Exchange gains/losses and the taxable income for maquiladoras. WMTA - February 18, 2009 ©2009 Deloitte LLP. All rights reserved.

Income Tax ©2009 Deloitte LLP. All rights reserved.

Exchange differences By Law, General Ledger must be kept in Spanish and in Mexican Pesos. This originates that transactions denominated in Dollars must be adjusted at the end of the month accordingly. Balances generating differences are mainly:  Bank accounts in Dollars.  Intercompany account (receivable or payable)  Rents or deposit in foreign currency.

©2009 Deloitte LLP. All rights reserved. When the option is to have a TP study Taxable Income is directly affected by the exchange rate fluctuations. For the income tax law, exchange gains are taxable and deductible the exchange losses.  The more exchange gain, the higher the taxable income.  Intercompany (Receivable Account):  The more exchange losses, the lower taxable income.  Intercompany (Payable Account):

©2009 Deloitte LLP. All rights reserved. Intercompany Account ReceivableAccount Payable Maquila Income1,000, Sundry Incomes350, Exchange Gain120, , (+)Total Income1,470, ,370, Direct Expenses850, Indirect Expenses90, Other Expenses10, Exchange Loss16, , (-)Total Deductions966, ,066, (=)Profits504, , (-)Profits Sharing to Employees9, (=)Taxable Income495, ,000.00

©2009 Deloitte LLP. All rights reserved. Other points to consider  It’s important to take into account the date of the accrual of exchange differences and the Mark Up determination  Analyze the impact of converting accounts receivable/payable into pesos

©2009 Deloitte LLP. All rights reserved. When the Safe Harbor is elected When the maquiladora is computing the taxable income based on the SH option, exchange differences are not affecting the taxable income of the maquiladora. Exchange differences are transferred via service price to parent company and therefore recognized as additional cost (or lower cost) for the manufacturing services.

©2009 Deloitte LLP. All rights reserved. Intercompany Account ReceivableAccount Payable Maquila Income1,000, Adjust to Maquila Income(145,000.00)55, Sundry Income350, Exchange Gain120, , (+) Total Income1,325, ,425, Direct Expenses850, Indirect Expenses90, Other Expenses10, Exchange Loss16, , (-)Total Deductions966, ,066, (=)Profits359, (-)Profits Sharing to Employees9, (=)Taxable Income350,000.00

IETU (Flat Tax) ©2009 Deloitte LLP. All rights reserved.

IETU Exchange differences do not accrue any IETU liability since income and expenses are deductible upon payment.

Value Add Tax ©2009 Deloitte LLP. All rights reserved.

VAT Similar as IETU computation, revenues and expenses are dedutible upon payment. No exchange differences are recognized and VAT credit is computed based on the exchange rate of paymente. Gross income for maquila services are 0% VAT taxed.

©2009 Deloitte LLP. All rights reserved. Alternatives The option is to consider the current situation as a casualty of the crisis and do nothing, or evaluate some of the following options:  Understand the tax situation for the parent company.  Transfer the exchange fluctuations to the parent company.  Stop differences in Mexico by capitalizing debt or paying a dividend.  Verify US consequences of the dividend payment.

©2009 Deloitte LLP. All rights reserved.