On November 16, 2020 the U.S.’ Internal Revenue Service (“IRS”) and Mexico’s tax administration service, the Servicio de Administracion Tributaria (“SAT”), agreed to renew the competent authority agreement arrangement known as the Qualified Maquiladora Approach Agreement (“QMA”) which was originally established in 1999 and previously updated in 2016.[1]

Background

For a bit of background on this structure popular with U.S. manufacturers, a maquiladora is a Mexican assembly plant that imports materials and equipment on a duty-free and tariff-free basis. Maquiladoras receive raw materials from companies based in the U.S. to assemble and export back, typically as semi-finished or finished goods. When a finished product assembled by a maquiladora is imported by a U.S. company, the company pays duties on the value-added portion only and not on the raw material value previously exported. QMAs are a result of an agreement that was made in the 1960s when the U.S. and Mexico agreed on guidance of how income attributable to manufacturing activities of a maquiladora should be taxed.

The QMA and Your Supply Chain

The renewal of the QMA is important because it prevents qualifying maquiladoras from being double taxed, giving added certainty to this form of supply chain. To receive benefit of the QMA, the Mexican taxpayer will need to enter into a unilateral advance pricing agreement (“APA”) with the Large Taxpayer division of SAT under terms negotiated in advance between the competent authorities.[2] Having the APA is a preferred means of securing approval from the SAT of the transfer pricing arrangement underpinning the maquiladora’s profit. The QMA adds further benefit to the IRS’ acceptance of the transfer pricing arrangement. With more than 700 U.S. companies having a maquiladora structure in place, many U.S. manufacturers potentially stand to benefit from this latest development. A maquiladora presents many potential advantages, including the more cost effective labor in Mexico, an established transportation infrastructure around the maquiladora hub locations along the U.S.-Mexico border, and the ability to retain key oversight functions in a time zone closer to the U.S. headquarters.

A&M Tax Says

U.S. companies looking to establish manufacturing operations in an alternative location may want to consider establishing a maquiladora to benefit from this established platform and proximity to North American markets. In the short run, companies may incur a larger up-front cost in obtaining the APA, although the unilateral APA is beneficial in Mexico in any event, the cost savings, in the long run, may prove to be more beneficial. In the years to come, we expect to see an increasing number of companies setting up maquiladoras in Mexico to take advantage of the QMA agreement and other operational benefits. It is unclear whether future periods will continue to be supported by QMAs or how this program may be affected by tax provisions to emerge under the new administration. In any event, A&M’s transfer pricing, corporate transformation, and supply and value chain tax teams can help U.S. companies evaluate this approach and implement the appropriate changes to maximize the operational benefits of this program.