For fiscal year 2022, the Ministry of Finance and Public Credit in Mexico has approved changes that encourage tax and TP compliance.
The tax reform includes several changes. This article will address the main aspects regarding TP compliance issues as well as the main impact on technical aspects for preparing the benchmarks analysis and the application of the TP methodology.
Domestic inter-company transactions
Since TP obligations are now outlined for transactions with related parties without any residence distinction, the audit procedures from the Tax Administration Service (SAT in Spanish) have evolved to oversee transactions between domestic-related parties.
Taxpayers (as well as TP advisers) must be aware that they may bear certain risks regarding domestic inter-company transactions. This aspect provides an opportunity for companies with local inter-company transactions to enhance the analysis and the tracking to comply with the arm’s length principle.
In line with the above, taxpayers will be obliged to disclose local inter-company transactions in appendix 9 of the Informative Tax Return. They should consider having in place the TP documentation report as this tax form requires the inclusion of the information regarding the methodology, the profit level indicators, the standard industry classification codes used in the analysis, the interquartile range of the comparable companies and the results.
Regarding filing dates, the deadline was modified to be no later than May 15 of the year immediately after the fiscal year in question. In this regard, taxpayers must now plan to prepare the TP documentation for local inter-company transactions and to define and track inter-company policies on a quarterly basis to observe and confirm compliance before the year end.
It is now defined that the period of financial information of comparable transactions or companies must correspond to the year under analysis. Only when the business cycle covers more than one year is it possible to use two or more years in the analysis, provided the period of the business cycle for the tested party is demonstrated. Before this, taxpayers used – as a rule of thumb – information from a three-year period for the comparables, in which results tend to stabilise atypical elements.
With this rule, and according to the OECD recommendations, a taxpayer must now demonstrate that its business cycle covers more than a single year if it is to apply for a multiannual analysis.
Before fiscal year 2022, taxpayers used statistical ranges – an interquartile range was preferred – of comparable transactions or companies to determine if their inter-company transactions met the arm’s length principle. Now, the rule in the Income Tax Law is that such ranges will be adjusted by applying (i) the interquartile method, (ii) the method under the framework of a mutual agreement procedure, or (iii) any authorised methodology issued by the SAT.
That said, it is important to consider more specific criteria for the searches of comparable companies, to avoid significant changes between the comparable companies or transactions and the rested party that could require the use of the statistical adjustment of the interquartile range.
Comparability criteria must be included for each type of transaction. With this change, the comparability degree between the tested transactions and the comparables tends to increase, as there would be a detailed and specific analysis and not a general evaluation.
Likewise, the recommendation is to focus efforts on the preparation or improvement of the functional analysis. In the past, this analysis considered the explanation of the functions, assets and risks of the tested party. Now it will be mandatory to disclose the same information for the counterparty, regardless of the entity that was selected as the tested party.
The transfer pricing method applied – which includes information and supporting documentation regarding comparable transactions or companies for each type of transaction – must include the detail of the comparability adjustments applied in the analysis (if applicable).
This is relevant as discussions with the SAT may arise, as the SAT itself has published its own comparability adjustment formulaic approach. Since there are several adjustment methodologies, the SAT and other academic approaches, and taking into account that formulas were not included in the Income Tax Law, taxpayers will have to include a detailed step-by-step explanation when applying the working capital adjustments.
Even though advance pricing agreements (APAs) granted certainty to both taxpayers and SAT, this option for maquiladora companies has been eliminated. In this regard, the only remaining compliance option available is safe harbour.
It should be noted that maquiladora APAs submitted before December 31 2021, as well as those in process at that date, will continue to be resolved. As of January 1 2022, maquiladora APAs could no longer be submitted under Article 182 of the Income Tax Law.
A closer look
As can be seen, the newly approved tax reform in Mexico has several changes relevant to transfer pricing. Both taxpayers and advisers must bear in mind that these modifications involve a closer look at domestic transactions emphasising the comparability factors, as well as certain issues from the availability of comparable data.
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