TP reporting schemes – a bucket of cold water for tax planning?
Jesús Aldrin Rojas of QCG Transfer Pricing Practice explains why it is important for taxpayers to reevaluate their TP policies, practices and schemes.
As of fiscal year 2020, in connection with Action 12 of the BEPS plan (mandatory disclosure rules), Title VI of the Federal Tax Code (CFF) is incorporated in relation to the treatment of ‘reportable schemes’.
The CFF defines a reportable scheme as "any plan, project, proposal, advice, instruction or recommendation made tacitly or expressly with the purpose of materialising a series of legal acts that generate or may generate, directly or indirectly, the obtaining of a tax benefit in Mexico", whether these schemes are devised by taxpayers or their tax advisors.
‘Tax advisor’ means any individual or legal entity that in the ordinary course of business carries out tax advisory activities and is responsible for or involved in the design, marketing, organisation, implementation or administration of the entirety of a reportable scheme. The concept of tax advisor reaches even foreign residents with a permanent establishment in Mexico or those who operate through their related parties or are covered by a global trademark.
Reportable schemes can be ‘generalised’ – when they are directed to any group of taxpayers – or ‘customised’ – when they are ad hoc planning for the specific circumstances of an individual or legal entity.
In both cases, the characteristics of the schemes must be disclosed to the authority (including issuing a certificate when the scheme is not reportable or there is a legal impediment to disclose it).
In the case of generalised reportable schemes, these must be reported when their design has been completed or within 30 days following the day on which the first contact is made for their commercialisation or the first legal act or event that forms part of the reportable scheme has taken place.
The tax authority will provide an identification number to the reportable scheme, which the taxpayer must include in its annual tax return for as long as the scheme continues. When the reportable schemes come from tax advisors, such advisors must file an informative return in the month of February of each year.
Penalties to tax advisors for failure to file reportable schemes can reach up to MXN 20 million (approximately $1 million) and taxpayers would lose the tax benefit derived from the reportable scheme and would be exposed to penalties between 50% and 75% of the amount of the benefit obtained through the scheme.
TP specific reportable schemes
Of the proposed reportable schemes, Article 199, Section VI proposes the following reportable schemes in terms of transfer pricing (TP):
Intangible assets that are difficult to value are transferred in accordance with the OECD Transfer Pricing Guidelines (OECD TP guidelines);
Business restructurings are carried out (under the terms of the guidelines) in which there is no consideration for the transfer of assets, functions and risks or when as a result of such restructuring, taxpayers who pay taxes in accordance with Title II of the Income Tax Law, reduce their operating income by more than 20%;
The temporary use or enjoyment of goods and rights are transferred or granted without consideration in exchange or services are rendered or functions are performed that are not remunerated;
There are no reliable comparables, because they are operations that involve unique or valuable functions or assets; or
A unilateral protection regime granted in terms of a foreign legislation (in terms of the guidelines) is used.
Can the Mexican tax authority detect reportable schemes?
With the implementation of the BEPS plan recommendations in Mexico, in particular Actions 8–10, the domestic regulatory framework has been adjusted, but not the TP practices of taxpayers, which often depend on centralised tax planning that abuses the regime.
Business restructuring (the reconversion of business models, limiting in appearance the functions, assets and risks of the taxpayers), disposals of intangibles or even the use of the transactional operating profit margin method in cases where the taxpayer contributes valuable intangibles to the multinational's business are frequent cases in which the taxpayer's taxable income is eroded.
In this type of situation, the taxpayer's position may be compromised by being subject to the Tax Administration Service’s (SAT) auditing programmes (which have even now reached the publication of effective tax rates by economic sector). In the worst case scenario, taxpayers may see their digital seals (essential for invoicing) cancelled, which would prevent them from operating, or even find themselves in the situation of configuration of the crime of tax fraud, which has criminal implications for legal representatives and companies.
As always, and considering the beginning of fiscal year 2022 where there are significant reforms to the regime, it is important for taxpayers to reevaluate their TP policies, practices and schemes. This process is essential, since it will allow them to move in an orderly manner and avoid, as far as possible, being exposed to the establishment of large sanctions.
Of course, a parent-subsidiary company review approach may be suitable, because it can alert groups to unseen risks that may compromise their operation in the Mexican market.
Jesús Aldrin Rojas
Managing partner, QCG Transfer Pricing Practice