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- Mexico’s transfer pricing (TP) legislation is stated in the Income Tax Law (ITL), Article 76 Sections IX, X, XII, Article 76-A, Article 179 and Article 180 and is based on the arm’s length principle, i.e., it follows the OECD Guidelines.
- The TP rules apply to Mexican taxpayers, including Mexican branches of foreign companies and there is a self-assessment regime, i.e. the burden of proof is on the taxpayer to confirm its TP meets the standard.
- The filing of TP Tax Returns before the Tax Administration Service (SAT – Servicio de Administración Tributaria in Spanish) is mandatory for companies with intercompany transactions. If SAT requests transfer pricing documentation, the taxpayer will normally have a deadline of 10 business days to respond.
- The OECD concept of Master File and Local File is an obligation for taxpayers that exceed $ $974,653,950 pesos of cumulative income during the immediately preceding fiscal year, among other assumptions. It is important to mention that in Mexico, the TP report differs from the OECD local file, so there are taxpayers that must prepare the TP report and not the local file and taxpayers that must prepare both documents. In addition, for larger groups (more than $12,000,000,000 pesos of consolidated income) Mexico has applied Country by Country Reporting (CbCR).
- The Mexican ITL provides, as a means of interpretation, the Transfer Pricing Guidelines for Multinational Companies and Tax Administrations (TPG), approved by the Organization for Economic Cooperation and Development (OECD) in 1995, or those that replace them, specifying that they will be applicable as long as they are consistent with the provisions of the Mexican ITL and the treaties entered into by Mexico. This regulation is not exclusive for legal entities, since in a harmonic interpretation of the ITL, the TPG are applicable to fiscal persons.
- Taxpayers must first apply the Comparable Uncontrolled Price Method (CUPM) and may only use the Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Residual Profit Split Method (RPSM) and the Transactional Operating Profit Margin Method (TOPMM), when the CUPM is not the appropriate one to determine the arm’s length principle of the transactions performed in accordance with the TPG.
- Considering that the TPG establish that the order of application of the methods includes first the traditional methods (CUPM, RPM and CPM) and then the transactional methods (PSM and TOPMM), in Mexico this is the hierarchy of methods: (i) CUPM, (ii) RPM and CPM and (iii) PSM, RPSM and TOPMM.
- Mexico has a self-assessment regime, where the burden of proof is on the taxpayer to ensure that TP regulations are adhered to.
- In Mexico there are four types of TP documentation: (i) transfer pricing report, (ii) local file, (iii) master file and (iv) CbCR.
- The ITL establishes the content of a transfer pricing report, which taxpayers will be obliged to prepare as long as they exceed 13,000,000 pesos as income in the immediately preceding fiscal year, and for taxpayers who provide professional services, the threshold is 3,000,000 pesos.
- Mexican taxpayers must file the TP informative return known as “DIM’s Annex 9” no later than May, 15th of the immediate subsequent fiscal year. A transfer pricing report is required to properly complete this return.
- As far as the CbCR is concerned, Mexico is attached to what is expressed by the OECD, so the content that this report should include is the same as what the OECD indicates it should contain. The threshold for the CbCR is $12,000,000,000 pesos of consolidated income in the immediately preceding fiscal year.
- The Local File and Master File is an obligation for taxpayers that exceed $974,653,950 pesos of cumulative income during the immediately preceding fiscal year, among other assumptions, e.g., state-owned companies or foreign resident legal entities with a permanent establishment in Mexico, etc. It is important to mention that in Mexico, the local file differs from the OECD local file, since part of the content that the OECD indicates must contain a master file, in Mexico it must be included in the local file. In addition, it is worth mentioning that the local file for Mexican purposes must be prepared in Spanish.
- Limited risk distributor and contract services and maquila are high-risk schemes.
- Persistent losses in any entity.
- Transactions with low tax jurisdictions resident related parties.
- Business restructurings, or changes in TP model, can also trigger a challenge but needless to say, businesses can evolve, and if the previous TP method no longer appears the most appropriate, it should always be reviewed, rather than being ignored for the sake of maintaining consistency.
- Global marketing expenses payments if locally this type of expense are also incurred.
- Its important to mention that the elaboration of the TP report, could lead to reductions in fines for certain taxpayers.
- Tax authorities may calculate the taxpayers’ gross income and authorized deductions by determining the price or consideration amount of transactions entered into between related parties, on the basis of the prices and consideration amounts that would have been used by independent parties in comparable transactions, whether such parties are legal entities, Mexican or foreign residents, individuals, or permanent establishments in Mexico of foreign residents, and even when the activities have been carried out through trusts.
- When the commission of one or more violations leads to a total or partial failure to pay contributions, including contributions withheld or collected -except in the case of foreign trade duties- and this is discovered by the tax authorities through the exercise of their powers, a penalty of between 55% and 75% of the unpaid contributions will be imposed.
- When a taxpayer who has committed a violation covers unpaid contributions and the corresponding ancillary charges after the tax authorities have begun to exercise review powers but before the taxpayer is notified of the final audit report of the field audit or the audit report, the penalty will be equivalent to 20% of the omitted contributions, when the taxpayer who has committed a violation pays them together with their accessories after the exercise of the faculties of verification of the tax authorities begins and until before the notification of the final act of the domiciliary visit or the office of observations is notified to him.
- If the taxpayer covers the unpaid contributions and the corresponding ancillary charges after he is notified of the final audit report of the field audit or the audit report, as applicable, but before the notification of a ruling determining the amount of unpaid contributions, he will pay a fine equivalent to 30% of the omitted contributions. If the declared tax loss is greater than the actual tax loss, the penalty is 30% to 40% of the difference between the declared tax loss and the actual tax loss, provided that the taxpayer has deducted all or part of the tax loss from its taxable income.
- The obligations regarding withholding and payment of taxes on account of third parties must be complied with, or, as applicable, a copy of the documents evidencing payment of said taxes must be obtained from such third parties. Payments made abroad may only be deducted if the taxpayer provides the information required under TP terms.
- Penalty for not submitting returns in electronic form, when obliged to do so, or for submitting them after the deadline, or for not complying with the requests of the tax authorities to submit them, or for complying with them outside the deadlines specified therein. From $18,360 pesos to $36,740 pesos for each return.
- Failure to file or incomplete filing of the “DIM’s Annex 9” $99,590 pesos to $199,190 pesos.
- The penalty for failing to file the Annual Related Parties Informative Returns (Local, Master and CBC returns) or for filing them incompletely, incorrectly, inconsistently, or in a different form incomplete, will be $199,630 pesos to $284,220 pesos. Other penalties include a ban on being a supplier to the public sector, revocation of the importer's permit.
- The information on comparable transactions corresponding to the year under analysis must be considered, and only when the business cycles or commercial acceptance of a product of the taxpayer covers more than one fiscal year, information on comparable transactions may be considered corresponding to two or more exercises, previous or subsequent.
- SAT will expect to see that a search for potential internal or external comparable transactions has taken place before defaulting to an external database search for comparable companies.
- In the case of using comparable companies from a region, the SAT would like to see an adjustment applied for differences in the markets where the comparable companies operate vs. the analyzed taxpayer.
- Usually, the use of worldwide comparable companies search is employed.
- The use of an interquartile range is required and there is a methodology in ITL to perform this calculation. The use of other types of ranges, such as maximum and minimum values, is not allowed.
- SAT is allowed to use 'secret comparables'.
- Advanced Pricing Agreements (APAs) is a written agreements between a taxpayer and SAT to govern the appropriate transfer pricing method for a forward-looking period. The option for a maquila to request an APA was eliminated, as a result, taxpayers that under such scheme may apply the Safe Harbor rule to comply with the transfer pricing regulations for their maquila transactions.
- The only exception to the TP rules in Mexico would be for taxpayers that do not exceed income of $13,000,000 pesos in the immediately preceding fiscal year. In the case of partnerships who provide professional services, the exception would be for those that get income lower than $3,000,000 pesos in the previous fiscal year.
- SAT has reinforced the elaboration of robust functional analyses that describe the assets used, risks incurred, and functions performed in each of the intercompany transaction analyzed, exposing that a deficient functional analysis could lead to erroneous conclusions.
For further information on transfer pricing in Mexico please contact:
Ricardo Suárez David
Fernando Pliego Vincent
Adrián Arturo Casarrubias Cobos