The regulatory framework for companies that enter into transactions with related parties is becoming increasingly complex. The tools developed by the tax authorities aim to generate greater knowledge and transparency of the operations carried out by multinational groups as well as to obtain a better understanding of how the value is created within the group and, above all, how the profits are allocated.
However, these measures have resulted in higher administrative costs for taxpayers and greater uncertainty regarding the correct way to comply with the new information requirements.
Mexico is no exception. In the last three years, transfer pricing regulations have changed drastically. These changes have taken the form of amendments to the Income Tax Law (ITL) and the enactment of specific administrative rules. Among the most significant changes are: the new transfer pricing regime for the maquiladoras and the negotiation of 700-plus advance pricing agreements (APA) for companies operating in this industry; the rules to allow the deductibility of pro rata expenses; an increase in the information requested in the transfer pricing informative return (Annex 9); and requirements of more detailed transfer pricing information in the statutory tax report (SIPRED) and in other informative returns (DISIF, Form 76, etc.)
In the past year, the transfer pricing regulatory framework in Mexico underwent further changes related to the passing of rules applicable to transfer pricing adjustments and the incorporation of the OECD's BEPS Action 13 initiative into the ITL.
Transfer pricing adjustments
The Mexican transfer pricing rules establish that taxpayers that enter into transactions with related parties are required to determine their taxable income and deductions considering prices or considerations that would have been used in comparable transactions with or between independent parties. In summary, related-party transactions must comply with the arm's-length principle.
If a controlled transaction is not arm's length, the taxpayer should adjust the price or consideration to ensure compliance with the arm's-length principle. Very little useful guidance is provided in the transfer pricing rules as to the implementation of such adjustments. This situation frequently creates uncertainty for taxpayers when implementing a transfer pricing adjustment or requires taxpayers to request a ruling from the tax authorities in order to obtain legal certainty.
As a result of several consultations between practitioners, taxpayers and tax authorities, new guidance on transfer pricing adjustments was included the Miscellaneous Tax Rule 184.108.40.206 applicable for 2017 that was published on December 23 2016. The Miscellaneous Tax Rule establishes the tax implications and requirements that taxpayers must follow when applying a transfer pricing adjustment to their taxable income and authorised deductions. The new rule provides, for the first time, a definition of what is understood as a transfer pricing adjustment. Under this definition, a transfer pricing adjustment relates to any change in prices, consideration or profit margins for any transaction carried out by the taxpayer and its related parties (domestic or foreign) for the purpose of determining the cumulative taxable income or authorised deductions, taking into consideration the prices or amounts used with or between third parties in comparable transactions, even though when cash or other material resources are not involved.
Some of the requirements included in the new rule are:
- Timely and properly submit the original and/or amended tax and informative returns revealing the transfer pricing adjustment performed;
- Preparation of transfer pricing documentation and economic analysis with the financial information before the adjustment, the calculations of the adjustment and another analysis after the adjustments are applied by the taxpayer;
- Obtain and conserve an affidavit, explaining why the prices, considerations, or profit margins originally agreed, did not correspond to those that would have determined independent parties in comparable operations;
- Obtain and conserve an affidavit explaining the consistency or inconsistency in the application of transfer pricing methodologies by the taxpayer and in the search for comparable transactions or companies, at least in relation to the immediately preceding fiscal year, with respect to the operation that was adjusted;
- Obtain and conserve all the documentation with which it is possible to corroborate that by means of the transfer pricing adjustment performed the operation in question reflects the prices, consideration or profit margins that third parties would agree in comparable transactions, and this documentation must also include the arithmetic calculation of the transfer pricing adjustment;
- Preserve the fiscal vouchers of the original transaction and the resulting of the transfer pricing adjustment that complies with the requirements established in the Mexican legislation;
- Maintain accounting records and/or book-tax reconciliation of the transfer pricing adjustments;
- Demonstrate that the related party with which the adjusted transaction was carried out increased its taxable income or decreased its tax deductions, as applicable, in the same fiscal year; and comply with all the additional obligations different to transfer pricing arising from the adjustment (e.g. withholdings, customs rectifications, etc.).
The transfer pricing adjustments should be applied no later than the date of the submission of the annual tax return (March 31 of the following year), and in the case of taxpayers who have exercised the option to file the statutory tax report the deadline is July 15 of the following year.
BEPS Action 13
Mexico has been a pioneer with respect to the adoption of BEPS Action 13 in its legislation. The 2016 tax reform amended the ITL by adding Article 76-A which requires taxpayers to provide three levels of documentation in the form of three additional informative returns, which in essence are in line with what is indicated in the OECD's BEPS Action 13 on transfer pricing documentation and country-by-country (CbC) reporting. The final rules for the filing of the new informative returns were published on April 12 2017.
The new regulations require that companies that enter into transactions with related parties (domestic or abroad) and have received during 2015 a taxable income equivalent to or greater than MXN 686,252,580 ($38.5 million) must file the following informative returns.
This report requires the multinational enterprise to disclose information of its global operations, organisational structure, key profit drivers and supply chain description, along with information about the company's global transfer pricing policies related to intangibles and financing.
In this sense, there are some relevant aspects in the final rules issued by the Mexican tax authority, principally:
- The master file elaborated by a foreign parent with a subsidiary in Mexico is recognised as valid for Mexican tax purposes, as long as the document contains all the information required in the aforementioned rules;
- It is possible to restrict the number of products or services in the group's supply chain to the principal five, or to the ones that represent more than 5% of the total group income;
- The master file and the intercompany agreements can be submitted in English language.
The taxpayer must provide general information about the local entity, including management structure; a local organisation chart; a detailed description of the business strategy; restructurings; transfer of intangibles; a full description of the transfer pricing analysis applied to each transaction carried out with foreign and domestic related parties; intercompany agreements in force during the analysed period; and financial information of the taxpayer and its counterparties, among others.
In this sense, some of the items required for the local file in the final rules issued by the Mexican tax authority exceeds what Action 13 of the BEPS Action Plan contemplates. Additionally, the Mexican local file requires the following information:
- Detailed analysis of all the transactions carried out with domestic and foreign related parties, whereas the OECD's form under Action 13 relates only to transactions with related parties resident abroad.
- Description of the value chain of the group, identifying how the local entity contributes in the process, as well as the classification between routine and value added activities, and the description of the policies for the allocation of profits along the value chain.
- Description of the strategy for the development, enhancement, maintenance, protection and exploitation (DEMPE) of the intangibles of the group.
- Financial and tax information of the foreign related parties with which the Mexican taxpayer carried out transactions, including amounts of current assets, fixed assets, sales, costs, operating expenses, net income, taxable base, and tax payments.
- Date of preparation and tax ID numbers of the preparer of the transfer pricing documentation and transfer pricing adviser (if different).
All information contained in the report must be in Spanish, except for the intercompany agreements and business descriptions of the comparable companies used in the analysis, which may be presented in English.
The final rules clarify that the information contained in the local file is evidence of compliance with the arm's-length principle in accordance with Articles 179 and 180 of the ITL.
The local file is a separate document from the traditional transfer pricing documentation report that large multinational companies typically prepare by March 31 of the following year, or by July 15 in the case of taxpayers who exercised the option to file the statutory tax report (SIPRED). Under the final rules, the SAT does not require the submission of the transfer pricing documentation study together with the local file. However, taxpayers should continue to prepare their transfer pricing documentation report contemporaneously in order to receive penalty protection. The regulations governing the transfer pricing documentation report have not changed.
Mexico-based multinational enterprise groups that during the previous fiscal year had an accumulated income equal to or higher than MXN 12 billion also must file the CbC report. This requires groups to submit quantitative and qualitative information about all the constituent entities of the group. The information required by Mexican legislation conforms to the minimum standards in Action 13.
Fines and penalties
Taxpayers who do not comply with these new obligations will be entitled to a fine of approximately $8,000 to $11,500. Moreover, consequences of non-compliance includes potentially more costly non-monetary penalties, which may include being prevented to enter into supplying contracts with the Mexican government; and the suspension of the national importers registry.
Main challenges for the Mexican taxpayers
With the new requirements being in their first year, taxpayers are facing many challenges related to the collection of the information of the group to which they belong and the elaboration of the transfer pricing documentation under the new BEPS environment. The most recurring issues found by the taxpayers are the following:
- Impossibility to obtain information from the corporate or other companies belonging to the group, including financial statements, agreements, intercompany policies, among others;
- Transfer pricing policies non-existent or beyond the reach of the local taxpayer;
- Lack of segmented financial information;
- Lack of intercompany contracts, or inconsistencies with the characteristics of the transactions actually carried out;
- Transfer pricing policy for intangibles not aligned with DEMPE approach;
- The expenses related to the preparation of the reports were not budgeted.
But above all, the main challenge in the short term is the collection of information and documentation according to the rules issued by the tax authority. Mexican companies must submit the required informative returns by the end of the year following the fiscal year declared. The information corresponding to the fiscal year 2016 must be filed no later than December 31 2017 using an electronic platform that the tax authorities are yet to release. Time is of the essence in this regard, given the filing deadline.
A changing landscape
The transfer pricing landscape in Mexico is changing rapidly, incorporating an array of new and increasingly complex requirements that are part of the global trend that calls for an increase in transparency and scrutiny for multinational enterprises. The transfer pricing adjustment rule signals a more mature transfer pricing regime that aims to provide more guidance and legal certainty to taxpayers. There are, however, many issues that still require pending clarification and potential double taxation may arise as a result of the time limitation to implement transfer pricing adjustments, particularly in cases when the Mexican taxpayer may increase their authorised deduction from the original transaction.
On the other hand, the BEPS initiative has fundamentally changed the global transfer pricing documentation landscape, including in Mexico. For this reason, taxpayers must be prepared to respond in a timely and appropriate manner to the increasing demands of information made by tax authorities.
Río Lerma No. 232 Piso 9, C.P. 06500, Mexico City
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 26 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 treating issues, planning, business model optimisation, 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, including, for the second consecutive year, the Mexico Transfer Pricing Firm of the Year at International Tax Review's Americas Tax Awards.
He has consistently been named as one of the world's leading transfer pricing advisers by the prestigious Legal Media/Euromoney Magazine.
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 advanced pricing agreements; mutual agreement procedures 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, mainly automotive and manufacturing, maquiladoras, retail and consumer goods, real estate, and the energy and resources market.
He also provides specialised counselling to clients in several anti-dumping and subsidy investigations. Simón is a frequent guest speaker in international tax and business forums in Mexico and abroad.
His professional accreditations and affiliations include board member of the Transfer Pricing Committee of the Institute of Chartered Accountants (Mexico) and lead transfer pricing advisor to Mexico's National Export Maquiladora and Manufacturing Council (INDEX). He has also been certified as a financial consultant from Mexico's Securities and Banking Commission.
He holds a MSc degree in economics and finance from Warwick University's Business School and a BA in economics from Universidad Panamericana.
|Luis X. Fernández|
Partner, transfer pricing
Partner with more than 10 years' experience in transfer pricing and economic consulting in anti-dumping and anti-subsidies investigations. He has experience working with clients belonging to industries such as chemical, pharmaceutical, oil and gas, maquiladoras, among others.
Luis was responsible of the design, creation, implementation and operation of Deloitte's TP shared services centre in Mexico, which has achieved efficiency and savings in operational processes for Deloitte Mexico. Currently, the centre provides services to more than ten countries.
Background and Interests
Luis holds a degree in business administration from the Autonomous Technological Institute of Mexico (ITAM) and a master in management and financial strategies (Iberoamerican University).
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