The Internal Revenue Service (IRS) announced in mid-October that they had reached an agreement with Mexico’s competent authority, Servicio de Administración Tributaria (SAT), on establishing a transfer pricing framework for maquiladoras. The two countries have worked together to address SAT’s approximately 700 pending unilateral APA requests in the maquiladoras industry.
Maquiladoras typically operate in Mexico as contract manufacturers for foreign multinationals.
Under the new agreement, the US and Mexican competent authorities have agreed on a TP framework that qualifying taxpayers may elect to apply to produce arm's length results. This will provide tax certainty for US taxpayers regarding double taxation, foreign tax credits and permanent establishments in connection with transactions with maquiladoras.
"This new deal is very significant," said Fabian Alfonso, a partner at BaseFirma. "It opens a path to avoid double taxation under the current maquila regime. This agreement also shows that the IRS and the SAT have a close relationship and that they are looking forward to ease business relationships between the two countries."
The agreement expands and updates an earlier agreement formed between the two countries in 1999. The IRS said in a press release that it was an “important step forward in strengthening ties between the two governments and providing certainty in the taxation of multinationals”.
Alfonso said that under the current regime, maquiladoras are set to pay income tax on safe harbours based on reasonably high margins.
"An APA with Mexico was the only option to bring those margins back to a lower standard, or at least to follow the corporation's transfer pricing strategy," said Alfonso. "However, negotiated arrangements with Mexico are not implicitly accepted by foreign tax authorities. That would only happen under a multilateral APA, which would involve extenuating negotiations with both tax authorities and between them."
Alfonso said that this solution avoids the multilateral APA agreement negotiation and accepts whatever is negotiated with the SAT. "This is great news for those 700-plus corporations that already requested an APA, and for those that in the future would like to go that path," he said.
SAT will shortly release details on the steps the taxpayers must take in relation to their pending unilateral APAs.
