IRS, Mexico Reach Tax Deal For Contract Manufacturers

U.S. companies operating contract manufacturers in Mexico can avoid double taxation between the United States and Mexico under a deal struck between their respective tax authorities and unveiled Friday by the IRS.

So-called maquiladoras can avoid double taxation through a unilateral advance pricing agreement signed with the Servicio de Administración Tributaria’s large taxpayer division, according to the IRS announcement Friday.

“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,” the U.S. tax agency said in the announcement. “It is an important step forward in strengthening ties between the two governments and providing certainty in the taxation of multinationals.”

The IRS’ announcement traced the origins of the deal back to a 1999 agreement between Mexican and U.S. officials covering transfer pricing and other tax treatment aspects affecting the maquiladoras — which usually operate as contract manufacturers run by foreign companies that import components into Mexico duty free for assembly and export. The new arrangement, the IRS said, “updates and expands” on that deal “to reflect recent revisions to Mexican domestic tax rules governing transfer pricing rules, documentation requirements and other tax attributes of maquiladoras.”

According to the announcement, the “centerpiece” of the new agreement is the pricing framework the Mexican tax authority, or SAT, would allow taxpayers with pending unilateral APA applications to opt in to.

“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 Mexican competent authorities,” the IRS said.

The SAT will release details about how to elect for the pricing framework “shortly,” the IRS said, while noting that because the arrangement was made in advance, transfer pricing results for U.S. taxpayer affiliates in Mexico will be considered “arm’s length” based on the Internal Revenue Code’s Section 482, which covers income and deduction allocation.

“In conjunction with the 1999 agreement, 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,” the tax agency said. “Further guidance on the U.S. taxable years and tax consequences of these unilateral APAs will be included in a forthcoming IRS practice unit.”