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After years of negotiations and debate, Kansas City Southern and TFM S.A. de C.V. have finally settled a value-added tax (VAT) claim with the Mexican government. Today, KCS announced it reached a settlement agreement with the government resolving a dispute over the payment of a VAT refund to TFM and the purchase of the government’s remaining TFM shares.

Mexican holding company Grupo TMM S.A., KCS and its subsidiaries TFM and Grupo Transportacion Ferroviaria Mexicana S.A. de C.V. (GTFM) signed the settlement agreement, which provides KCS and its subsidiaries full ownership of GTFM and TFM shares. The pact also eliminates a potential obligation of KCS, GTFM and Grupo TMM to acquire the Mexican government's remaining 20 percent ownership of TFM, and satisfies the government’s legal obligation to issue the VAT refund to TFM.

KCS used part of VAT refund’s value to purchase TFM shares and cover taxes related to the settlement. Under the agreement, no cash payment will be made by any party, all existing and potential claims relating to the VAT refund and “put” obligation will be dropped, and existing litigation between the parties will be dismissed.

“This settlement … will be good for the Mexican government, the Mexican people and for KCS’ shareholders,” said KCS Chairman, president and Chief Executive Officer Mike Haverty in a prepared statement. “Now, we can move forward with our ongoing capital investments in TFM and focus on providing … rail service along the NAFTA rail corridor.”

As part of the VAT claim settlement, KCS will be required to make a contingent payment to Grupo TMM per a 2004 TFM acquisition agreement.