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U.S. taxpayers doing Mexican manufacturing (maquiladoras) can avoid double taxation

IR 2016-133

IRS has announced that U.S. taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with the Large Taxpayer Division of Mexico’s Servicio de Administración Tributaria (SAT) under terms that have been negotiated by the U.S. and Mexican competent authorities.

RIA observation: 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 (i.e., value attributable to labor).

Background. APAs are essentially agreements with tax authorities on how to treat certain transactions for transfer pricing purposes. A bilateral APA involves multiple tax authorities all agreeing to the tax treatment of a transaction, whereas a unilateral APA only resolves how the transaction will be treated by a single tax authority and leaves unresolved how it will be treated in other relevant jurisdictions.

Back in ’99, the U.S. and Mexican competent authorities 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 competent authorities have been discussing how to address SAT’s current inventory of approximately 700 pending unilateral APA requests in the maquiladoras industry.

New agreement & election. The U.S. and Mexican competent authorities have reached a new agreement that updates and expands upon the ’99 agreement 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 between the competent authorities focused on an election that SAT would extend to qualifying taxpayers with pending unilateral APA requests. These taxpayers may elect to apply a transfer pricing framework that the U.S. and Mexican competent authorities have agreed in advance will produce arm’s length results. SAT will release details shortly about the election and will directly notify qualifying Mexican taxpayers. The notification will include details 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 ’99 Agreement or file a request for a bilateral APA with the U.S. and Mexican competent authorities. (See Rev Proc 2015-41, 2015-35 IRB 263, covered at Weekly Alert ¶  20  08/20/2015, for further information on filing a bilateral APA request with the Advance Pricing and Mutual Agreement (APMA) program.)

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.

Further guidance on the tax consequences of these unilateral APAs will be included in a forthcoming IRS practice unit.

References: For APAs, see FTC 2d/FIN ¶  G-4743; United States Tax Reporter ¶  4824.07.