The US Internal Revenue Service has announced that US taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a standard unilateral advance pricing agreement (APA) with the Mexican tax authority, Servicio de Administración Tributaria (SAT).
The IRS said that it had discussed the matter with SAT and had come to an agreement on terms for US companies.
Maquiladoras are Mexican companies that process, transform, assemble, or repair imported materials, parts, and components into finished goods that are subsequently exported out of the country. In 1999, the US and Mexican competent authorities reached an agreement on transfer pricing and other aspects of the tax treatment of maquiladoras of US multinational enterprises.
This new agreement updates and expands upon the 1999 agreement to reflect recent revisions to Mexican domestic tax rules governing transfer pricing rules, documentation requirements, and other tax attributes of maquiladoras, the IRS said on October 14.
The centerpiece of the discussions between the competent authorities is an election SAT would extend to qualifying taxpayers with pending unilateral APA requests. These taxpayers may elect to apply a transfer pricing framework that the US and Mexican competent authorities have agreed in advance will produce arm's length results. 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 US and Mexican competent authorities, the IRS said.
The IRS stressed that the transfer pricing results set forth in unilateral APAs executed between SAT and Mexican affiliates of US taxpayers pursuant to the program will be regarded as "arm's length" under section 482 of the Internal Revenue Code. It added that the SAT will release details shortly about the election and will directly notify qualifying Mexican taxpayers about the steps they must take with regard to their pending unilateral APA requests.
The IRS said: "This announcement represents the culmination of two years of collaboration between the competent authorities to address SAT's current inventory of approximately 700 pending unilateral APA requests in the maquiladoras industry. It is an important step forward in strengthening ties between the two governments and will provide certainty in the taxation of multinationals."