Last fall the IRS reached an agreement with the Mexican tax authority, SAT. After collaborating for two years, the IRS and the SAT announced they’d worked out the details for how to bring the maquila industry up to date and aligned with changes in Mexico’s domestic tax rules governing transfer pricing.
The first round of transfer pricing changes, reflecting changes in the country's transfer pricing rules, have been concluded by the SAT via “unilateral APAs.” Some of the changes are retroactive.
Luckily, the work done by the IRS and SAT allows taxpayers to avoid a lengthy negotiation between the two tax authorities.
Traditionally, these types of adjustments to income earned by the subsidiary of a multinational could trigger rounds of negotiations between the IRS and SAT to ensure any adjustments made on the books in one country would be offset by a corresponding adjustment on the books in the other. Without the corresponding adjustment, a transfer pricing change in one country could result in double taxation.
Luckily, the work done by the IRS and SAT allows taxpayers to avoid a lengthy negotiation between the two tax authorities. As long as the adjustment imposed by the SAT is in accord with the agreed framework, a corresponding adjustment will be allowed by the IRS, without the need for taxpayers to obtain permission in advance.
And the corresponding adjustment, even for prior years, may be aggregated and reflected in the most recent year in which a U.S. return hasn’t yet been filed (2016 for taxpayers still on extension). Easy-peasy.
This solution hasn't been broadly publicized in the United States, but calls with the Advance Pricing and Mutual Agreement team at the IRS have confirmed the approach. If your maquila operations have recently been subject to a transfer pricing adjustment by Mexican tax authorities, please give us a call to make sure you obtain a corresponding adjustment in the United States and avoid being taxed twice.