Mexico
Prof José Carreras
by Prof José Carreras Benitez
In general, transfer pricing regulations in Mexico are provided in Article 76, Sections IX, X, and XII of the Income Tax Law (also known as LISR, its Spanish acronym), which establishes the obligation for legal entities to obtain and keep the documentation that proves that transactions carried out with foreign and domestic related parties generating taxable income or authorised deductions for income tax purposes are at market value. An exception to such compliance is available for certain taxpayers with lower incomes.
The basic methods for establishing transfer prices in Mexico are as follows:
Comparable uncontrolled price method
Resale price method
Cost plus method
Profit sharing method
Residual profit split method
Transactional operating profit margin method
Under Mexican law, the method of profit sharing established in the OECD TP guidelines (TPGs) is divided into two separate methods.
The OECD TPGs are referenced explicitly in the Mexican legislation and are used for guidance and interpretation in transfer pricing-related issues.
Regarding corporations, and for income tax purposes, two or more persons are considered to be related parties when one of them participates, directly or indirectly, in the administration, control, or equity of the other or when a person or group of persons participates, directly or indirectly, in the administration, control, or equity of such persons.
The informative report on transactions with related parties with foreign tax residence (Annex 9 DIM). The information sought in this report includes identification data of each of the related parties; the types and number of transactions carried out with each related party; the transfer pricing methodology applied for each transaction, including the ranges of values determined when comparables have been used.
Additionally, this report requests data related to the results of the transfer pricing study, the adjustments applied during the tax year, and an indication whether the transfer pricing study is available. This statement must be filed no later than May 15 of the following tax year.
New BEPS informative reports. LISR requires taxpayers that enter into transactions with related parties with foreign tax residences to provide the tax authorities (no later than 31 December of the year immediately following the tax year in question) with the following related party reports:
Multinational business group related party master informative report;
Local related party informative report; and
Country-by-country informative report of the multinational business group.
Article 76, section IX of the Income Tax Law (LISR) sets forth the information required to be recorded and disclosed in a transfer pricing study as follows:
The name, corporate name, domicile, and tax residence of the related parties with whom transactions are carried out, as well as documentation that proves the direct and indirect participation of the related parties;
Information related to the functions or activities, assets used, and risks the taxpayer assumes for each type of operation;
Information and documentation on transactions with related parties and the amounts for each related party and each type of transaction under the classification and data established in Article 179 of the Income Tax Law; and
The method applied following Article 180 of the Income Tax Law, including information and documentation on comparable transactions or companies for each type of transaction.
The local file aims to provide specific information on intercompany transactions carried out by the taxpayer, perfectly detailing and identifying the parties involved, describing the generalities of the transactions carried out, and, with a robust analysis of the comparability criteria and applicable analysis methodology, concluding and demonstrating full compliance with the TP standard. The local report is basically the traditional transfer pricing study.
The master file is intended to provide a comprehensive and generalised overview of the structure and operating dynamics of the corporate group as a whole in terms of its intercompany interactions. This report analyses the group's operations, financing policies, its policy for the development, use, and exploitation of intangibles, and the group's internal services policy.
Finally, the country-by-country report (CbCR) is a standard form to be completed and submitted by the multinational group to provide annual, integrated information on the economic activities carried out by each entity that is part of the group, and in each tax jurisdiction. It is a more financial than descriptive document compared to the first two reports.
The penalties for non-compliance with TP rules are as follows:
Failure to file an Annex 9 DIM is subject to a fine of between MXN 86,050 and MXN 172,100.
Failure to send the informative annual reports of operations with related parties (local, master, and CbCR) will result in fines from MXN 172,480 to MXN 245,570. Also, the taxpayer will not be able to carry out procurement, leasing, services, or public works contracts with the Federal Public Administration, both centralised and parastatal, or with the Federal Attorney General's Office (Article 32-D Section IV of the CFF). Likewise, the taxpayer will be suspended from the importers' registry if they have not filed the federal tax returns required by law.
Digital seal certificates (those used for issuing electronic invoices) may be temporarily restricted when there is a:
Failure to file the informative report (Annex 9) of the DIM for transactions with related parties;
Failure to identify related party transactions in the accounting records; or
Failure to carry out accounting (the Transfer Pricing Study is part of the accounting), among other restrictions.
Economic analysis is regulated in Section IX of Article 76 of the Income Tax Law, which establishes the minimum elements that the TP analysis must contain. This section refers us to the methodology established in Article 180 of the same law.
To demonstrate compliance with the arm's length principle, the established methodology (one of the 6 methods used in Mexico) must be applied for each transaction.
In Mexico, unlike other countries and the OECD, there is a hierarchy of methods whereby you may directly apply the method that best demonstrates compliance with the arm's length principle.
The CUP method should be applied in the first instance, giving preference to the RPM and CPM; only when its application is not possible may one of the other methods be used.
Mexico currently allows the APA as a valid transfer pricing method to determine compliance with the arm's length principle as an alternative to the transfer pricing study.
Contract manufacturing companies, better known as limited risk manufacturing companies within the IMMEX* programme, are not allowed to process an APA or perform a transfer pricing study to determine compliance. This is only allowed through a safe harbour, which consists of determining a profit for tax purposes, and considering elements such as the value of the assets or the costs and expenses incurred.
*IMMEX stands for Industria Manufacturera, Maquiladora y de Servicios de Exportacion (Manufacturing, Maquiladora and Export Services Industry).
INTEGROUP (IT) is an integral firm offering specialised services in tax, legal, audit, and internal control. IT has a group of experts with extensive experience who offer personalised, ethical, and highly professional service in order to provide effective and rapid responses to client requirements.
GGI member firmIntegroup S.C.Guadalajara, Jalisco, MexicoT: +52 33 36 15 78 15
Audit & Accounting, Tax, Law Firm, Advisory
José Carreras is the tax partner in charge of dealing with international businesses. Since the year 2000, he has gained experience in offering value-added tax opinions, and win-win ideas. José is fluent in both Spanish and English.
