Accounting In late 2000, the government of Mexico introduced new regulations that were intended to raise tax revenues but, simultaneously, would hurt maquiladoras’ competitiveness. Specifically, the Mexican government requires that maquiladoras report as a minimum pre-tax income the largest of two computations: (a) 6.5 percent of total operating expenses, or (b) 6.9 percent of operating assets. During acquisition due diligence, the controller of EF indicated that EFSA was in compliance with the first option of the Safe Harbor provision. Specifically, EFSA’s transfer price to EF was at least 6.5 percent of manufacturing conversion costs, an amount that was internally referred to as “total cost to the border”. Exhibit 1 compares the net income of PFC for broccoli production based on domestic operation (produced by PFC) and the net income of PFC based on combined operations (broccoli production by both PFC and EFSA).
