Transfer pricing adjustments are any modification to prices, amount of payment, or profit margins regarding transactions executed between a taxpayer and its related parties that tend to adjust the accruable income or deductions to the value of such transactions, as if performed by independent parties.
Two recent precedents regarding transfer pricing adjustments, both from a ruling by the First Circuit Court in Mexico City against a taxpayer, were published in the Weekly Federal Court Report in February.
In the first precedent (Register 2016257), it was decided that transfer pricing adjustments regarding transactions between related parties can be performed through a complementary tax return only when one of the parties is a non-resident, and only when the tax authority of the country where the related party is located performs the adjustment. In such a case, the Mexican tax authorities should accept the adjustment, the court ruled. However, this makes it difficult for taxpayers to comply with their Mexican tax obligations on time.
In the second precedent (Register 2016258), the court ruled that to be deductible as a result of transfer pricing adjustments, receipts or invoices for tax purposes must correspond to the fiscal year in which the transaction between the related parties took place. The reason for this is that the provider of the goods or services is bound to accrue income monthly and annually and, therefore, must verify that the transactions comply with Mexico's transfer pricing regulations. Along the same lines, the recipient of the goods or services, who takes the corresponding deduction, must analyse whether the transactions comply with the transfer pricing regulations.
The court also ruled that its interpretation is supported by Mexican law. The law states that, in order to take a deduction, taxpayers must meet the law's formal requirements, including the obligations pertaining to receipts for tax purposes, at the time of filing the tax return, at the latest.
These rulings are not binding on other courts or any other tax authority, but constitute a valid interpretation that could be wielded by them.
The second court decision is of particular importance because some taxpayers deemed that the interpretation to impose a limit was not initially stated in the Income Tax Law.
Nevertheless, to avoid further misunderstanding, the tax authority eased the interpretation of the court ruling through administrative rules in July and allowed taxpayers access to transfer pricing adjustments.
The new administrative rules state that if a taxpayer wants to make deductible transfer pricing adjustments for income tax purposes, the taxpayer must comply with the requirements stated in the law and the administrative rules.
Among those requirements, the taxpayer must have receipts for tax purposes or CFDI (valid invoices) that express the adjustment "can" be issued in the fiscal year when the tax return was filed or should have been filed. This distinctive feature allows taxpayers to avoid the referred limitation because it provides the possibility of issuing the receipt for tax purposes or CFDI in a different tax year than the one when the tax return was filed or should have been filed.
This conclusion was reached because the administrative rules provide that the tax receipt "may" be issued when the tax return should have been filed or was filed. This opens up the possibility to have a tax receipt or CFDI issued at a later date, unlike what the previous precedent construed by limiting the deduction of the adjustment, which allows the deduction only if the tax receipt for fiscal purposes is issued before filing the tax return.