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Mexico: New tax position on pro-rata expenses assigned to Mexico

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David Cuellar


Marco Nava

According to the Mexican income tax law (MITL), expenses incurred abroad by a non-resident which are assigned to a Mexican entity on a pro-rata basis are not deductible for income tax purposes in any case. Based on the MITL, a tax deduction of pro-rata expenses is only available for Mexican branches or permanent establishments registered in Mexico to the extent that certain requirements are met. Nevertheless, recently the Mexican Nation Justice's Supreme Court issued a favourable resolution to a private case in which it expressed its position about the prohibition for Mexican entities to deduct pro-rated expenses incurred outside Mexico. In this regard, the Mexican Supreme Court concluded that the limitation for Mexican entities to deduct pro-rata expenses for income tax purposes has not to be deemed in terms of strict application and rather that the tax authorities, before disallowing a tax deduction, must verify if other requirements are satisfied.

The resolution states that there should be a reasonable relationship between the expense and the benefit obtained locally in such manner that the expense does not exceed the benefit obtained by the Mexican taxpayer. In this regard, Mexican tax authorities should validate if the following main requirements are met:

  • The expense must be strictly indispensable to the carrying out of business in Mexico.

  • There must be a reasonable relationship between the expense incurred and the benefit obtained in Mexico.

  • If the expense was incurred between related parties the consideration has to be determined at fair market value under Mexican transfer pricing rules.

  • Taxpayers must be able to demonstrate with documentation the details of the transaction such as type of operation, contractual terms, transfer pricing methodology adopted and comparable data used for such purpose.

  • The expense must be in compliance with Mexican tax laws, accounting principles and the expense must be incurred for a valid business reason and not in an abusive manner.

The Mexican Nation Justice's Supreme Court issued this resolution to protect the constitutional rights in favour of a Mexican taxpayer in the sense that the Mexican tax authorities have to verify if the pro-rata expense complied with such requirements before assessing a tax liability.

In this regard, expenses assigned on a pro-rata basis to a Mexican entity may be deductible to the extent that they comply with the requirements set forth in the domestic law and the criteria stated in the resolution mentioned before. Nevertheless, it is important to consider that the Mexican tax authorities may take a subjective position to some of the concepts included in the Supreme Court's precedent in order to disallow the deduction of pro-rata expenses, since the resolution is not conforming to jurisprudence.

David Cuellar (david.cuellar@mx.pwc.com) and Marco Nava (marco.a.nava@us.pwc.com), Mexico City

PwC

Tel: +52 55 5263 5816

Fax: +52 55 5263 6010

Website: www.pwc.com

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