A closer look at transactions between Mexican related parties
Carlos Pérez Gómez and Alberto Platas of HLB MAAT Asesores discuss how the transfer pricing regime in Mexico has been modified to apply equally to transactions with foreign and domestic related parties.
The transfer pricing (TP) rules in Mexico have been explicit regarding the taxpayers’ obligations in relation to transactions entered with foreign related parties, while for transactions with domestic related parties some of the obligations were implicit or inferred.
This situation motivated the Mexican tax authorities (MTA) to publish, for more than 10 years, explanatory rules to clarify the obligations and tax requirements applicable to transactions with related parties within Mexico.
Until fiscal year 2021, the main differences regarding compliance for transactions with foreign and domestic related parties, are detailed below:
Supporting documentation (TP report): There was an explicit obligation for transactions carried out with foreign related parties, nonetheless only through normative criteria the understanding was that the obligation was also applicable for domestic transactions.
Informative return for related parties’ transactions: Although there was a specific TP informative return for transactions with foreign related parties, there was the intention – without success – through rulings, that taxpayers also disclose information on national intercompany transactions.
To determine if the transactions celebrated with related parties meet the arm's-length principle: For a long time, taxpayers were uncertain whether the arm’s-length principle reached domestic transactions. That being said, the MTA never stopped enquiring about domestic transactions for TP purposes in audit procedures.
Related parties’ definition (in a section and article for transactions with related parties abroad): By use of regulatory criteria, it was interpreted that the definition of related parties encompassed transactions with both related parties, foreign and domestic.
Use of the OECD TP guidelines (in a section and article for transactions with related parties resident abroad): By use of regulatory criteria, it was interpreted that the use of the OECD TP guidelines was applicable for transactions with both related parties, foreign and domestic.
The statutory period for a TP audit is longer when it involves foreign and domestic related parties.
From fiscal year 2022, the TP rules in Mexico are reformed, and the distinction between foreign and domestic related parties is removed, by equally applying the obligations to both types of entities. Therefore, it will not be necessary to have normative or interpretation criteria for its application in domestic transactions.
The scope of some international legislation regarding TP did not foresee transactions with domestic related parties. However, for more than 10 years Mexico has been emphasising the application of the TP regime to these transactions.
Several experts consider that there is a neutralising effect in transactions between domestic related parties, since, in the same country a person taxes the income of a transaction, the counterparty would deduct the expense of the same operation. Furthermore, under a TP adjustment – that would increase or decrease the original value of the transaction – the balance between the parties involved would be cancelled.
However, the concern of the MTA, regarding the TP regime in transactions between domestic related parties, is attributable to the following:
There are special regimes within the Mexican territory that would make profit shifting among domestic related entities an eroding scheme for the MTA, for example the income tax rate in the border states is lower than the general rate;
There is not always a natural balance, since in some transactions, for example the sale of assets such as PP&E, lands, shares and intangibles, when the seller can accumulate or tax the profit (sometimes a loss can be obtained), the buyer can only deduct a portion of the value of the asset that it acquires through depreciation or amortization on annual basis, and in the case of shares it cannot deduct any value until its sale, as part of the cost; and
In the groups of national companies, there may be entities with high profits while others may have losses. This could lend to recognise transactions among themselves – or, making transfer price adjustments between them – with the intention to reduce both high profits and losses; all intended to pay less taxes at a consolidated level.
From 2022, the TP regime in Mexico is modified to apply equally to transactions made with foreign and domestic related parties, thus providing certainty to taxpayers when complying with their TP obligations.
Carlos Pérez Gómez
Partner, HLB MAAT Asesores
Director, HLB MAAT Asesores