Transfer Pricing in Mexico
Transfer pricing in Mexico began in 1998, and since then the legislation in this area has been reformed and expanded.
Mexico has adapted its tax regulations according to the guidelines indicated in the actions of the BEPS Plan (Base and Erosion and Profit Shifting) of the Organization for Economic Cooperation and Development (OECD), in order to combat tax evasion or avoidance.
From these guidelines, the adoption by Mexico of action 13 of the BEPS Plan, regarding transfer pricing documentation, takes on great importance, allowing the different Tax Agencies of the world to exchange information from multinational groups through the Country by Country Reports (CBC Report).
Currently, the transfer pricing regime in Mexico is regulated by Articles 76, 76-A, 179 and 180 of the Income Tax Law (LISR), as well as by some articles of the Federal Fiscal Code.
It also has special legislation on transfer pricing for maquila and hydrocarbons.
Principle of Full Competition: Concept
Also called the principle of independence or “arm’s length”, it is a fundamental pillar to follow in relation to transfer pricing.
This principle states that the prices agreed between related parties must be agreed at market value, that is to say, as would have been done by independent parties.
Regarding Mexican legislation on transfer pricing, this principle is regulated in section XII of Article 76 of the Income Tax Law.
The aforementioned article states that in the case of corporations that carry out transactions with related parties abroad, they must determine their cumulative income or authorized deductions, considering prices that would have been used with independent parties in comparable situations.
Definition of Related Parties in Mexico
According to the fifth paragraph of article 179 of the ISRL, one or more will be considered as related parties when:
- One participates directly or indirectly in the administration, control or capital of the other.
- A person or group of persons participates directly or indirectly in the administration, control or capital of such persons.
It will also be considered a related party to:
- A permanent establishment, as to the parent company or other permanent establishments thereof.
- Companies or entities subject to preferential tax regimes with respect to taxpayers resident in Mexico.
Transfer Pricing Methods in Mexico
For the analysis of transfer pricing in Mexico, six methods have been available, which according to Article 180 of the SRA, are the following:
- Comparable Uncontrolled Price Method.
- Resale price method.
- Added cost method.
- Profit split method.
- Residual Profit Split Method.
- Transactional profit margin method.
Likewise, a hierarchy is established regarding the use of the methods, indicating that the comparable uncontrolled price method should be applied first, while the other methods may only be used to the extent that the first method is not appropriate.
Comparability Analysis in Mexico
According to the third paragraph of Article 179 of the Law, in order to determine whether a transaction between related parties is comparable to one carried out by independent parties, the following criteria of comparability shall be taken into account:
- Characteristics of the operations.
- The functions or activities, assets and risks assumed in the operations.
- The contractual terms.
- The economic circumstances.
- The business strategies.
Documentation and Declaration of Transfer Pricing in Mexico
The transfer pricing regime in Mexico establishes in its article 76 and 76-A, the supporting documentation, as well as the informative affidavits that must be submitted.
Transfer Pricing Informative Affidavit
In accordance with section X of Article 76 of the Law, it is stated that the information on operations carried out with related parties abroad during the immediately preceding fiscal year shall be presented together with the annual declaration, in accordance with the forms indicated by the tax authority.
Such declaration is included in Annex 9 of the Multiple Information Declaration (DIM).
However, since the incorporation of article 76-A to the Law, according to the measures indicated in Action 13 of the BEPS, three additional types of annual informative declarations were adopted for those taxpayers indicated in sections I, II, III and IV of article 32-H of the Federal Tax Code.
Such taxpayers are the following:
- Taxpayers that in the last immediately preceding fiscal year declared have consigned in their normal declarations cumulative income for income tax purposes equal to or greater than an amount equivalent to $815,009,360.00.
- Mercantile companies that belong to the optional tax regime for groups of companies.
- Those parastatal entities of the federal public administration.
- Legal entities resident abroad that have a permanent establishment in the country.
As for the above-mentioned declarations, they are divided into the following ones:
Local Informative Declaration
This statement shall contain a description of the company’s organizational structure, activities and related operations. Also, the financial information of the obligated taxpayer and of the companies or comparable operations must be included.
Master Information Statement
This statement should include information about the multinational group, such as its structure, description of the activity, intangibles, and financial and tax position.
Country by Country Information Statement
Such statement shall contain the information at the tax jurisdiction level on the worldwide distribution of income and taxes paid.
It must also contain indicators of the location of economic activities in the tax jurisdictions in which the multinational business group operates in the relevant tax year.
A list of all the entities that make up the multinational group of companies and their permanent establishments, including the main economic activities of each of the entities that make up the multinational group of companies.
Likewise, with respect to those obliged to make this last declaration, it should be noted that in addition to being in any of the situations described above, they must be in one of the following situations:
They are multinational controlling corporations, for which they must meet the following requirements:
- Be residents in Mexico.
- Have subsidiaries defined in terms of the financial reporting standards, or permanent establishments, which reside or are located abroad, as the case may be.
- They are not subsidiaries of another company residing abroad.
- Are required to prepare, present and disclose consolidated financial statements in terms of financial reporting standards.
- Report in their consolidated financial statements the results of entities with residence in another country or more jurisdictions.
- Have obtained in the immediately preceding year consolidated income for accounting purposes equivalent to or greater than $12 billion pesos.
- Are legal entities resident in national territory or resident abroad with a permanent establishment in the country, which have been designated by the controlling legal entity of the multinational business group resident abroad as responsible for providing the information statement country by country.
Verifying documentation in Mexico
Section IX of Article 76 of the Law states that documentation must be available to prove that the transactions carried out with related parties residing abroad were made at market value.
To this end, the documentation must contain:
- Identification data of the related persons.
- Information on the functions, assets and risks assumed by the taxpayer in the operation.
- Information and documentation of the transactions with related parties and their amounts.
- Methodology applied for the analysis of such transactions.
However, taxpayers that comply with any of the following requirements are exempt from the obligation to have such documentation: Taxpayers, who carry out business activity, whose income in the immediately preceding fiscal year has not exceeded $13’000,000.00. Taxpayers whose income derived from the rendering of professional services has not exceeded $3’000,000.00 in such fiscal year.
Penalties for Noncompliance with Transfer Pricing
Sanctions related to non-compliance with transfer pricing rules are regulated in Articles 76, 81 and 83 of the Mexican Federal Tax Code.
According to the tenth paragraph of Article 76, when an omission in the payment of contributions is incurred due to the noncompliance with transfer pricing rules, the fine may amount to 27.5% to 37.5% of the contribution omitted.
Likewise, section XVII of Article 81 of the referred Code indicates the fine for not presenting the declaration referred to in section X of Article 76, or presenting it with errors; which will amount to $77,230.00 to $154,460.00.
In case of the infringement for not submitting or submitting incompletely the informative affidavits referred to in article 76-A of the Law, section XL of article 81, indicates that a fine shall be imposed which may amount to $154,800.00 to $220,400.00.
Additionally, it will also be an infraction according to fraction XV, of article 83 of the Fiscal Code if the operations with related parties residing abroad are not identified in the accounting, which will be sanctioned with a fine of $1,750.00 to $5,260.00.
The last paragraph of Article 179 of the ISRL, states that the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the OECD Council, will be used as an interpretation criterion in the matter of transfer pricing.
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