US and Mexico Revise Unilateral APA Applications Involving Maquiladoras

On October 14, the Internal Revenue Service (IRS) announced that US 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 a new agreement.

Background: Maquiladoras

Maquiladoras typically operate in Mexico as contract manufacturers of foreign multinationals importing material on a duty-free and tariff-free basis for assembly or manufacturing. 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. The new agreement updates and expands the 1999 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 IRS informed.

Pending Unilateral APA Requests

The 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. The IRS informed that it negotiates the 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 US and Mexican competent authorities have agreed in advance will produce arm’s length results.

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

Source: IRS

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