The Importance of Pursuing or Reviewing APAs in Mexico Before 2021 Ends

Thoughtware Alert Published: Dec 03, 2021

In 2006, Mexico created the IMMEX (Manufacturing, Maquila, and Export Services Industries) program, which incentivizes national exports by allowing the temporary importation into Mexico from overseas of raw goods, materials, and fixed assets for use in an industrial or service process involving the production, transformation, or repair of finished goods, which must then be exported. Companies operating under the IMMEX program are commonly known as maquiladoras.

Historically, the maquiladora program has promoted business in Mexico from foreign investors by providing three major incentives: 

  • A tax exemption on the 16 percent value-added tax on the importation of raw goods, materials, and fixed assets used for the production of export goods
  • Certainty on the avoidance of a permanent establishment by the foreign investor with maquiladora operations in Mexico (as long as the maquiladora complies with the requirements outlined in the Mexican Income Tax Law (MITL))
  • The determination of minimum taxable profits for the maquiladora based on two mechanisms: i) Safe Harbor or ii) through a particular transfer pricing resolution or Advance Price Agreement (APA)

Under the Safe Harbor regime, the profits earned by the maquiladora should be at least the minimum of i) 6.5 percent of its total costs and expenses or ii) 6.9 percent of its total assets. The Safe Harbor is a streamlined process that is easy to implement and takes less time than an APA.

An APA is a resolution by the Mexican tax authority (SAT) of a formal query made by a Mexican taxpayer regarding the methodology used to set its transfer prices and the application of the arm’s-length principle. In essence, the APA program was designed to serve taxpayers seeking tax certainty for at least five years on the appropriate intercompany compensation for their unique maquiladora operations and for which the returns under the Safe Harbor regime would not produce arm’s-length results. An APA applies to the fiscal year when the APA is requested, the immediate preceding year, and up to three fiscal years following the year of the corresponding request.

Recently, the Mexican Congress approved some important modifications to the MITL for fiscal year 2022 that have completely eliminated the option to determine taxable profit for maquiladoras through an APA. The new changes will greatly affect maquiladoras by allowing the avoidance of a permanent establishment only to those taxpayers who comply with their transfer pricing obligations through the application of the Safe Harbor. The SAT expects that these changes would increase the taxable base on maquiladora operations.

The elimination of the APA program for maquiladoras starting in fiscal year 2022 produces a unique challenge for taxpayers who have not yet received an APA resolution or who currently seek an APA resolution for prior years. What should these taxpayers do? Can they continue to determine their taxable profit under their current methodology? Should they withdraw their current applications and resubmit an APA request before year-end?

In 2020, the SAT and the IRS renewed the Qualified Maquiladora Approach Agreement (QMA), first introduced in 2016, under which U.S. taxpayers with maquiladora operations can avoid double taxation when they follow the transfer pricing methodologies determined in their prior APAs. The QMA currently covers fiscal years until 2019, leaving a gap for fiscal years 2020 and 2021. Both tax authorities have acknowledged the potential need to renew the QMA again to cover tax year 2020 and onward, but this would depend on relevant economic, commercial, and public health developments.

Currently, many maquiladoras are still waiting for a resolution on their APAs for fiscal years up to 2019. In practice, while waiting, most of these taxpayers have continued to determine their taxable profits based on methodologies ratified in their previous APAs or, in other cases, have opted to apply the methodologies outlined in the QMA. However, these taxpayers should expect to make adjustments once their APA is resolved for those years. The SAT also has recently noted that maquiladoras with a pending APA resolution should adhere to the QMA approach if they have not done so.

Taxpayers who have applied for an APA for tax years 2020 and 2021 have essentially two alternatives. They can continue with their current process, or they must inform the SAT in this fiscal year (2021) if they wish to request an exemption for the years that were originally considered for the APA after the fiscal year 2020, and subsequently submit a new APA application that may cover the tax years 2020 to 2024. This second option may provide tax savings and tax certainty for taxpayers, who can manage to submit an APA application before year-end. Inevitably, these taxpayers would have to apply the Safe Harbor rates starting in 2025, but acting now can provide some significant benefits.

We invite U.S.-based taxpayers with maquiladoras to review the current status of their pending APAs. In some cases, stepping away from their current APA and submitting a new request before the close of the fiscal year 2021 could provide significant tax savings and tax certainty for fiscal years 2020 to 2024. Taxpayers should compare those benefits against the potential costs of the application, which include an application fee of MXN 256,967 or $12,850.

For more information, contact your BKD Trusted Advisor™ or submit the Contact Us form below.
 

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