations a.In both options mentioned, the M&E should not be the property of any related party with the IMMEX. b.The foreinger mus be owner of the M&E of at least 30% of the M&E. new rules will be issued Exception The above mentioned regarding M&E is not applicable for companies that at December 31, 2009: 1.Hold an approved IMMEX program, 2.They complied with obligations stated in article 216-bis of the MITL 11Proyecto de modificaciones al Decreto IMMEX

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C. Article 33 Additional comments 4.Manufacturing or repair for goods sold within Mexico are not considered as maquila service therefore can not apply tax preferences for IMMEX. Accounting records must keep separate records for maquila and no maquila activities. 5.Service maquila are not manufuaturers and very few can be considered as such for tax purposes: Water dilution with other substances Cleaning and oxido remuval (oil, paint and other primers). Conservative application Testing, targetting, labeling and classification Develop or improvement of products Note: It is important to evaluate alternatives to avoid EP or TP miscompliance. 12Proyecto de modificaciones al Decreto IMMEX

©2010 Galaz, Yamazaki, Ruiz Urquiza, S.C.