Article 27 of the Uruguay Round Subsidies and Countervailing Measures Agreement (SCM Agreement) originally required all developing WTO Members to phase out any "export subsidies" by January 1, 2003.
In November 2001, during the WTO Ministerial Conference held in Qatar, that period was extended until December 31, 2009 (the extension was renewed annually until December 31, 2007); thereafter a two-year phase-out period began.
In summary, export subsidies are subsidies that are contingent, in fact or in law, on exports performance.
Before the 2010 reform of the Free Trade Zone Law, our Free Trade Zone regime was an export subsidy regime and therefore category (a) of article 17 of said law refers to processing industries for export. At that time, it was required 100% of the production of a company that operated under the Free Trade Zone regime to be exported. However, article 22 of that same law (which is still in force since there could still be companies operating under that paragraph (a)), establishes the possibility for companies to sell up to a maximum percentage of their local production, which for the companies in paragraph (a) was up to 40%.
This article 22 establishes that, under such case, on local sales, the companies -operating under paragraph (a)- must pay income tax like any other local company.
The 2010 reform was precisely so that the Free Trade Zone regime would cease to be a regime based on export subsidies, and for this reason the category of processing company was created, without imposing any export requirements, paragraph (f). In accordance with the foregoing, article 21 ter of the Free Trade Zones Law clearly establishes that the benefits of this type of companies are not subject, in any way, to their exports and also indicates that, therefore, article 22 of the Free Trade Zone Law does not apply to them. In fact, all the executive agreements of the companies that operate under this classification expressly confirm that this article 22 of the Free Trade Zone Law is not applicable to them.
We are then struck by a case that was presented to us recently (more than a decade after this reform), where the Tax Administration intends to collect income tax on local sales of a company that operates under the category (f) without applying the preferential rate of 6% that the Free Trade Zone Law grants. In summary, the Tax Administration is requiring this taxpayer to apply a differentiation between their local sales and their exports, since it requires them to apply the regular rate of 30% for the former and the preferential rate of 6% only for exports. Clearly, this would imply to recondition the tax benefits of the regime to exports, which was clearly prohibited by the WTO and hence the 2010 reform.
In this case, the Tax Administration refers to the alleged application of article 83 of the Free Trade Zone bylaws, but this article regulates sales to the local market as provided in article 22 of the Law; it is illogical then to think that the article of the bylaws that regulates article 22 of the Law could be applied, when article 22 of the Law is not applicable to companies that operate under category (f). Regarding the existence of this article 22 and its regulation after the 2010 reform, it should be clarified that after the reform, some companies continued to operate under paragraph (a) and that, until 2019, service companies (paragraph (c)), was also applicable to them, hence they could not be repealed.
In accordance with the foregoing, it is clear that the preferential rate of 6% enjoyed by any company that operates as a processing company under paragraph (f) of article 17 of the Free Trade Zone Law, applies to all its sales, not only with respect to sales within the regime or exports, because it is a company whose tax benefits are not conditioned on export results. We hope that any position contrary to this is quickly discarded, in order to maintain the good image of our country in terms of foreign investment.
By Carla Baltodano
Related Practice Areas:
