On September 8 2021, the Federal Executive presented the decree amending, adding and repealing several provisions of the Federal Tax Code (CFF), the Mexican Income Tax Law (LISR), the Value Added Tax Law (LIVA), and the Special Tax on Production and Services Law (LIESP).
This decree, which will be submitted for review and eventual approval by the Mexican Congress, contains important modifications to the transfer pricing (TP) regime.
Taxpayers under the regime
Title VI, Chapter II of the Income Tax Law (LISR) would be amended to read as follows "of multinational enterprises and related party transactions", specifying that the obligations of the regime reach both individuals and corporations under Titles II and IV of the Income Tax Law. Documentation obligations are standardised for both nationals and foreigners alike (LISR 76-IX).
TP documentation
It is proposed that the analysis of functions, assets and risks should not only include the activities carried out by the taxpayer, but also those carried out by its counterpart(s) (LISR 76-IX,b).
The possibility of multi-year analysis is limited to cases in which it is possible to demonstrate the existence of a business cycle (LISR 179). The application of the TP methods must be accompanied by the proposed comparability adjustments (LISR 76-IX, d) and their results should be adjusted by the interquartile range, the method agreed upon in the framework of a mutual agreement procedure map, or eventually, the method proposed by the tax authorities through the issuance of general rules (LISR 180).
Secret comparables
Importantly, the mechanism proposed by the tax authorities in the exercise of their powers of verification by which taxpayers may have access to ‘confidential’ information on prices, amounts of consideration or profit margins of independent third parties (presumably taxpayers in Mexico) is revised.
The taxpayer may have access to this information by appointing two representatives, being the primary aim to eventually correct their situation, detract facts, clarify omissions or challenge the tax credit imposed (CFF 46).
TP information returns
The obligation to file the TP informative returns of operations with related parties would be extended not only to taxpayers who carry out operations with related parties residing abroad, but also to taxpayers who carry out operations with domestic related parties.
May 15 is established as the new filing date for the TP informative returns declaration of operations with related parties, date on which the local file must also be presented for taxpayers who are obligated under the terms of Articles 32-A, second paragraph and 32-H, Sections II, III, and IV of the CFF (LISR 76-X, 76-A).
The filing of the master TP informative return of the multinational corporate group and the country-by-country informative return will be made with a deadline date of December 31 of the fiscal year immediately following the one in which it is reported (LISR 76-A).
Maquiladoras
Taxpayers of the regime, both maquiladoras and shelter companies, are limited to obtaining a safe harbour (6.9% on costs and expenses, 6.5% on assets) as options to avoid setting up a permanent establishment in Mexico, eliminating the possibility of obtaining an advanced TP agreement.
It also establishes that the omission to file the informative declaration of manufacturing companies, maquiladoras and export services companies (DIEMSE) in the month of June of the year in question, would lead to the configuration of a permanent establishment in the country (LISR 182).
Exclusion from the trust regime
One of the novelties of the reform proposal is the inclusion of a ‘trust regime’ for legal entities constituted only by individuals and with income below the threshold of 35 million pesos (approximately $1.7 million) or who, being newly constituted, do not estimate to exceed this level of income.
The trust regime establishes preferential conditions for eligible taxpayers; however, corporations are excluded when one or more of their partners, shareholders or members participate in other corporations in which they have control or when they are related parties under the terms of Article 90 of the Law (LISR 206).
Crime of tax fraud in intercompany operations
The mechanism previously established in Article 177 of the Income Tax Law (LISR) is incorporated into the Federal Tax Code (CFF), which empowers the tax authorities in the exercise of their powers of verification to determine the existence of simulation of legal acts in operations between related parties, which would allow to ignore the fiscal effects given by the taxpayers to that operation. Simulation is punished in the same terms as the crime of tax fraud (CFF 109,IV, CFF 42-B).
Jesús Aldrin Rojas
Managing partner, QCG Transfer Pricing Practice
E: jesus.aldrin.rojas@qcglatam.com
