|Successfully filing TP informative tax returns holds the key to tax compliance success|
Article 76-A was included in the Mexican Income Tax Law to implement Action 13 of the BEPS project, which refers to transfer pricing documentation.
This Article 76-A obliges taxpayers whose taxable income in the preceding tax year exceeds MXN 686.3 million ($36.8 million) and who carry out transactions with related parties to submit by December 31 of the following year the following tax informative returns to the Mexican tax authorities. Taxpayers with issued stock in the financial market or taxed under an integration regime, government companies and foreign taxpayers with permanent establishments in Mexico are also obliged to submit the transfer pricing informative tax returns. In addition, all taxpayers must keep the ordinary transfer pricing documentation:
- Master informative tax return, which must include information regarding the multinational group;
- Local informative tax return, which must include information regarding the organisational structure, strategic activities, and transactions executed with related parties; and
- Country-by-country informative tax return, which must include an overview of all the entity's members of the multinational group.
- It is the ultimate holding company resident in Mexico of a multinational group, which shall be classified as a company if:
i) it is a Mexican resident;
ii) it holds subsidiaries as defined in the financial reporting standards, or permanent establishments residing or located abroad;
iii) it is not a subsidiary of any foreign company;
iv) it is obliged to prepare, file and disclose consolidated financial statements in terms of the financial reporting standards;
v) it reports in the consolidated financial statements, profits from foreign-based entities; and
vi) it has obtained in the immediately preceding year consolidated income for accounting purposes that equal or exceed MXN $12 billion.
- It is a legal entity deemed to be a resident in Mexico or a foreign resident that has a permanent establishment in Mexico, appointed by the ultimate holding company of the multinational group.
In the First Amendment to the 2017 Miscellaneous Tax Resolution, which was published in May 2017, the Mexican tax authorities included in detail the information to be provided through the transfer pricing informative returns (master, local and country-by-country). On November 1 2017, the software required to file these informative returns was made available to taxpayers through the Mexican tax authority website.
Once the details of the information to be provided and the relevant software and forms were made public to taxpayers, certain difficulties were encountered by Mexican taxpayers when filing these transfer pricing informative tax returns. In this article, we will address some of those practical issues regarding the master informative tax return and the local informative tax return.
To start with, in connection with the master informative tax return, as mentioned, an overview regarding the multinational business group has to be included. Based on administrative rules, a multinational business group is defined as a group of companies considered related parties with a presence in two or more countries.
However, the definition of a multinational business group is not clear. Therefore, uncertainty may arise when a company is obliged to submit the master informative tax return and is part of a multinational group with specific characteristics. For example, a company obliged to submit the master informative tax return that is part of two different competing multinational business groups, is depicted in Chart 1.
The issue arises when the obliged company must submit information on the group to which it belongs. As mentioned, the definition of a multinational business group is not exact. Hence, in principle, the obliged company must submit the master informative tax return with sensitive information of both Group A and Group B.
In connection with the above, the Mexican tax authorities have published on their website answers to certain frequently asked questions addressing this particular issue. From the Mexican tax authorities' standpoint, in virtue of the definition of related party (term included in the definition of a multinational group), the master informative tax return that the obliged company must submit should include information of both Group A and Group B.
This certainly would not be feasible from a business standpoint, since two competing groups would have to disclose each other (through the common entity, i.e. the obliged company) sensitive information such as organisational structure, description of the business model, business strategies, and value drivers, among others.
Another situation concerning the master informative tax return that could place an obliged company in a predicament is that of two business groups (Group A and Group B that are engaged in completely different activities) that are owned by a holding company, the obliged company belongs to Group A. This could be depicted as per Chart 2.
Derived from the absence of an exact definition of a multinational group and guidelines for these matters, it is not clear that the obliged company would have to include information on Group A or of both Group A and B in the master informative tax return. From a business standpoint, Group A is defined as a multinational group different from Group B. The master informative tax return, in principle, would have to include information of both groups, based on the related party status of Group A and B, as well as on the tax authorities' point of view exposed in the FAQ on their website.
The same problem might arise for the case of two groups in which there is no holding company but there is a common shareholder. This is derived from the broad definition of related party and the absence of a definition of a multinational group. The obliged company would have to submit information from all the companies of the groups in which the common shareholder participates.
If it were the case, such a situation would be impossible to fulfil. This is because, in general, although two groups are owned by the same holding company or by a common shareholder, they are usually managed individually with little to no connection between them and actually act as independent business groups, certainly they would not be allowed to share sensitive information with other groups.
We have described a couple of examples of specific situations that might raise a great deal of legal uncertainty because the specific information that has to be submitted by an obliged company before the Mexican tax authorities is unclear, or the disclosure of information is not feasible from a business standpoint.
Requirements in the local informative tax return
This uncertainty becomes relevant when a local obliged company intends to fulfil the obligation, but it might not have access to certain information required in the local informative tax return, hence it would be left in a position of legal uncertainty as well. Such requirements are the following:
- Rule 3.9.16 section a) paragraph 3: Description of the value chain of the group to which the obliged taxpayer is a member of, identifying the location and participation of the obliged taxpayer in such value chain, describing at each stage of such chain the specific activities, as well as whether they are routine or value-added activities, and the description of the policy to allocate or determine profits along that value chain;
- Rule 3.9.16 section b) paragraph 11: List of the unilateral, bilateral or multilateral advance pricing agreements, as well as any other resolutions in which the Mexican tax authority is not a party that involves any of the transactions carried out between related parties during the declared tax year, providing copies of those resolutions within the reach of the obliged taxpayer; and
- Rule 3.9.16 section c) paragraph 2: Financial and tax information of foreign based related parties that are counterparties to each analysed transaction, consisting of current assets, fixed assets, sales, costs, operating expenses, net income, taxable base and tax payments, specifying the currency in which such information is provided.
As observed, the complexity to gather the information requested by the local informative tax return is such that the obligation may become impossible to fulfil for the Mexican obliged company since the information requested might not be available.
All issues described in the previous paragraphs become even more relevant bearing in mind the penalties for failing to file the transfer pricing informative tax returns. Taxpayers that do not file or do not properly file said returns (whether incomplete, with errors, inconsistencies or in a different manner from that indicated in the tax provisions) are subject to:
- A fine ranging from approximately $7,000 to $10,000;
- Prohibition to enter into agreements with the public administration; and
- Potential cancellation of their importers registry.
The penalties for filing the transfer pricing informative returns with errors or omissions may be highly costly for the companies, specifically when consisting of the cancellation of their imports registry or the prohibition to enter into agreements with the public administration. If such activities represent an essential part of the core business, the lack of such registry or the agreements might lead the company to bankruptcy.
In summary, certain Mexican taxpayers may be in a position of legal uncertainty since the filing of the transfer pricing informative returns may be impossible to fulfil, derived from the fact that the taxpayers might not have access to the information requested in the local informative tax return and from the fact that the information that in principle should be submitted for purposes of the master informative return is not sufficiently clear.
In this regard, once the forms for filing the transfer pricing informative returns are published in the official gazette, an annulment suit may be filed online through a "Juicio en Línea", arguing that due to the request of information through these informative tax returns, the right to legal certainty for taxpayers has been violated. Of course, this should be analysed on a case-by-case basis.
Mexico has been aligned with the OECD's BEPS project since its beginnings, specifically with transfer pricing recommendations, which certainly places Mexico as a pioneer in the implementation of the OECD's recommendations.
Notwithstanding the above, hopefully the Mexican tax authorities revisit the definition of a multinational group included in the administrative rules because, as previously described, the current situation may lead the companies obliged to submit the master informative tax return in Mexico to filing it with errors or omissions and therefore be sanctioned with a costly penalty.
It would be positive that in the near future the requirements of the local file that differ from the recommendations made by the OECD in Action 13 of the BEPS project are revisited, since in many cases they relate to information held by the group as a whole, and therefore it might not be available for the Mexican entity.
Chevez, Ruiz, Zamarripa y Cía
Manuel Scapachini is a partner in Chevez, Ruiz, Zamarripa since 1991. With more than 36 years of experience, he is specialised in high-level tax consulting for clients primarily in the financial and tourism sectors.
He obtained a bachelor's degree in public accounting from the Banking and Commercial School (EBC).
He is a member of the Mexican Institute of Public Accountants (IMCP) and of the College of Chartered Accountants of Mexico (CCPM). From 1992 to 1994, he was part of the Fiscal Commission, from 2010 to 2012, he was part of the Board of Honour and from 2012 to 2013, he advised on special matters of the national executive committee.
Additionally, he is a member of the Academy of Fiscal Studies (AEF). Previously, he headed the direction committee from 2007 to 2009 and from 2002 to 2009 he was a member of the CONCAMIN fiscal committee.
Chevez, Ruiz, Zamarripa y Cía
Ignacio Mosquera joined Chevez, Ruiz, Zamarripa in 2010 and was promoted to associate in 2015. He is specialised in high-level transfer pricing consulting and has been engaged in diverse projects for multinational and Mexican groups regarding transactions that require advisory and/or compliance for transfer pricing purposes, financial valuations, as well as anti-dumping controversies. He has also advised clients supporting and attending multiple transfer pricing audits or disputes conducted by the tax authorities.
He has published several articles in tax-specialised magazines regarding transfer pricing matters.
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