After two years of negotiations, the SAT and the IRS have announced a new transfer pricing methodology intended to expedite open Advanced Pricing Agreement (“APA”) applications for maquiladora operations.
In an attempt to apply fair tax methodologies and avoid double taxation for US companies with subsidiaries located in Mexico operating under the maquiladora structure, the SAT and IRS have announced a new transfer pricing methodology for pending APA agreements. The new methodology is expected to expedite the resolution of more than 700 pending APA requests.
The SAT will provide qualifying taxpayers with pending unilateral APA requests the option to apply a specific transfer pricing framework. Under the joint agreement, both the IRS and SAT will accept the results of the new methodology. This will provide transfer price certainty to taxpayers on the computation of income tax and reduce the risk of double taxation.
The SAT is in the process of establishing the general rules and procedures related to this new methodology. We expect that the SAT will contact all qualifying Mexican taxpayers which have pending APA applications that may qualify for the election with more details. Further guidance is expected in the next 4–6 weeks.
Companies that are contemplating an APA application or have a pending APA application should contact the Plante Moran international consulting team for additional details. Please don’t hesitate to contact us if you have any questions or concerns.
A recent Mexican court ruling may have significant impact on certain operating structures
A Mexican court has recently issued a ruling intended to clarify the rules surrounding certain personal services structures commonly used in Mexico (e.g. outsourcing, insourcing, and subcontracting services). Companies that utilize a dual Mexican entity structure or a third party outsourcing company may be unable to obtain a credit or refund of the value-added tax (“VAT”) paid to the service provider if they do not meet the definition of specialized subcontract services as outlined in the Mexican Federal Labor Law (“FLL”). The new ruling specifies that payments made to non-specialized outsourced service providers will be deemed as salaries to employees and not subject to VAT payments. As such, the underlying VAT paid could be deemed as unrecoverable.
Other Mexican oversight agencies, such as the Mexican labor authorities or Mexican income tax authorities, may also adopt this mindset regarding non-specialized personal services. The Mexican Labor Authorities may deem that the employees of the third party services company are eligible for profit sharing of both the services company and the company contracting for such services. Furthermore, the Mexican income tax authorities may even take the stance that payments made by the contracting company to the services company are non-deductible for income tax purposes.
The Mexican Federal Labor Law indicates that specialized personal services companies are required to meet certain criteria to be deemed specialized personal services in the eyes of the labor law. Personal services companies that do not meet the following criteria may be deemed to have a labor relationship with the contracting company, and both the contracting and personal services companies may have additional tax implications. The criteria for specialized personal services are as follows:
- The service provider’s employees may not perform all of the activities of the contracting party
- The service provider must be able to prove that the services performed are specialized in nature
- The service provider cannot perform the same services that are completed by the contracting party’s team members
It is important to note that this ruling occurred in the State of Jalisco. As such, Jalisco is the only State where this ruling should be considered precedent at this time. It is unknown at this time whether other Mexican states will set similar presidents, or whether the Mexican authorities will attempt to apply this ruling in other States.
Companies that operate a dual Mexican entity structure or operate via an outsourcing agreement (such as a shelter operation) are encouraged to contact the Plante Moran Global Services team to determine the impact this may have on their operations.