St. Mary's Law Journal


This Article principally considers various United States federal income tax issues in the formation, financing, and operation of maquiladoras. Mexico’s most successful means of attracting foreign investment is its Maquiladora Program. Mexico created the program to encourage U.S. and other non-Mexican enterprises to establish manufacturing facilities in Mexico. It spawned a domestic industry whose economic output is second only to that of Mexico’s national oil industry. In the 1980s, the maquiladora industry experienced explosive growth from 620 plants in 1980 to more than 2,000 currently. They employ approximately 500,000 workers earning an average wage of five dollars per day plus a free lunch. Maquiladoras are also important to the United States’ economy. U.S.-Mexico bilateral trade hit a record $59 billion in 1990, making Mexico the United States’ third largest trading partner.

The first section of this Article discusses “debt/equity swaps,” which are frequently used to provide the initial funding for maquiladoras. The following sections then consider the income tax effect of the operations of maquiladoras. This Article provides a discussion of tax issues associated with debt/equity swaps as well as many of the U.S. income tax issues associated with the operation of maquiladoras. This includes I.R.C. § 482 concerns involving transfer pricing, intercompany services, intercompany expenses, intercompany receivables, and the intercompany use of tangible and intangible assets. It also includes the impact of I.R.C. § 1059A on correlative adjustments under I.R.C. § 482, and the I.R.C. § 1504(d) contiguous country election. There are other U.S. tax issues, not addressed in this Article, which could surface in the formation and operation of maquiladoras.


St. Mary's University School of Law