In Mexico, a company with a local presence that is currently undergoing, or may in the future undergo, a tax review for FY 2020 of its transfer pricing policies (or other international tax matters) that may give rise to a case that could be resolved by the Mexican and US competent authorities under Article 26 of the Mexico-USA Income Tax Treaty[i] (the “Treaty”) should  notify the IRS pursuant section 12 of U.S. Revenue Procedure. 2015-40 (“Treaty Notification”) no later than September 30th, 2025. The potentially affected US affiliate should do the same.

For example, a taxpayer facing a potential transfer pricing audit by the Tax Administration Service of Mexico (“SAT”) that would result in the allocation of additional accruable income needs to take immediate action to file the Treaty Notification in order to preserve its opportunity to initiate a Mutual Agreement Procedure (MAP). Taxpayers may file a Treaty Notification even before an audit has been initiated but where they believe a future government action would breach the Treaty. Similarly, a notification should be made to the SAT in accordance with Mexican law.

Filing the Treaty Notification has several benefits: It places some additional indirect pressure on the SAT to initiate an adjustment before the five-year limitation period under Mexican law expires. It also creates the opportunity to reduce the Mexican tax liability via the MAP once the SAT makes an adjustment. Finally, under US federal income tax regulations, a US taxpayer claiming a credit for a foreign income tax must exhaust all “effective and practical remedies” to reduce the foreign tax. The IRS has indicated that this includes initiating a MAP under the applicable US income tax treaty. 

A U.S. taxpayer filing a Treaty Notification may also wish to consider filing a protective claim in accordance with section 11 of the Revenue Procedure and applicable US law (section 6402). For example, a protective claim may be made when a taxpayer believes that an action of a foreign tax authority is likely to result in a competent authority issue. This claim can be included with the Treaty Notification.

The time limitation to submit the Treaty Notification expires within four years and six months from the due date of the relevant annual tax return for the year at issue or the date of the actual filing. For Mexican taxpayers with actual or potential tax assessments for FY 2020, the due date to file the Treaty notification or the protective claim will be no later than September 30th, 2025. This means that the letter needs to be filed with SAT by or before this date.

In Mexico, according to the Miscellaneous Tax Regulations, when a taxpayer considers that there may be measures of one or both of the Contracting states that may result in an allocation of income or expense that is not in accordance with the provisions of the Treaty, it may request the suspension of the 4.5 years period for notifying the beginning of the MAP. The aforementioned notification aims to suspend the term to formally begin the MAP.

A&M can support clients in conducting US and Mexico fact finding and a review of available materials relating to the rectification proposed by the SAT. Our strong and reliable network of Transfer Pricing and International Tax Treaty experts in Mexico and U.S. can work on both sides of the issue with the competent authorities and guide companies to the resolution of the MAP process.

Not filing this letter within the time parameter of the Treaty may result in the taxpayer losing its right to pursue MAP support for FY 2020.

[i] United States – Mexico Income Tax Convention; Article 26