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Mutual agreement procedures in Mexico: where do we stand?

Mutual agreement procedures in Mexico: where do we stand?
diciembre 13

It is no secret that the way of doing business worldwide has drastically changed and continues to do so in an exponential manner. The internationalization of business activities has become so ordinary, that domestic and international tax rules are evolving continuously and adapting to new trends. Although there are thousands of treaties that have been signed around the world to prevent double taxation, reality shows that tax treaty disputes are on the rise. This article focuses on Mexico’s profile in relation with mutual agreement procedures (MAPs) aiming to solve tax treaty disputes.

Frequently, different jurisdictions find themselves competing to impose comparable taxes on the same taxpayer in respect of the same item of income. In order to avoid this, Article 25 of the OECD Model Tax Convention on Income and on Capital (OECD Model) establishes a mutual agreement procedure between contracting states for resolving difficulties arising out of the application of tax conventions.

This procedure is useful for solving three types of situations. First, MAPs may resolve cases in which a person considers that the actions of one or both of the contracting states in a specific tax convention result or will result for him in taxation not in accordance with the provisions of that convention. Besides, MAPs may be used to solve issues and difficulties related with the interpretation or application of the Convention. Finally, a mutual agreement procedure is useful to eliminate double taxation in cases not provided for in the convention. Interestingly, Article 25 of the OECD Model includes the possibility to resort to tax arbitration as an integral part of the procedure, in order to solve pending issues between the competent authorities after a given period of time has passed in a MAP.

Although MAPs are not new in the tax arena, their use and outcomes have not been as successful as expected. Action 14 of the BEPS Action Plan sought to make these dispute resolution mechanisms more effective. As a result, the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) includes a section targeted to tackle some of the existing obstacles in mutual agreement procedures.

Since June 7, 2017, Mexico and 70 other jurisdictions have signed the MLI. Even though Mexico opted out of the mandatory binding arbitration provision, the rest of the modifications regarding minimum standards and best practices related with improving dispute resolution mechanisms should be fully applicable once the MLI clears the national validation process.

A couple of weeks ago, the Organisation for Economic Cooperation and Development (OECD) released the latest mutual agreement procedure statistics for 2016. Mexico’s profile shows that during the fiscal year of 2016, the country had a starting inventory of 16 MAPs and an end inventory of 21 MAPs. Out of the pending 21 MAPs, 15 related to transfer pricing cases.

Another interesting fact is the outcome of the MAPs in Mexico. During 2016, only five cases were solved. Out of these five cases, one reached an agreement fully eliminating double taxation; another one reached an agreement partially eliminating double taxation; one determined that there was no agreement; and the remaining two had a non-specified outcome.

The latest statistics show that the use of MAPs in Mexico continues to be almost inexistent when compared to other jurisdictions. For instance, in 2016, Germany had an end inventory of 1180 MAPs, while the United States had an end inventory of 967 procedures for that same year. Although Mexico has committed to implement some of the changes proposed in the MLI for mutual agreement procedures, it remains to be seen if these changes will boost the use of this mechanism in the country.

Global trends point towards an increase in tax treaty disputes. Therefore, it is of utmost importance that any deficiencies in the procedure or any lack of national regulation gets addressed as soon as possible, so that MAPs can be more effective and serve their purpose. Taxpayers in Mexico continue using domestic tax litigation as the main option to solve tax disputes. Hopefully, the mutual agreement procedure will become a more appealing and effective alternative in the future.

Lic. Adriana Higuera Ornelas, LL.M.
Senior Associate at JCH Abogados

Lic. Juan de la Cruz Higuera Ornelas, LL.M.
Senior Associate at JCH Abogados

*Notice: The information contained in this article does not constitute a professional legal opinion or advice. Therefore, the author shall not be held liable for any use given to it at any time. The content is for general and informative purposes only and it may occur that the Mexican authorities do not share the author’s views and interpretations. For a specific case, we encourage any interested party to obtain a professional opinion or advice. Finally, this text should not be copied or published without the author’s previous written authorization.

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1 Comment

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