Updated U.S.-Mexico accord lets maquiladoras avoid double taxation

Luis Ramirez, Principal
ASL International Group

U.S. taxpayers with maquiladora operations in Mexico won’t be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with Mexico’s tax agency under terms that were negotiated by the U.S. and Mexico.

The companies would have to reach the agreements with the Large Taxpayer Division of Mexico’s tax agency, the Servicio de Administración Tributaria (SAT).

Maquiladoras are foreign-owned export manufacturing firms in Mexico that are allowed to import component parts duty-free and pay tariffs only on the value added in Mexico that is attributed to labor. APAs are essentially agreements with tax authorities on how to treat certain transactions for transfer pricing purposes. A unilateral APA resolves how a transaction will be treated by a single tax authority. (Bilateral APAs involve multiple tax authorities all agreeing to the tax treatment of a transaction.)

Back in 1999, the U.S. and Mexico reached an agreement on transfer pricing and other aspects of the tax treatment of maquiladoras of U.S. multinational enterprises. For the past two years, U.S. and other tax authorities have been discussing how to address the SAT’s current inventory of approximately 700 pending unilateral APA requests in the maquiladoras industry.

New agreement and election

The U.S. and Mexico reached an updated agreement that expands the earlier accord in order to reflect recent revisions to Mexican domestic tax rules governing transfer pricing rules, documentation requirements and other tax attributes of maquiladoras. The discussions focused on an election that the SAT would extend to qualifying taxpayers with pending unilateral APA requests. These taxpayers may elect to apply a transfer pricing framework that the IRS and SAT have agreed in advance will produce arm’s length results.

The SAT will release details about the election and directly notify qualifying Mexican taxpayers. The notification will include information on the steps the taxpayers must take with regard to their pending unilateral APA requests.

Qualifying taxpayers that decline the election may apply the safe harbors provided by the 1999 Agreement or file a request for a bilateral APA with the U.S. and Mexico.

Assurance on taxation issues

The IRS noted that this announcement will provide certainty for U.S. taxpayers regarding double taxation, foreign tax credits and permanent establishments in relation to transactions with their maquiladoras. For the full IRS announcement, see the following link. Contact us if you need more information about your situation.

https://www.irs.gov/uac/newsroom/irs-announces-position-on-unilateral-apa-applications-involving-maquiladoras

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