Transfer Pricing in Mexico
Transfer Pricing in Mexico began in 1998, 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 avoidance or evasion.
Mexico’s adoption of Action 13 of the BEPS Plan is of great importance, regarding supporting documentation, which allows the different Tax Agencies around the world to exchange information of multinational groups through the Country-by-Country Reports (CBC Report).
This regime is currently regulated in articles 76, 76-A, 179 and 180 of the Income Tax Law (ITL), as well as in some articles of the Federal Fiscal Code.
Likewise, there is special legislation on this matter regarding maquila and hydrocarbons.
Principle of Full Competence: Concept
Also known as the Arm’s Length principle, it is a fundamental pillar to follow in relation to Transfer Pricing.
This principle states that prices agreed among related related parties must be agreed at market value, i.e. as if they had been made by independent parties.
In Mexican law, this principle is regulated in Section XII of Article 76 of the Income Tax Law.
The aforementioned article states that in the case legal entities entering into 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.
Related Parties Definition in Mexico
According to the fifth paragraph of Article 179 of the Income Tax Law, one or more are considered to be related parties when:
- One participates directly or indirectly in the management, control or capital of the other.
- A person or group of persons participates directly or indirectly in the management, control or capital of such persons.
The following shall also be considered related parties:
- A permanent establishment, in terms of the parent company or other permanent establishments thereof.
- Companies or entities subject to preferential tax regimes with respect to the taxpayer resident in Mexico.
Transfer Pricing Methods in Mexico
For the analysis of transactions among related parties, Mexican legislation has provided for six methods, which according to Article 180 of the Income Tax Law, are as follows:
- Uncontrolled comparable price method.
- Resale price method.
- Additional cost method.
- Utility partitioning method.
- Residual method of utility partitioning.
- Transactional profit margin method of the transaction.
It also establishes a hierarchy regarding the use of the methods, indicating that the Uncontrolled Comparable Price Method should be applied first, and that the other methods above 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 among related parties is comparable to a transaction carried out by independent parties, the following comparability criteria shall be considered:
- Characteristics of the transactions.
- The functions or activities, assets and risks assumed in the operations.
- The contractual terms.
- Economic circumstances.
- Business strategies.
Transfer Pricing Affidavit and Documentation
In accordance with articles 76 and 76-A of the Income Tax Law, the Supporting Documentation, as well as the informative affidavits that must be filed.
Transfer Pricing Informative Affidavit
In accordance with section X of Article 76 of the Law, states that the information on transactions with related parties abroad, carried out in the immediately preceding year, shall be filed together with the annual fiscal year affidavit, in accordance with the forms indicated by the tax authority.
This declaration is included in Annex 9 of the Multiple Informative Declaration (DIM).
Nevertheless, according to article 76-A incorporation to the Law, with the measures indicated in BEPS Action 13, three types of additional informative annual affidavits 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 affidavits accumulable income for income tax purposes equal to or greater than an amount equivalent to $815,009,360.00.
- Commercial companies that belong to the optional tax regime for groups of companies.
- Those parastatal entities of the federal public administration.
- Legal entities residing abroad who have a permanent establishment in the country.
As for the statements indicated above, these are divided into the following:
Local Informative Affidavit
This Affidavit shall contain a description of the company’s organizational structure, activities and related operations. Likewise, the financial information of the obligated taxpayer and of the comparable companies or operations must be included.
Master Informative Affidavit
This affidavit must contain information on the multinational group, such as its structure, description of the activity, intangibles and financial and tax position.
Country by Country Informative Affidavit
Such affidavit must contain information at the tax jurisdiction level on the worldwide distribution of income and taxes paid.
It must also contain indicators of the location of the economic activities in the tax jurisdictions in which the multinational corporate group operates in the corresponding fiscal year.
A list of all the entities comprising the multinational corporate group as well, and their permanent establishments, including the main economic activities of each of the entities comprising the multinational corporate group.
Likewise, regarding those required to file this last affidavit, 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 must be multinational controlling legal entities, for which they must meet the following requirements:
- Being residents in Mexico.
- Having subsidiaries defined in terms of financial reporting standards, or permanent establishments, located abroad, according to the situation.
- Not being subsidiaries of another company resident abroad.
- Being required to prepare, present and disclose consolidated financial statements in financial reporting standards terms.
- Reporting in the consolidated financial statements the results of entities resident in one or more other countries or jurisdictions.
- Having obtained in the immediately preceding fiscal year consolidated revenues for accounting purposes equal to or exceeding the $12 billion pesos.
- Being legal entities resident in Mexican territory or resident abroad with a permanent establishment in the country, who have been designated by the controlling legal entity of the multinational corporate group resident abroad as responsible for providing the Country-by-Country Informative Affidavit.
Regarding the filing date of such affidavits, those will have to be filed until December 31 of the fiscal year immediately following the year in which the transactions were carried out.
Supporting Documentation in Mexico
Section IX of Article 76 of the Law states that it is necessary to have Supporting Documentation that the transactions carried out with related parties residing abroad have been carried out at market value.
For this purpose, the documentation must contain:
- Identification data of the related parties.
- Information on the functions, assets and risks assumed by the taxpayer in the transaction.
- Information and documentation of the transactions with related parties and the amounts.
- Methodology applied for the analysis of such transactions.
Nevertheless, taxpayers who meet 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.
Sanctions for Transfer Pricing Non-Compliance
Sanctions related to non-compliance with Transfer Pricing rules are regulated in Articles 76, 81 and 83 of the Mexican Federal Tax Code.
Pursuant to the tenth paragraph of article 76, when there is an omission in the payment of taxes due to non-compliance with Transfer Pricing rules, the fine may amount from 27.5% to 37.5% of the omitted tax.
Likewise, Section XVII of Article 81 of the referred Code establishes the fine for not filing a affidavit referred to in Section X of Article 76, or filing it with errors, which will amount from $77,230.00 to $154,460.00.
In the case of the infraction for not filing or incomplete filing of the informative affidavits referred to in Article 76-A of the Law, Section XL of Article 81, states that a fine of $154,800.00 to $220,400.00 will be imposed.
In addition, an infraction will also be incurred according to section XV of Article 83 of the Tax Code if the transactions 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 Income Tax Law states that the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the OECD Council, shall be used as an interpretation criterion for Transfer Pricing matters.
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