Transfer Pricing – IRS announces changes in APA for Mexican Maquiladoras

IR 2016-133

IRS today announced that U.S. taxpayers with maquiladora operations in Mexico will not be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with Mexico’s Servicio de Administración Tributaria (SAT) under terms discussed in advance between the U.S. and Mexican competent authorities.

Maquiladoras typically operate in Mexico as contract manufacturers of foreign multinationals.

To recap in 1999, the U.S. and Mexican competent authorities reached an agreement on transfer pricing and other aspects of the tax treatment of maquiladoras of U.S. multinational enterprises. The new agreement updates and expands upon 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.

Because the transfer pricing framework adopted under SAT’s program was discussed and agreed upon with the U.S. competent authority in advance, the transfer pricing results set forth in unilateral APAs executed between SAT and Mexican affiliates of U.S. taxpayers pursuant to this program will be regarded as “arm’s length” under section 482 of the Internal Revenue Code.

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

Please contact CPA Global Tax for further information and assistance.

 

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“Investment in US property” inclusion is not qualified dividend – Tax Court affirms

In Osvaldo Rodriguez et ux V. Commissioner, the fifth circuit recently upheld the decision in a transaction involving inclusion of IRC 956 income with respect to the taxpayers’ Controlled Foreign Corporation (CFC) in Mexico.

Osvaldo and Ana Rodriguez, husband and wife, were citizens of Mexico and permanent residents of the U.S. They were the sole shareholders of Editora Paso del Norte, S.A. de C.V. (Editora). Editora had been incorporated in 1976 under Mexican  law, and in 2001 it had established operations in the U.S. as a branch under the name Editora Paso del Norte, S.A. de C.V., Inc.—a controlled foreign corporation (CFC).  On their amended 2003 and original 2004 U.S. federal income tax returns, the taxpayers included in gross income $1,585,527 and $1,478,202, respectively, for amounts of Editora’s earnings invested in U.S. property and taxable directly under IRC 951(a)(1)(B) and IRC 956. 

Taxpayers treated the IRC 951 inclusions as qualified dividend income subject to preferential qualified dividend rates. IRS determined that the Code Sec.  951 inclusions were taxable at ordinary income rates.

The fifth circuit upheld the decision and ruled that the amounts included in the Rodriguez’s gross income under IRC 951(a)(1)(B) and IRC 956 with respect to their CFC’s investments in U.S. property were not qualified dividend  income under IRC 1(h)(11). 

Is new excise tax imposed by Puerto Rico (PR) a creditable foreign tax?

In October 2009, Puerto Rico enacted a new PR excise tax on certain personal property produced in PR and services performed in PR. The tax is effective for transactions occurring after December 31, 2010.

IRC Code Section 901 allows a credit against US federal income tax for any income tax paid or accrued during the tax year to a foreign country or US possession. Foreign tax is creditable only if it has a character of income tax in US sense. PR excise tax is clearly not the income tax. However, under Code Section 903, a tax paid in lieu of income tax qualifies for a credit in US if the foreign tax is imposed in substitution and not in addition to a generally imposed income tax.

PR excise tax has some novel features and IRS needs time to evaluate. Until IRS resolves the issue of creditability of PR taxes, IRS announced in Notice 2011-29 that it will not challenge a position that the PR tax is a creditable foreign tax under Code Section 903. 

It is pertinent to note here that IRS is still evaluating creditability of Mexican “Flat Tax” which was imposed in January 2008, however, such tax remains creditable at this time under the similar grounds.