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Mexico: New miscellaneous rules allow the deduction of pro-rata expenses

David Cuellar
Historically the Mexican Income Tax Law (MITL) has disallowed the deduction of allocated expenses paid abroad when charged on a pro-rated basis. The deduction of pro-rated expenses, conditioned to comply with certain requirements, has only been allowed for Mexican branches or permanent establishments registered in Mexico.

During the past summer the Mexican Supreme Court took a step forward in favour of the taxpayers. The outcome of the case in question concludes that for the pro-rata expense to be deductible, there should be a reasonable relation between the expense and the benefit obtained by the Mexican tax resident, the payer of the service.

Further to the court precedent, the Mexican tax authorities (SAT) recently published in the Official Gazette the Fifth set of Miscellaneous Tax Rules for the 2014 Fiscal Year (these rules are issued directly by the SAT without a legislative process, and they are aimed at clarifying the interpretation of the MITL and other Tax Acts or to provide benefits to taxpayers), and included a rule that clarifies that taxpayers may be entitled to claim the aforementioned expense's deduction provided that all the requirements set forth therein are met. Some of the most relevant requirements are as follows:

  • The expense must be strictly indispensable for the taxpayer's activity and must be effectively rendered;
  • Evidence must be gathered to prove the transaction is authentic;
  • The recipient of the payment must be a tax resident of a country with a comprehensive Tax Information Exchange Agreement (TIEA) in force with Mexico;
  • Proof must be provided that it was agreed as an arm's-length transaction at a fair market value, in compliance with Mexican transfer pricing rules;
  • Proof must be provided of the reasonableness of the relation between the expense incurred and the benefit obtained by the taxpayer;
  • The taxpayer must obtain and keep the relevant agreement that must include the rationale supporting the determination of the consideration, as well as the benefits that the services will provide and granting the right to obtain any relevant information regarding the services being charged.

With this rule, effective the day after publication, the Mexican authorities have adjusted their criteria regarding the deductibility of pro-rata expenses. For multinational companies to apply this rule and enable the deduction for the Mexican payer, they should take into consideration all the requirements mentioned in this rule as well as any other requirements established in the Mexican tax legislation set for expenses deductibility and payments abroad.

David Cuellar (david.cuellar@mx.pwc.com) and Juan Jose Chavez (juan.jose.chavez@mx.pwc.com)
PwC
Tel: +52 55 5263 5816
Fax: +52 55 5263 6010
Website: www.pwc.com

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