By Baker & McKenzie

As a result of the amendments to the Mexican Income Tax Law ("MITL") in 2003, which affected transfer pricing regulations, companies that had legal or economic relationships with nonresident related parties and that secured their maquiladora program from the Mexican Ministry of Economy under the provisions of the Decree for the Promotion and Operation of the Export Maquiladora Industry ("Maquiladoras"), were no longer required to secure advance pricing agreements ("APA´s") issued by the Mexican Ministry of Finance and Public Credit ("SHCP").

For such purposes, the MITL amendments established a series of new transfer pricing methodologies available to the Maquiladoras for purposes of determining the applicable mark-up that should be applied to the transactions with nonresident related parties without the need to file and secure an APA from the SHCP for one or more fiscal years.

In most cases, by applying the new Maquiladoras´ transfer pricing regulations to the specific Maquiladora operations, the mark-up reflected by such computations is lower than the one that would have been approved by the SHCP through an APA. Thus, significant income tax savings can be achieved by adopting any of these new transfer pricing methodologies.

However, at the time these new amendments came into effect, many Maquiladoras had already filed for APA´s covering the 2003 as well as prior and subsequent fiscal years. As of today, the SHCP is still issuing APA´s covering such fiscal years in which the mark-ups are higher than those that could have been obtained if any of the new transfer pricing methodologies available for Maquiladoras were applied to the particular operations of a given Maquiladora.

Under domestic tax law, when taxpayers are given the option to choose between two or more tax alternatives in a particular fiscal year, and once the taxpayer has made a choice, this choice cannot be changed in the same year. Thus, in principle, it would seem that those taxpayers that filed for APA´s covering the 2003 and prior and subsequent fiscal years, cannot use the new transfer pricing methodologies to reduce the mark-up issued by the SHCP via the APA.

Notwithstanding the foregoing, we have noticed that, under certain circumstances, the rights granted in APA´s may be waived, so that even though an APA has already been issued, the Maquiladora may either keep and maintain the mark-up approved by the SHCP in the APA or calculate a new mark-up applying any of the approved Maquiladoras transfer pricing methodologies. Obviously, this possibility depends on certain key factors that have to be analyzed on a case-by-case basis.