Doing business in Mexico: MNE complexity and its effects on the local TP environment
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Doing business in Mexico: MNE complexity and its effects on the local TP environment

Simón Somohano and Eduardo Campos Martínez of Deloitte Mexico assess the transfer pricing landscape in Mexico, taking into account recent national reforms and the incoming impact of the multilateral discussions on base erosion and profit shifting (BEPS)

Since President Enrique Peña Nieto's administration took office in Mexico in 2012, the need to perform key structural reforms was defined as one of the priorities in the new government's agenda. Among such structural overhauls, the tax changes were expected to constitute one of the most important reforms in decades.

The Mexican Congress finally approved the long-awaited tax reform package in 2013 and it became effective on January 1 2014. The tax reform is broad and covered practically every single tax and tax-related aspect in the fiscal regulations, from increasing the top bracket of personal income tax rates (to 35%) to BEPS-inspired anti-abuse legislation, to new special excise taxes on carbonated soft drinks and high-calories snacks. Initially, it appeared that the tax reform would also addressed the much needed changes and clarifications to local transfer pricing rules. Practitioners, taxpayers and tax authorities have discussed the necessity of amending the existing transfer pricing legal framework mainly because of its high degree of uncertainty when applied to the business models of multinational enterprises (MNEs) operating in Mexico. Several proposals to enhance the transfer pricing regime were submitted by business organisations and professional associations. But sadly, Mexican tax authorities and legislators missed this opportunity to revamp the local transfer pricing regime in order to face the upcoming challenges that the BEPS initiative will bring to taxpayers and tax authorities alike [for further reading on this, read Deloitte's insights on 'BEPS in Mexico: Transfer pricing challenges for taxpayers and tax authorities' in 2014's 'Latin America: Spotlight on transfer pricing issues', published by International Tax Review].

However, the tax reform introduced changes affecting transfer pricing, both directly and indirectly. The most relevant include: (1) the elimination of the Annual Statutory Tax Return for certain taxpayers that were obliged to file this in the past – which include two detailed annexes specifically for transfer pricing matters and two questionnaires, one for the taxpayer and another for the external auditor; (2) a new informative return on relevant transactions (Form 76) – including a section for transfer pricing issues; (3) a new annex 9 of the special tax return (Declaración Informativa Múltiple) with an extended number of questions and requests regarding intercompany transactions carried out with foreign related parties – which might look to summarise the documentation report; and (4) the Maquiladora regime returned to the original compliance options – where taxpayers can request an advance pricing agreement (APA) or apply the safe harbour rules.

The Mexican transfer pricing environment is in a mature stage, but is also becoming a complex, time-consuming and money-intensive issue for MNEs when doing business in Mexico. Aside from the fiscal core purposes of transfer pricing, other financial regulatory local agencies seem to be interested in applying transfer pricing regulations for non-tax purposes. As an example of the expanding focus on transfer pricing from regulators other than the tax authorities, in 2013, Mexico's Central Bank – Banco de México (Banxico) – issued a rule requesting all banking institutions to prepare transfer pricing documentation that should be filed before selling portfolios of loans when their market value surpasses certain thresholds.

Mexico's National Insurance and Surety Bond Commission (CNSF) requests entities subject to its regulation to prepare specific transfer pricing documentation before performing "relevant" intercompany transactions. The financial markets and stock market regulator, the National Banking and Securities Commission (CNBV) and the National Commission for the Pension System (CONSAR) also request that certain financial institutions file their full transfer pricing documentation studies on an annual basis. For this last case, certain transfer pricing reviews are already underway, mainly for years between 2011 and 2014. Although their supervisory staff's expertise and knowledge regarding transfer pricing topics is still in progress, they do have strong knowledge of financial institutions and markets and it is expected to increase their reviews and assessments for the following years, mainly focusing in certain financial derivatives transactions, debt swaps, and inter-banking loans between related parties.

The new Maquiladora regime for income tax purposes, which is designed to protect the Maquiladora's parent company from a permanent establishment characterisation, is also uncertain. The Maquiladora industry seems to be applying for APAs, although – as also applied to all the aforementioned transfer pricing local regulations – guidance is very limited and the tax authorities, particularly the Tax Administration Service (SAT) is still in the process of establishing an action plan to process the large number of requests (more than 650) in order to limit the information requests to data and information that is relevant to the economic analysis of each case. While there is an expectation that the first APAs would be issued at the end of 2015 or early 2016, it is unclear for many Maquiladoras – particularly for small and mid-size companies with limited resources to process large amount of data that is frequently requested by the SAT– how much time this negotiation would take.

Transfer pricing is now of great relevance in Mexico, not only for fiscal compliance purposes, but also because its application is spreading to other fields, even if it is not entirely clear what the purpose, benefits or effectiveness from a regulatory standpoint will be. It seems like several government agencies are convinced of the positive regulatory effects of the application of the arm's-length principle to protect minority investors and the public in general, but none of them is actually applying their inspection powers properly. On the other hand, it is not uncommon that taxpayers feel confused with all these transfer pricing related compliance documentation requirements; costs are increasing and practitioners are now starting to be deeply specialised in certain industries.

MNEs doing business in Mexico

During the last few years, Mexico gained international attention because of its relatively high economic growth and macroeconomic stability. The country managed to be one of the emerging economies that came out of the 2008-2009 global financial crisis relatively unscathed.

Since the mid-1990s, Mexico has opened its economy to adapt to the globalisation trend and is now a major player in global business. Recently, some specific industries have shown remarkably strong growth, including the automotive, aerospace and energy industries – this last one derived from the reforms opening up the oil and gas industry to private investment and offering international-level terms and conditions to public-private partnerships.

This new economic outlook is yielding complicated business structures not precisely designed to fit traditional transfer pricing arrangements, but rather operating according to the competitive challenges of the modern international trade and investments flows. To be more aligned with other countries that follow the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) and to increase the country's competitiveness from a tax point of view, in 2014 the Mexican Supreme Court issued a landmark ruling that expenses incurred on a pro rata basis with non-residents may be deductible if some requirements are met, despite a provision in the Mexican Income Tax Law (MITL) that specifically disallows the deductibility of such expenses. This interpretation is consistent with current international practices and shows that the tax authorities urgently need to understand that the complexity of business in Mexico is increasing and that, therefore, they should stay away from key interpretations on common matters such as corporate services rendered between MNEs.

Under the new regulations, the MITL provision disallowing the deduction of shared expenses with non-residents will not apply if a Mexican taxpayer complies with the requirements set forth in the regulations. In addition to the general deductibility requirements included in the regulations (the expenses must be essential for the company to carry out its business activities; there must be a justifiable connection between the expenses incurred and the benefit received, or expected to be received, by the company; if the expenses were incurred between related parties, the taxpayer must demonstrate that the allocation was agreed upon at arm's-length terms, and so on), transfer pricing documentation must be maintained for pro-rated expense transactions between related parties on contemporaneous basis.

Although this ruling was welcomed by taxpayers and practitioners, there are new business structures with more complex issues that will arise in the following years when assessments are performed on the present fiscal years and the sophistication from the tax authorities will be crucial for performing the right questions and solving controversies.

Derived from the changes to the Maquiladora regime for purposes of MITL, many taxpayers had to rapidly adapt to the new rules for avoiding any risks of non-compliance. Such changes had to be made because many MNEs were operating under several hybrid models (for example, manufacturing and then both exporting and selling locally; or establishing an additional legal entity for performing distributor or service activities). After restructuring operations, taxpayers should opt to apply the safe harbour rates (6.5% on total manufacturing costs and 6.9% of total operating assets, including foreign-owned machinery and equipment (M&E) and inventory) or they should apply for an advance pricing agreement (APA). The guidance for the APA process is not clear, but there is an important interaction between the business representatives, particularly between the National Export Manufacturing and Maquiladora Industry Council (INDEX) representing the Maquiladora industry, the tax authorities and practitioners. This interaction is driven mainly because of the high number of companies operating under this Maquiladora regime in Mexico and it is an important process that helped to file a large number of APAs.

Energy reform

The energy reform also entered into action also during 2014, adding more changes and complexity to the business environment in Mexico. The liberalisation of the energy sector became one of the most controversial reforms probably of the last 50 years in Mexico. Once the amendments to the Constitution and other laws were approved, most of the large national oil companies (NOC) and major energy MNEs turned to Mexico to analyse possible investment opportunities, although the recent downturn of the oil barrel international price has cooled down the high expectations placed on the promised reform that should supposedly play the major role in the recovery and growth of the Mexican economy.

At the end of 2014 the Mexican government released the bidding rules for the production sharing contracts for exploration and extraction of hydrocarbons in shallow waters, called Round One. These rules establish that the private companies acting as contractors for Mexico's state-owned oil company – Petróleos Mexicanos or PEMEX – that carry out transactions with related parties for the sale and commercialisation of hydrocarbons, as well as for supplying goods and services, would be subject to the transfer pricing regulations established in the MITL and in the OECD Guidelines.

Transfer pricing related issues for the energy sector are highly complex and if the main legal framework is uncertain, all tax related issues (still under discussion) will also reflect a higher level of uncertainty.

In a welcome development, in early September 2015, the Federal Executive sent to Congress the economic package for 2016 that includes a proposal to reinstate the exemption of the application of thin capitalisation rules to companies engaged in the generation of electricity. Thin capitalisation rules limit the deduction of interest expense with foreign related parties to a debt-to-equity ratio of 3:1. The constitutional reform to the electric industry that allowed private investment in this industry also removed the generation of electricity from the list of strategic activities of the Mexican state, thus eliminating the exemption of thin capitalisation rules that the industry enjoyed until then.

Transfer pricing and financial services

In recent years, the local financial services industry in Mexico has been increasingly subject to tighter regulations. The government's main regulation agencies have constantly argued such measures are one of the main reasons why the Mexican financial system is healthy even after the inevitable 2008-2009 stress tests derived from the world financial crisis.

According to information published on the statistical bulletins of the CNBV, in 2015 the financial sector has shown an overall growth of 17.91% from June 2014 to June 2015, measured by the growth in total assets. Stock brokerage had the largest growth of 46.97%, followed by development banking with 29.64%, financial groups with 13.72% and commercial banking with a 13.42% growth rate.

Based on continuing to increase the security of the Mexican financial system, several regulatory bodies within the system are starting to implement transfer pricing regulations for non-fiscal purposes. These institutions include Banxico, CNBV, CNSF, and CONSAR.

In October 2012, Banxico introduced Bulletin 15/2012, which requires multiple banking institutions to obtain an authorisation for the transmission of rights or debt to related parties, where the related value exceeds the equivalent of 25% of the basic equity of the entity. Such authorisation should include a transfer pricing study based on the OECD Guidelines, prepared by a practitioner with experience of at least 10 years and with a client portfolio of tier-one financial entities.

The CNBV, through the Credit Institutions Law – which represents the legal framework for issuing regulations to the credit and banking institutions – under its Article 45-S mentions that the board of directors of Mexican commercial banks, or an ad-hoc committee, composed of at least one independent director (who should preside), must approve the conclusion on the analysis for any transaction carried out with related parties to which such institutions belong, or carried out with entities engaged in business activities with which the institution maintains business links.

The pricing of the aforementioned transactions shall be agreed on a fair market value principle. Additionally, all transactions that are of significant importance to the banking institution should be agreed upon a previous transfer pricing analysis, prepared by a suitably qualified third party expert. Such expert should be independent to the corporate group to which the financial institution belongs. The information referred shall be available at all times to the CNBV, which may suspend or limit, partially or completely, the transactions described in the preceding paragraph, if in their opinion such transactions were not agreed under market conditions.

When transactions of relative importance involve the transfer of risks – measured as a ratio of the assets subject to transfer versus the equity of the banking entity – by any member of the corporate group to which it belongs, the chief executive officer must prepare a report with the proper analysis and submit it to the CNBV within 20 working days from the execution date of such transactions.

Also, the CNBV requests that all multiple banking institutions prepare annual transfer pricing documentation based on the OECD Guidelines. Such documentation should be filed to the CNBV during the first three months after the close of the previous fiscal year.

The main purpose of the CNBV is to keep track of all relevant transactions between related parties for all financial institutions and confirm that operations comply with the arm's-length principle. It is expected that CNBV increases the number of transfer pricing audits for the following years.

The CONSAR, through the Law of the Pension Systems, requests its regulated entities to prepare a transfer pricing report carried out by an independent adviser, in which the pricing of intercompany transactions is certifies to be agreed in accordance with the arm's-length principle. A similar obligation is also imposed on insurance and surety bonds companies by the CNSF through the Law of Insurance and Surety Bonds.

Based on all the aforementioned legal frameworks and compliance requirements, the main entities engaged in business activities within the Mexican financial services industry are facing significant administrative burdens related to transfer pricing regulations, both fiscal and non-fiscal related – despite the fact that the OECD Guidelines indicates that these should be avoided. Such compliance stipulations also require practitioners to be highly specialised and taxpayers to have personnel with a certain degree of knowledge on such matters for them to understand what is requested and incorporate them into their routine business practices.

Taxpayers and practitioners are expecting the CNBV to increase its levels of review and assessment in the coming years, on top of the compliance developments that have already taken place in recent years, which are now widely discussed among the industry.

Transfer pricing audits by the Mexican tax authorities

Transfer pricing audits in Mexico are considered to be in a developing phase, although they continue to focus primarily on formality issues. A typical examination would challenge deductions of payments mainly regarding services, or royalties among other tangible transactions, such as purchase of raw of materials or finished products. The ruling of the court for the case related to pro rata expense mentioned earlier is in line with this strong position of rejection from the tax authorities.

Taxpayers continue to invest a disproportionate amount of effort to obtain the not-so-clear documentation for demonstrating: (1) the service was effectively rendered; and (2) the local entity benefit and business reason for engaging in the provision of services from related parties. MNEs' headquarters find it hard to understand the purpose of such requests through audits performed by the Mexican tax authorities and have to struggle to cover the excessive administrative burden that this implies.

This new trend seems to be consistent through the last transfer pricing audits: opening multi-year audits to taxpayers with several consistent losses and challenging the business nature or rationale of such losses. Normally, MNEs establish limited-risk entities in Mexico, and therefore the tax authorities expect them to have a consistent guaranteed return. Although this might not happen for a variety of economic reasons, the tax authorities' position is clear regarding loss-making entities; this being that they will challenge taxpayers with recurring losses. These kind of positions are being initially questioned using the global annual reports of the headquarters of the taxpayers, arguing that if the MNE is profitable on an aggregated basis, losses could be allocated without any reasonable justification to the Mexican subsidiaries.

Segmented financial information must be prepared for testing the controlled transactions on a common basis when assessing the arm's-length compliance of many local taxpayers. Such information is constantly challenged also by the tax authorities and is expected to be prepared based on Mexican generally accepted accounting practices (GAAP). Although taxpayers confirm such accounts were indeed prepared on the requested rules, an independent auditor might be needed to certify its effective compliance with such principles. Moreover, information submitted in a foreign language is requested to be re-submitted in Spanish and the translation performed by a certified translator. This once again increases the already high investment of resources by taxpayers in their effort to prepare a strong defence for the audit procedures.

As of September 2013 (the most recent data publicly released), the SAT indicated that 45 audits were in process, 26 resolutions were finalised with tax adjustments, and eight appeal cases were underway.

BEPS implementation in Mexico

Mexico has been one of the early adopter countries of the BEPS Action Plan. Certain tax amendments for 2014 were approved by the Congress to address BEPS issues directly. Among others, these related to the recommendation to neutralise the effects of hybrid instruments and entities under which taxpayers take advantage of the mismatching between the local and foreign tax authorities (BEPS Action 2). For example, the MITL establishes that interest, royalty and technical assistance payments made by Mexican taxpayers to foreign resident entities that are deemed related parties would be deemed non-deductible in any of the following cases:

  • When the foreign resident entity that receives the payment is regarded as tax transparent, except if the shareholders or members of such entity are subject to taxation with respect to the income realised through such entity and the payment is determined at fair market value;

  • The payment is deemed inexistent in the country or jurisdiction where the recipient resided; or

  • The payment is not considered as taxable income by the recipient.

In addition, the tax law updates establish that payments made by a Mexican resident taxpayer, which are also deducted by a related party, are deemed non-deductible for the Mexican party carrying out the payments.

The SAT tries to identify BEPS strategies through certain mechanisms, such as the aforementioned Form 76, where the taxpayer must declare: financial operations established in articles 20 and 21 of the MITL; transfer pricing operations (adjustments); equity participation and tax residence; reorganisations and restructures; and other relevant transactions, such as sales of intangible and financial assets or the transfer or goods through mergers or spin-offs.

The economic package for 2016 also includes a legislative proposal to include the country-by-country report outlined as part of BEPS Action 13, the guidance documents on transfer pricing documentation and country-by-country reporting and the country-by-country implementation package issued by the OECD in September 2014 and June 2015 respectively. The proposal includes the reporting of three-tier global standard for transfer pricing documentation: (1) master file, (2) local file and (3) country-by country report. The master file requires key information about group operations, including a high-level overview of business operations, in addition to important information of global transfer pricing policies regarding intangibles and financing. The local file requires entity level analysis – local entity description, detailed analysis of controlled transactions, and financial information at the local entity level. The country-by-country reporting requirements for Mexican-based MNEs demand the annual provision of aggregate information, in each jurisdiction where they do business, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNE group, as well as information about which entities do business in a particular jurisdiction and the business activities each entity engages in.

The proposal, if approved, will require that the disclosure statements for fiscal year 2016 would be submitted no later than December 31 2017.

In this sense, other measures implemented by the Mexican government to challenge what are perceived to be base eroding or profit shifting actions of MNEs are the negotiation of several agreements to facilitate information exchange between countries, and the prevention of abusive practices in the application of double tax treaties.

Going forward

MNEs should carefully plan their intercompany transactions before implementation. This might add some challenges since the dynamics of the current international trade and investment flows require MNEs to quickly adapt to satisfy the customer's demands. Establishing proper flexible intercompany global policies helps to provide a solution that can quickly answer such immediate demands and practitioners need to have a deep understanding of the entire supply chain and the industry of the analysed MNEs.

The Mexican tax authorities and other local regulatory agencies have traditionally been focusing primarily on the formal requirements contained in the transfer pricing related local legislation but they are now broadening the scope of their reviews, not only for tax purposes but for other regulatory matters, too. Preparing the diverse multi-purpose documentation might be time-consuming and resource-intensive for MNEs, but will continue to be needed for opening a discussion on the substance of intercompany transactions or any deeper discussion that might arise from any reform for adapting the recently released OECD's working papers with regards to BEPS, transfer pricing and anti-abuse measures.



Simón Somohano

Lead partner, transfer pricing services, Latin America & the Caribbean Region


Galaz, Yamazaki, Ruiz Urquiza, S.C.

Paseo de la Reforma 489, piso 6,

Col. Cuauhtémoc, 06500, México DF

Tel: +52 (664) 622 7872

Simón Somohano is a tax partner based in in Mexico City and Tijuana responsible for Deloitte's Transfer Pricing practice in Latin America and the Caribbean Region.

He has more than 24 years of experience in the application of tax, economic and financial criteria in transfer pricing, anti-dumping/subsidy investigations, valuation analysis of intangibles, double tax treaty issues, tax planning, business model optimization (BMO), structuring and economic consulting.

Under his leadership, Deloitte's regional transfer pricing practice has been consistently recognised as one of the leading practices in Latin America.

He has consistently been named as one of the World's Leading Transfer Pricing Advisors by the prestigious Legal Media Group/Euromoney.

His clients include several Fortune 500 multinational companies doing business in Mexico. He has extensive experience and a successful track record leading the Mexican negotiations of advance pricing agreements (APAs) and transfer pricing examinations with Mexican and foreign authorities, teaming with colleagues in Deloitte's global transfer pricing network.

Simón advises in a variety of industry sectors, including manufacturing, retail and consumer goods, real estate, technology, and the energy and resources market where he co-leads the tax & legal services.

He also provides specialised counseling to clients in several anti-dumping and subsidy investigations. Simón is a frequent guest speaker in international business forums in Mexico and abroad.

He has authored various articles on transfer pricing in specialised journals and is a co-author of Transfer pricing international handbook: A country-by-country guide published by the International Tax Institute and Transfer pricing: A theoretical, legal and practice framework, published by the Institute of Chartered Accountants (Mexico).

His professional accreditations and affiliations include: board member of the transfer pricing committee of the Institute of Chartered Accountants and lead transfer pricing adviser to the National Export Manufacturing and Maquiladora Council (INDEX). He has also been certified as a qualified financial consultant from Mexico's Securities and Banking Commission.

He holds an MSc degree in economics and finance from Warwick University's Business School in the UK and a BA in economics from Universidad Panamericana (Mexico City).



Eduardo Campos Martínez

Transfer pricing partner


Galaz, Yamazaki, Ruiz Urquiza

Paseo de la Reforma # 489 piso 6

Col Cuauhtemoc

CP 06500, México DF

Tel: +52 55 50 80 66

Eduardo Campos is a transfer pricing partner in Deloitte Mexico, based in the Mexico City office. He has more than 13 years of experience assisting multinational companies in transfer pricing matters including valuation analysis of intangibles, structuring new business models, acquisitions, business valuations, and portfolio valuations, among other topics. He joined the firm in January 2003.

His clients includes several Fortune 500 clients with subsidiaries in Mexico and multinational Mexican companies with presence in more than 30 different countries according to the latest data published by Forbes Mexico. He has successfully represented different clients in transfer pricing audits performed by the Mexican tax authorities and, over the past year, has also been negotiating advance pricing agreements (APA) and mutual agreement procedures (MAP) for the automotive industry.

He has specialised in transfer pricing topics for the finance, chemical and automotive industries assisting important multinational enterprises with the implementation of new transfer pricing policies. He has worked with two of the major commercial banks in Mexico with new transfer pricing documentation requirements set up by the Central Bank and the National Banking and Securities Commission.

He holds a bachelor's degree in economics from Instituto Teconológico y de Estudios Superiores de Monterrey (ITESM) with a specialism in corporate finance and financial markets. He has also participated in different tax seminars in Mexico and performed as a guest speaker for the Chinese Chamber of Commerce in Mexico. He has participated as speaker at Universidad La Salle and ITESM on the topic of financial derivative transactions.

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