International Tax Monthly

Updated U.S.-Mexico Accord Lets Maquiladoras Avoid Double Taxation

U.S. taxpayers with maquiladora operations in Mexico won’t be exposed to double taxation if they enter into a unilateral advance pricing agreement (APA) with Mexico’s tax agency under terms that were negotiated by the U.S. and Mexico.

The companies would have to reach the agreements with the Large Taxpayer Division of Mexico’s tax agency, the Servicio de Administración Tributaria (SAT).

Maquiladoras are foreign-owned export manufacturing firms in Mexico that are allowed to import component parts duty-free and pay tariffs only on the value added in Mexico that is attributed to labor. APAs are essentially agreements with tax authorities on how to treat certain transactions for transfer pricing purposes. A unilateral APA resolves how a transaction will be treated by a single tax authority. (Bilateral APAs involve multiple tax authorities all agreeing to the tax treatment of a transaction.)

Back in 1999, the U.S. and Mexico reached an agreement on transfer pricing and other aspects of the tax treatment of maquiladoras of U.S. multinational enterprises. For the past two years, U.S. and other tax authorities have been discussing how to address the SAT’s current inventory of approximately 700 pending unilateral APA requests in the maquiladoras industry.

New Agreement and Election

The U.S. and Mexico reached an updated agreement that expands the earlier accord in order to reflect recent revisions to Mexican domestic tax rules governing transfer pricing rules, documentation requirements and other tax attributes of maquiladoras. The discussions focused on an election that the SAT would extend to qualifying taxpayers with pending unilateral APA requests. These taxpayers may elect to apply a transfer pricing framework that the IRS and SAT have agreed in advance will produce arm’s length results.

The SAT will release details about the election and directly notify qualifying Mexican taxpayers. The notification will include details on the steps the taxpayers must take with regard to their pending unilateral APA requests.

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 Mexico.

Assurance on Taxation Issues

The IRS noted that 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. Contact us if you need more information about your situation.

UK Tax Agency Tackles Online VAT Evasion

Her Majesty’s Revenue and Customs (HMRC) warned in a tax guidance that overseas online retailers must pay VAT on items sold in the UK.

The tax agency said VAT liability applies to overseas sellers supplying goods already in the UK at the point of sale to consumers through an online marketplace. It also applies to:

    • UK VAT representatives for overseas sellers, and
  • Online marketplaces allowing sales by overseas sellers.

This ruling reportedly applies to such mega-online retailers as Amazon and eBay. They would be responsible for VAT fraud committed by sellers using their websites. According to the Guardian, a UK newspaper, Amazon already “has been conducting a review of seller VAT compliance in the UK.”

Overseas Retailer Defined

An overseas online retailer will, according to HMRC, be established in the country where the functions of its business’s central administration take place. In working this out, the retailer must take account of where:

    • Essential management decisions are made,
    • Its registered office is located, and
  • Management meetings take place.

HMRC says that if an entity isn’t sure it’s an overseas seller after considering these factors, the deciding factor is where essential management decisions take place.

An online marketplace is a website, or any other means by which information is made available over the Internet, through which those other than the operator are able to offer goods for sale, whether or not the operator also does so. It doesn’t matter if the online marketplace isn’t established in the UK or selling its own goods over the Internet.

Overseas sellers making their supplies as a business activity in the UK must register for VAT in the UK. Once registered, they must charge VAT on UK sales and account for and pay that tax to HMRC.

Joint and Several Liability

HMRC warns that operators failing to meet the requirements can be held “jointly and severally liable” for the tax from the date of any liability notice. UK VAT representatives of an overseas seller failing to meet the tax requirements can also be held jointly and severally liable from the date they became a representative.

Ireland Outlines Appeal of Apple Tax Ruling

Ireland’s Department of Finance outlined its key arguments to appeal the European Commission’s (EC’s) ruling that it had breached European Union (EU) state aid rules in its tax deal with Apple.

Arguments for the Appeal

In a statement, Irish Finance Minister Michael Noonan outlined several arguments for the appeal.

First, he said, Ireland didn’t provide favorable treatment to Apple. The Chairman of Ireland’s Revenue Commissioners has stated that:

    • There was no departure from the applicable Irish tax law,
    • There was no preference shown in applying the law, and
  • The full tax due was paid in accordance with the law.

Second, the Apple decision questions Ireland’s reputation and affects how it could be treated by other jurisdictions.

Third, the EC is undermining the fundamental principle of international tax, which is that tax should be paid where the value is created — in this case, the United States.

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, reportedly has said that most of the tax from U.S. technology multinationals such as Apple should be due in the United States, not Ireland, under the new Organisation for Economic Co-operation and Development (OECD) rules governing base erosion and profit shifting (BEPS).

Nonresident Companies

The companies investigated in the Apple case weren’t tax resident in Ireland. Under Irish tax law, nonresident companies are chargeable to Irish corporation tax only on the profits attributable to their Irish branches. This means that profits that aren’t generated by the Irish branches can’t be charged with Irish tax under the tax law. Examples include profits from technology, design and marketing that are generated outside Ireland.

After a lengthy investigation, the EC concluded that Ireland had granted undue tax benefits of up to €13 billion ($14.26 billion) to Apple, and that this was illegal under EU state aid rules because it allowed Apple to pay substantially less tax than other businesses. Based on that decision, Ireland is required to recover that money. The EC has stated that this amount may be reduced if other countries require Apple to pay more taxes or if the U.S. requires Apple to pay larger amounts of money to the U.S. parent company.

An Issue of Sovereignty

Finally, Noonan raised the argument of sovereignty and a member state’s right to tax. “This decision encroaches on member state sovereignty in the area of tax, by extending competition rules into the tax area to an unprecedented and unjustified extent. By doing this, the Commission creates uncertainty for business and investment in the European economy, both in its novel interpretation of longstanding rules and their unfair retroactive application.”