I believe the Sidecar files are the "canonical source", but I'm not sure. However, if you make any tagging changes to the files through MC, it will update both the file tags (in the files) and the sidecar files (the XML) in tandem, so they should really always match. Perhaps Matt or Yaobing can comment on which of these two data sources "win" if they conflict. MC's ability to read and write file tags directly in MP4s is quite new, and I'm not sure of the details on this (I'm not even positive that it can write tags in video-containing MP4s yet, or if it is currently just for audio-only MP4s).
The sidecar files are extremely useful because MC stores a LOT of file metadata that can't be easily stored within the file tags themselves (not while conforming to existing specs), and this allows all of this metadata to be portable. If you move those videos to another machine and import them fresh into MC, so long as you also copy over the sidecar files, MC will automatically import ALL of the metadata you had in MC on the original system. Likewise, if you delete the files out of MC (but not off the disk) or move them outside of MC (in Windows Explorer, for example), normally MC would "lose" the files and lose all of the metadata associated with them when they're re-imported. However, so long as you keep those sidecar files with them, when MC re-imports the files it will automatically re-import all of the metadata included in the sidecar file, and they'll just "magically" re-import with all of their tags intact.
The sidecar files are VERY handy.