Switch Pricing 2022 – Regulation And Apply – Tax

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1. Rules Governing Transfer Pricing

1.1 Statutes and Regulations

In Mexico, the provisions related to the transfer pricing regime

are included in the Income Tax Law (ITL) and the Federal Tax Code

(FTC).

In general, taxpayers that carry out transactions with related

parties, either resident in Mexico or abroad, are required to

determine their taxable income and deductions in accordance with

the arm’s-length standard.

Through a tax audit, tax authorities may challenge the taxable

income or deductions of the taxpayer derived from its related party

transactions and issue a tax assessment.

The Mexican transfer pricing regime includes provisions that

establish the definition of a related party, transfer pricing

methods and their applicable hierarchy, what could be considered as

a comparable company or transaction, comparability adjustments and

business cycle considerations, and information that could be used

for interpretation purposes, among other concepts.

In addition, the ITL establishes the requirements for compliance

with contemporaneous transfer pricing documentation, which must be

prepared and maintained on an annual basis by the taxpayer. In

general, this contemporaneous transfer pricing documentation does

not have to be submitted to the tax authorities; however, it may be

requested through a tax audit process.

The only threshold for the requirement to maintain

contemporaneous transfer pricing documentation is that it does not

apply to taxpayers whose income in the immediately preceding fiscal

year did not exceed MXN13 million (approximately USD6.5 million)

and taxpayers whose income from the provision of professional

services did not exceed MXN3 million (approximately USD1.5

million).

Three-Tier Transfer Pricing Documentation

In addition to the obligation for to keep contemporaneous

transfer pricing documentation, since 2016 Mexico has included tax

provisions related to the three-tier transfer pricing documentation

proposed by the OECD. This is, local file, master file and

country-by-country requirements.

These provisions may duplicate transfer pricing obligations for

taxpayers.

This three-tier transfer pricing documentation requirement is

implemented trough the obligation to file informative tax returns

with similar information as proposed in Action 13 of the Base

Erosion and Profit Shifting project issued by the OECD (BEPS

project) consisting in a local file, master file and

country-by-country report.

Regarding transfer pricing adjustments, in general there are not

detailed tax provisions, but the Miscellaneous Tax Rules (MTR) have

included guidelines for transfer pricing adjustments and the

documentation to be prepared and filed for the applicability of the

amendments of the taxable income and/or deductions derived from

said transfer pricing adjustments.

The FTC incorporates rules for taxpayers and tax advisors for

the disclosure of reportable schemes. The schemes that must be

reported are those that generate or may generate, directly or

indirectly, a tax benefit for the taxpayer in Mexico. For

transactions between related parties, the FTC states the following

as reportable:

• transfer of hard-to-value intangibles;
• restructures without consideration or if, as a result of said
  
  restructuring, the operating profit is lowered by more than
  
  20%;
• transactions without consideration;
• transactions without the use of reliable comparables; and
• mutual agreement procedures (MAPs) or advance pricing
  
  agreements (APAs) obtained by a foreign-based related party
  
  regarding a transaction with a Mexican taxpayer.

1.2 Current Regime and Recent Changes

Since 1997, the Mexican tax legislation has considered transfer

pricing provisions for recognising the arm’s-length principle

as the benchmark for related-party transactions.

Significant updates were considered in the years 2001, 2002 and

2006, with the implementation of a transactional approach versus a

global approach, recognition of the OECD Guidelines for

Multinational Enterprises and Tax Administrations as established in

1995 as a basis for interpretation, and its updates (OECD Transfer

Pricing Guidelines) as long as they are consistent with the ITL

provisions, and a hierarchy for the application of transfer pricing

methods.

In 2016, an update to the ITL was carried out to include the

three-tiered obligation established by BEPS (local file, master

file and country-by-country reporting) for taxpayers who, in

general, in the immediately preceding fiscal year had declared in

their annual tax returns, taxable income equal to or exceeding

MXN904,215,560 (approximately USD45 million) – which is

adjusted annually considering inflation – and carried out

transactions with related parties. This obligation is in addition

to the annual transfer pricing compliance report.

As per the 2022 ITL, if the taxpayer has these obligations, the

local informative return must be submitted on May 15th of the

following year, whereas the master informative return and

country-by-country report have to be submitted no later than

December 31st of the following year.

From 2016 and until the ITL of 2021, the local informative

returns had to be filed before the tax authorities, no later than

December 31st of the immediately following year. Therefore, the

update for the 2022 ITL will result in important challenges for

taxpayers and transfer pricing advisors in Mexico, since this

update speeds-up the filing process of this tax return by more than

seven months.

2. Definition of Control/Related Parties

2.1 Application of Transfer Pricing Rules

The ITL states that two or more persons or entities are related

parties when one of them participates directly or indirectly in the

management, control or capital of the other, when a person or group

of persons participates directly or indirectly in the management,

control or capital of those persons, or when there is a link

between them as according to customs regulations.

The ITL does not consider a minimum percentage of capital

ownership for two or more persons to be considered as related

parties; the definition of related party is therefore very

broad.

In addition, transfer pricing benchmarking considers a

transactional approach, and no threshold amount is

contemplated.

In this sense, all related party transactions that derive in

income or a deduction for the Mexican entity should be analysed in

compliance with the arm’s-length principle as per Mexican tax

provisions.

3. Methods and Method Selection and Application

3.1 Transfer Pricing Methods

The ITL establishes six transfer pricing methods that could be

used for analysing intercompany transactions, which in the order

established therein are the following:

• the Comparable Uncontrolled Price Method (CUP);
• the Resale Price Method (RPM);
• the Cost Plus Method (PLM);
• the Profit Split Method (PSM);
• the Residual Profit Split Method (RPSM); and
• the Transactional Net Margin Method (TNMM).

Unlike the OECD Guidelines, which considers the residual

analysis as part of the transactional profit split method, the

Mexican ITL establishes these as separate transfer pricing methods

(PSM and RPSM), and therefore their applicability must be

considered individually.

3.2 Unspecified Methods

The Mexican ITL does not consider the application of unspecified

methods, and only the six transfer pricing methods included in

Article 180 of said law should be used for analysing intercompany

transactions.

3.3 Hierarchy of Methods

According to the ITL, the CUP should, if possible, be used when

analysing related party transactions. If the CUP is not applicable,

any other method may be applied on the following basis:

• it is demonstrated that the CUP is not applicable in order to
  
  analyse the related party transaction, according to the OECD
  
  Guidelines; and
• it is demonstrated that the method applied is the most
  
  appropriate one to analyse the related party transaction in
  
  accordance with the available information and the OECD Guidelines,
  
  giving preference to the RPM and CPLM.

Additionally, the ITL establishes that, if applying the RPM,

CPLM or TNMM, both the selling price and the costs associated with

such transaction should be established under the arm’s-length

standard. It would be necessary to prove that the method applied is

the best method or the most reliable based on the available

information, giving preference to the RPM and CPLM.

3.4 Ranges and Statistical Measures

As established in the ITL, from the application of any of the

transfer pricing methods specified in the law, when two or more

comparables exist, a range of prices, consideration amounts, or

profit margins could be obtained. These ranges would be adjusted by

means of the interquartile method, the method agreed in a mutual

agreement procedure as included in tax treaties to which Mexico is

a signatory, or the authorised method as per the rules issued by

the Mexican tax authorities.

If the taxpayer is not within the adjusted range, then the

arm’s-length price, consideration amount or profit margin

would be the median of said range.

3.5 Comparability Adjustments

As stated in the ITL, transactions or companies are considered

comparables when there are no differences that significantly affect

the prices, consideration amounts or profit margins as per the

transfer pricing methods established in said law, and if

differences exist, where these are eliminated with reasonable

adjustments. For determining said differences, the ITL establishes

that, among others, the following elements should be

considered.

• Characteristics of the transactions including:
• 1. for financial transactions, elements such as principal amount,
     
     term, guarantees, solvency of the debtor and interest rate;
  2. for the provision of services, elements such as the nature of
     
     the service, and if the service involves an experience or technical
     
     know-how;
  3. in relation to the use, enjoyment or sale of tangible assets,
     
     elements such as the physical characteristics, quality, and
     
     availability of the asset;
  4. in relation to the exploitation or transfer of an intangible
     
     asset, elements such as if the intangible consists in a patent,
     
     trade mark, trade name or transfer of technology, as well as its
     
     duration and protection grade; and
  5. in the sale of shares, elements such as the updated equity of
     
     the issuing entity, present value of the margins or free cash
     
     flows, or the stock market quotation for public entities.
• Functions and activities, including the assets used and risks
  
  assumed in the transaction, of each entity involved in said
  
  transaction.
• Terms and conditions of the intercompany agreement.
• Economic circumstances.
• Business strategies, including those related to market
  
  penetration, maintenance, or expansion.

In addition, general transfer pricing practice in Mexico

considers adjustments to reflect differences in the relative levels

of accounts receivable and accounts payable, as well as inventories

and property, plant and equipment.

Recently, it has been a common practice by the tax authorities

in Mexico to apply a country risk adjustment in audit processes,

which is performed when there are differences in the existing

economic circumstances of the market/country in which the tested

party and the comparables’ operation takes place.

As part of this country risk adjustment, the Emerging Markets

Bond Index (EMBI) could be considered as a factor to compute the

applicable country risk adjustment. This kind of adjustment

triggers a higher profit margin for the comparables and therefore a

higher interquartile range.

4. Intangibles

4.1 Notable Rules

As established in the ITL, transactions related to the

exploitation or transfer of intangible assets must be in compliance

with the arm’s-length principle. For this type of

transaction, elements such as the type of asset (patent, trade

mark, trade name or transfer of technology, among others), the

duration, and the degree of protection of the intangible must be

considered.

The RPM is the transfer pricing method included in the ITL, that

should generally be used to analyse intercompany transactions where

significant or relevant intangible assets are used by the related

parties.

In general, the RPM consists in a two-step method, where a

global profit is obtained and through step one the

“routine” profitability of the related parties involved

is determined, which includes the application of any other of the

transfer pricing methods for obtaining the minimum profit that each

company must obtain. Step two will determine the residual profit,

obtained by subtracting the routine profit from the global profit,

which will be distributed between the related parties considering,

among other things, the relevant intangible assets used by each

related party.

In 2018, the tax authorities issued non-binding criteria related

to royalty payments, through which it was established as a wrongful

practice for royalties to be paid to foreign-based related parties

for the licensing of an intangible asset that was originally owned

by a Mexican entity, and for which no transfer price was

established or, where the transfer price was below the market

price. Furthermore, these non-binding criteria establish that

Mexican entities should not consider as a deductible item the

investments derived from the purchase of intangibles assets

acquired from foreign-based related parties, even if a third party

in Mexico is involved in the purchase of said intangible asset. The

exception being if the intangible assets had been acquired earlier

by the foreign-based related party from a third party and it proves

the payment regarding the acquisition cost.

4.2 Hard-to-Value Intangibles

The provisions regarding intangible assets including in the ITL

are limited and no broad guidelines are established. As mentioned,

the OECD Guidelines are a source for interpretation, therefore they

may be used for the application of these intangibles since no

specific or special rules are considered in Mexican provisions.

The updated OECD guidelines recognise hard-to-value intangibles

as part of Chapter VI “Special considerations for

intangibles”, and further considerations are established in

Annex II to Chapter VI, which provides guidance for tax

administrations to apply regarding these intangibles.

As part of the analysis for hard-to-value intangibles, the OECD

Guidelines recommend that tax administrations should consider the

application of the ex-ante and ex-post approaches, which will

minimise the information asymmetry that this type of asset

entails.

As mentioned, starting in 2020, the tax authorities incorporated

a new section in the FTC related to reportable schemes;

specifically, Section VI of Article 199 of the FTC requires

taxpayers to disclose information related to intercompany

transactions related to the transfer of hard-to-value

intangibles.

In 2018, as a specific rule, the tax authorities issued

non-binding criteria related to intangible property, which

established that a taxpayer in the transfer pricing analysis should

not consider companies as comparables in cases where there are

significant differences due to unique and valuable contributions or

when these unique and valuable contributions are not recognised

correctly.

4.3 Cost Sharing/Cost Contribution Arrangements

Regarding cost-sharing, Mexican tax provisions establish that

expenses from transactions with foreign-based related parties that

are assigned on a pro-rata basis, are considered a non-deductible

item.

As an exemption, there is a miscellaneous tax rule which

establishes that the aforementioned tax provision should not be

applicable if the taxpayer complies with the requirements included

therein. The requirements include, among other elements, the

following:

• the expense should be considered as strictly indispensable for
  
  the Mexican entity considering its business activities;
• regarding the foreign-based related party, it must be an entity
  
  that is resident for tax purposes in a country with which Mexico
  
  has an agreement for the exchange of information;
• proving that the services related to the expenses were
  
  rendered;
• for related parties, complying with transfer pricing
  
  provisions; and
• demonstrating a reasonable relation between the expense and the
  
  benefit obtained or expected to be obtained by the Mexican
  
  entity.

This documentation requirements are hard to comply with on a

post-transaction basis, therefore it is strongly recommended that

prior to establishing these types of agreements, Mexican residents

should be aware of said documentation requirements to prepare, in

time, a defence file.

5. Affirmative Adjustments

5.1 Rules on Affirmative Transfer Pricing

Adjustments

As stated in the ITL, the tax authorities audit faculties are

for tax-years ended. Mexico considers a calendar tax year to start

on January 1st and end on December 31st, therefore transfer pricing

provisions are applicable on an annual basis.

Regarding transfer pricing adjustments performed, the specific

rules are established in the MTR.

Transfer pricing adjustments can be real (accounting and tax

effects) or virtual (only tax effects) and are categorised as the

following.

• Voluntary or compensatory: adjustment performed by the taxpayer
  
  prior to the annual tax return (March 31st) or May 15th for
  
  entities that obtain the accounting reporting opinion (dictamen
  
  fiscal).
• Primary: adjustment that derives from the audit process carried
  
  out by the tax authorities on the taxpayer.
• Corresponding national: adjustment that derives from the audit
  
  process carried out by the tax authorities on the related party in
  
  Mexico for which the intercompany transaction was carried out with
  
  the taxpayer.
• Corresponding foreign: adjustment derives from the audit
  
  process carried out by the foreign tax authorities on the
  
  foreign-based related party for which the intercompany transaction
  
  was carried out with the taxpayer.
• Secondary: Adjustment to a contribution, derived from the
  
  transfer pricing adjustment, which is generally characterised as a
  
  presumed dividend.

Rule 3.9.1.3 of the MTR establishes the list of requirements for

adjustments that reduce their taxable income to be deductible,

which includes the following.

• To obtain and keep documentation that supports that, previous
  
  to the adjustment, the taxpayer determined that the intercompany
  
  transaction was not in compliance with the arm’s-length
  
  principle according to the ITL transfer pricing provisions.
• To obtain and keep a statement signed by the elaborator of the
  
  original transfer pricing documentation, explaining why the
  
  transaction was not originally agreed in compliance with the
  
  arm’s-length principle.
• To obtain and keep a statement signed by the elaborator of the
  
  documentation, explaining the consistency or inconsistency in the
  
  application of transfer pricing methodologies and the search for
  
  comparable companies/transactions, in relation to the adjusted
  
  transaction corresponding, as minimum, to the immediately preceding
  
  fiscal year.
• To obtain and keep all documentation through which it can be
  
  verified that, with the transfer pricing adjustment, it can be
  
  concluded that the transaction was agreed in compliance with the
  
  arm’s-length principle.
• A digital tax return (Comprobante Fiscal Digital por
  
  Internet, or CFDI) or tax receipt regarding the original
  
  intercompany transaction.
• For real adjustments, a CFDI or tax receipt regarding the
  
  transfer pricing adjustment which must comply with certain specific
  
  requirements.
• For deductible items from the purchase of merchandise through
  
  importation, keep all documentation related to the related
  
  value-added tax (IVA) and the special tax for products and services
  
  (IEPS)
• Proof that the related party with whom the adjusted transaction
  
  was carried out, has accrued the corresponding adjustment and that
  
  the adjustment does not derive in a taxable income for a tax haven;
  
  such proof can consist in a statement under oath of the legal
  
  representative of the related party, translated into Spanish,
  
  confirming that the corresponding adjustment was performed and that
  
  the accrued income was not taxed in a tax haven.

As an important item related to transfer pricing adjustments, it

should be noted that, under a non-binding criterion published by

the Mexican tax authorities in 2018, taxpayers should not perform

any modification to prices, amounts of consideration, or profit

margins that are already within the interquartile range.

This criterion is particularly relevant in situations where

Mexican taxpayers intend to decrease the transfer pricing results

(for instance, from the upper to the median of the arm’s-length

results) and consequently decrease the taxable basis.

6. Cross-Border Information Sharing

6.1 Sharing Taxpayer Information

Since 1992, Mexico has entered into several Double Taxation

Treaties with the more than 60 jurisdictions, based on the

OECD’s and UN’s Model Tax Conventions.

In addition to Double Taxation Treaties, Mexico has entered into

Tax Information Exchange Agreements with the purpose of these

promoting international co-operation in tax matters through the

exchange of information. In general, these Tax Information Exchange

Agreements align with the model developed by the OECD Global Forum

Working Group on Effective Exchange of Information.

Mexico is also a member of the Convention on Mutual

Administrative Assistance in Tax Matters, which entered in force as

of September 2012. This Convention intends to facilitate

international co-operation, through the exchange of information,

including automatic exchanges, and the recovery of foreign tax

claims in order to address tax evasion and avoidance issues. As

part of this Convention, as of 2014, Mexico is also part of the

Multilateral Competent Authority Agreement, through which the

Mexican tax authorities receive and share the financial information

of taxpayers with the other jurisdictions that are part of this

agreement.

7. Advance Pricing Agreements (APAs)

7.1 Programmes Allowing for Rulings Regarding Transfer

Pricing

Article 34-A of the FTC establishes that taxpayers may submit

all related documentation, data, and information to request a

consultation regarding the transfer pricing methodology for

intercompany transaction(s) to the tax authorities in order to

obtain an advanced pricing agreement (APA).

The validity of the APA is subject to the compliance with

requests that prove that the intercompany transaction in this

procedure is established considering prices, consideration amounts

or profit margins that would have been established by third parties

in comparable transactions.

7.2 Administration of Programmes

The APA should be requested before the Central Administration of

the Transfer Pricing Audit Administration of the Large Taxpayers

General Administration, which is the main administration that

administers the APA programme.

7.3 Co-ordination between the APA Process and Mutual

Agreement Procedures

APAs are valid the fiscal year in which they are requested, the

immediately preceding year, and for up to three fiscal years

following the one in which they are requested.

APAs may be valid for a longer period when they derive from a

mutual agreement procedure (MAP) in accordance with an

international convention to which Mexico is a signatory.

MAPs are also administered by the Central Administration of the

Transfer Pricing Audit Administration of Large Taxpayers General

Administration.

7.4 Limits on Taxpayers/Transactions Eligible for an

APA

Mexican tax provisions do not establish a list of specific

transactions or taxpayers that could be subject to an APA.

In this sense, subject to the compliance with the requested

information in procedure sheet 102/CFF, there are no limits on a

taxpayer requesting an APA for an intercompany transaction.

7.5 APA Application Deadlines

There is no specific filling date for the application of an

APA.

Once the application for an APA has been submitted by the

taxpayer, procedure sheet 102/CFF establishes eight months for the

tax authorities to issue a response, including a potential request

for further documentation from the taxpayer.

7.6 APA User Fees

The applicable user fee for the request of an APA in 2022, is

MXN275,906.07 (approximately USD13,800), and the annual APA review

post-resolution MXN55,181.21 (approximately USD2,760).

7.7 Duration of APA Cover

As mentioned in 7.3 Co-ordination between the APA

Process and Mutual Agreement Procedures, an APA may be

valid for the fiscal year in which it is requested, the immediately

preceding year, and for up to three fiscal years following the one

in which it is requested.

An APA may be valid for a longer period when they derive from a

MAP in accordance with an international treaty to which Mexico is a

signatory.

7.8 Retroactive Effect for APAs

An APA can have retroactive effect of up to one year

(see 7.7 Duration of APA Cover). In addition,

bilateral and multilateral APAs are subject to agreement between

the competent tax authorities and therefore a wider period for

retroactive effects could be negotiated.

8. Penalties and Documentation

8.1 Transfer Pricing Penalties and Defences

Regarding penalties, failure to submit or submission with errors

of the annual transfer pricing informative return established in

Article 76 Section X of the ITL would entail a penalty, in FY 2022,

of between MXN86,050 and MXN172,100 (approximately

USD4,300–8,600). This informative return requests certain

information from the contemporaneous transfer pricing report (ie,

transactions analysed, related parties and transaction amounts,

transfer pricing method applies, among others).

In connection with the transfer pricing informative returns

(local file, master file and country-by-country) established in

Article 76-A of the ITL, the penalty for failure to submit,

submission with errors, incongruence or submission in a different

form that stated in the tax provisions, is, in FY 2022, between

MXN172,480 and MXN245,570 (approximately

USD8,600–12,250).

In addition, the government will not engage in contracts with

taxpayers that failed to submit the tax returns established in the

ITL.

On the other hand, if the Mexican tax authorities conclude that

a company underpaid taxes in Mexico as a result of non-arm’s

length transfer prices, the penalty could consist of a monthly

interest rate payment equal to the government published rate, plus

surcharges and penalties that range from 55–75% of the

re-evaluated and unpaid tax. These penalties are applied after the

taxpayer is audited and in case of an existing error or tax payment

omission.

If determined by the tax authorities through their audit

faculties, there is no specific defence mechanism for transfer

pricing penalties, and more likely than not the taxpayer will be

required to submit without errors the corresponding tax return.

There is an administrative mechanism that a taxpayer could apply

to consider the reduction of the penalties by 100%, which is stated

in Article 70-A of the FTC; however, the taxpayer must be reviewed

through an audit process by the tax authorities to have this

reduction considered.

8.2 Taxpayer Obligations under the OECD Transfer Pricing

Guidelines

Article 76-A of the ITL, establishes that taxpayers who, in the

immediately preceding fiscal year, had declared in their annual tax

returns taxable income equal to or exceeding a certain amount

established in Article 32-H of the FTC (MXN904,215,560 for FY 2022;

approximately USD45 million), and have carried out transactions

with related parties, must file the following informative

returns.

• Master information return of related parties, which must
  
  include information regarding the multinational business
  
  group.
• Local informative return of related parties, which must include
  
  the organisational structure, strategic and business activities, as
  
  well as the information regarding operations with related
  
  parties.
• Country-by-country informative return of the business
  
  multinational group.

In this regard, it is established that a country-by-country

informative return must be filed by taxpayers when they are within

any of the following categories.

• Multi-national holding companies, which shall be understood as
  
  the companies meeting the following requirements:
• 1. resident in Mexico;
  2. with subsidiary companies defined in terms of the financial
     
     information standards, or else, permanent establishments residing
     
     or located abroad, as the case may be;
  3. not subsidiaries of any other company residing abroad;
  4. bound to prepare, file and disclose the consolidated financial
     
     statements in terms of the financial information standards;
  5. which report, in their consolidated financial statements,
     
     income for entities residing in other countries or jurisdictions;
     
     and
  6. which have obtained in the immediately preceding fiscal year
     
     consolidated income for accounting effects equivalent to or
     
     exceeding MXN12 billion (this amount may be amended by the Mexican
     
     Federal Congress for the relevant fiscal year in the Federal Income
     
     Law).

• Legal entities residing in Mexico or abroad with a permanent
  
  establishment in the country, that have been appointed by the
  
  holding company of the multinational business group residing abroad
  
  as parties responsible for providing the country-by-country
  
  informative return.

9. Alignment with OECD Transfer Pricing Guidelines

9.1 Alignment and Differences

The ITL considers as a source for interpretation the OECD

Transfer Pricing Guidelines, and in general Mexico’s transfer

pricing provisions are closely aligned with the said

guidelines.

A difference would be that unlike to the OECD Transfer Pricing

Guidelines, which consider the residual analysis as part of the

transactional profit split method, the Mexican ITL establishes

these as separate transfer pricing methods (PSM and RPSM), and

therefore considers six transfer pricing methods.

In addition, there is a specific Article in the ITL that

considers as a non-deductible item all expenses from foreign-based

related parties that are assigned to a Mexican entity considered on

a pro-rata basis. There are certain requirements for the

documentation that a Mexican entity can prepare and obtain to have

this type of expense considered deductible, which are described in

detail in 4.3 Cost Sharing/Cost Contribution

Arrangements.

Furthermore, the ITL contemplates a hierarchy for the

application of transfer pricing methods, which differs from the

OECD Transfer Pricing Guidelines in considering the most applicable

method for the intercompany transaction analysis.

9.2 Arm’s-Length Principle

Mexico’s transfer pricing regime is aligned with the

arm’s-length principle as established in the OECD Transfer

Pricing Guidelines, and it is the basis of analysis when reviewing

whether an intercompany transaction complies with what would have

been established with or between independent third parties in

comparable transactions.

9.3 Impact of the Base Erosion and Profit Shifting (BEPS)

Project

Mexican transfer pricing provisions consider the OECD’s

BEPS project recommendations from Actions 8–10 regarding more

detailed and robust functional analyses for intercompany

transactions, as well as thorough detail regarding supporting

documentation to review materiality issues.

In addition, Article 76-A established to align with Action Plan

13 regarding the submission of annual tax returns which somewhat

resemble the OECD’s recommendations for a local file, master

file and country-by-country report.

Furthermore, in connection with BEPS project Action 4, the ITL

has implemented measures that limit interest deductions that exceed

30% of EBITDA, which applies only to taxpayers with interest

expenses exceeding MXN20 million in a given fiscal year.

9.4 Impact of BEPS 2.0

As of April 2022, Mexico has only implemented certain provisions

related to the VAT Law, which address the taxation of digital

services for such tax.

9.5 Entities Bearing the Risk of Another Entity’s

Operations

Mexico’s tax legislation and transfer pricing practice

does not forbid entities to bear the risk of another entity’s

operations by guaranteeing the other entity a return.

However, in cases where a Mexican entity guarantees the interest

payments of a related party (whether foreign or domestic), thus

assuming the credit risk of the lender, these interest payments

should be treated as dividends from a tax perspective.

10. Relevance of the United Nations Practical Manual on

Transfer Pricing

10.1 Impact of UN Practical Manual on Transfer

Pricing

Mexican legislation does not consider the UN Practical Manual on

Transfer Pricing as a source for interpretation of transfer pricing

practice.

Mexican tax provisions consider only the OECD Transfer Pricing

Guidelines as a source for interpretation of transfer pricing

practice.

11. Safe Harbours or Other Unique Rules

11.1 Transfer Pricing Safe Harbours

The use of safe-harbour rules is limited to a targeted sector,

which is the Maquiladora industry.

The safe-harbour mechanism established in the ITL for this

industry, consists in determining the tax profit base as the

maximum value that results from applying 6.9% on the total value of

the assets and 6.5% on the total amount of costs and expenses.

Articles 181 and 182 list the specific computational

characteristics that must be considered for determining the total

value of the assets and the total amount of costs and expenses.

In addition, Maquiladora entities that apply

these safe-harbour rules, must submit annually a tax return with

the corresponding computations.

From 2021, the FTC has established a new faculty for the tax

authorities to publish information regarding reference parameters

with respect to profit levels, deductible concepts or effective tax

rates, based on the industry in which the taxpayer operates.

11.2 Rules on Savings Arising from Operating in the

Jurisdiction

Mexican tax provisions do not consider any rules governing

savings that apply to transfer pricing and related-party

transactions.

11.3 Unique Transfer Pricing Rules or Practices

Mexican tax provisions consider specific rules for transfer

pricing adjustments which have been discussed in detail

in 5.1 Rules on Affirmative Transfer Pricing

Adjustments.

In addition, there is a restriction regarding expenses arising

from transactions with foreign-based related parties that assign

said expenses on a pro-rata basis, which are considered a

non-deductible item. There are certain requirements regarding the

documentation that a Mexican entity can prepare and obtain to have

this type of expense considered as deductible, which are described

in detail in 4.3 Cost Sharing/Cost Contribution

Arrangements.

12. Co-ordination with Customs Valuation

12.1 Co-ordination Requirements between Transfer Pricing

and Customs Valuation

Transfer pricing provisions included in the ITL are only

applicable for purposes of said law, this is, only for income tax

purposes.

Mexican Customs Law establishes the taxes to be considered for

the determination of customs value in import and export

transactions. The Customs Law considers specific methods for

determining the customs value, which are different to transfer

pricing methodologies.

In general, there is no co-ordination between transfer pricing

documentation and customs valuations, since generally transfer

pricing documentation will not be valid for customs purposes and

vice versa.

13. Controversy Process

13.1 Options and Requirements in Transfer Pricing

Controversies

Mexican tax provisions consider a five-year statute of

limitation.

The audit process starts once the taxpayer receives a ruling

from the tax authorities, which in general will require several

information and documentation to be submitted by the taxpayer,

stating the initiation of a tax audit.

The tax authorities have up to two years to notify the taxpayer

of an Observations Ruling, which will include the specifics of

their qualification of the facts or of the omissions in the

information provided by the taxpayer through the audit process.

Once this Observations Ruling is notified, as an alternative tax

resolution mechanism, the taxpayer has 20 business days to request

a conclusive agreement procedure before the Mexican

Taxpayer’s Ombudsman (PRODECON). This resource consists in

holding discussions with the tax authorities through the assistance

of PRODECON, to reach an agreement before a tax assessment is

issued. If no agreement is reached in this procedure or a partial

agreement is negotiated, then the audit process will continue its

course until a tax assessment is determined.

Once the tax authorities have determined their tax assessment,

taxpayers are entitled to challenge these results through the

following options.

Administrative Appeal (Recurso de

Revocación) before the Legal Department of

the Mexican Tax Authorities

Once the tax assessment is notified to a taxpayer, they will

have 30 business days to file for an administrative appeal. This

defence mechanism provides taxpayers with a final instance to

provide additional information to that already provided through the

audit process.

It is important to mention that, for the duration of this

defence mechanism, the taxpayer will not have to secure the amounts

determined in the tax assessment.

In general, if the audit process derives from transfer pricing

implications, which include intercompany transactions from

foreign-based related parties that are resident for tax purposes to

countries to which Mexico has a tax treaty, a MAP can be requested.

If initiated, the MAP will suspend the administrative appeal

process until its termination.

If no agreement is reached in the MAP, the administrative appeal

will continue its term process.

If the taxpayer obtains an unfavourable result through the

administrative appeal, this can be appealed before the Tax

Court.

Nullity Petition (Juicio Contencioso

Administrativo Federal) before the Tax

Court

Taxpayers can proceed to a nullity petition after the tax

assessment is notified, and as a general recommendation, if the

administrative appeal resolution obtained is partially or totally

unfavourable. After said resolution, taxpayers have up to 30

business days to file the nullity petition.

Taxpayers that begin this process need to secure the amounts

derived from the tax assessment, including the principal amount

plus all corresponding extras such as the update adjustment,

surcharges, and penalties.

If the resolution of the nullity petition is partially or

totally unfavourable, the taxpayer can dispute this resolution

through an amparo complaint.

Amparo  before the Collegiate

Circuit Court

After the taxpayers get a partial or total unfavourable

resolution by the tax court regarding the tax assessment, they have

fifteen business days to file for an amparo.

It is important to emphasise that this resource proceeds only

against a final decision made by a court that goes against any of

the following:

• the applicability of the law to the case;
• the interpretation of laws; and
• the general principles of Mexican law in the absence of an
  
  applicable law.

If the resolution obtained by the taxpayers is an unfavourable

one, they can dispute it through an extraordinary appeal before the

Supreme Court of Justice.

Extraordinary Appeal before the Supreme Court of

Justice

An extraordinary appeal needs to be verified and accepted by the

President of the Supreme Court. For the filing to be admitted by

the President of the Court it must comply with certain

requirements. For instance, that the filing made by the taxpayer to

the Collegiate Circuit Court includes a proposal on the

constitutionality of an interpretation, rule, or human right

included in an international treaty, or the resolution made by the

Collegiate Circuit Court includes a pronouncement of this

nature.

Furthermore, the President of the Supreme Court will verify that

the requirements of importance or transcendence are met, which

means that if the resolution appealed by the taxpayer implies the

omission or contradiction of a judgment upheld by the Supreme Court

of Justice relevant to a constitutional matter, or if there is an

issue of constitutionality that could result in the creation of a

new criteria of relevance, the appeal is likely to be admitted.

14. Judicial Precedent

14.1 Judicial Precedent on Transfer Pricing

There are few judicial precedents on transfer pricing matters in

Mexico.

In general, such precedents consider the formalities behind the

transfer pricing provisions as established in the ITL rather than

substantive controversies.

14.2 Significant Court Rulings

The following are some of the relevant judicial precedents on

transfer pricing matters in Mexico.

One of the most relevant court rulings was issued in August

2013, in which the Federal Court of Fiscal and Administrative

Justice issued an isolated ruling that established that in

accordance with the OECD Transfer Pricing Guidelines, the tax

authorities may ignore the self-characterisation of an intercompany

transaction carried out between related parties and recharacterise

it according to its economic substance. (August 2013- Court

precedent number VII-P-2aS-353)

In June 2014, in an isolated ruling, the Supreme Court of

Justice ruled that expenses assigned on a pro-rata basis carried

out between related parties could be considered as a deductible

item, provided that several conditions were met. (June 2014- Court

precedent number 2a. LIV/2014 (10a)) This precedent contributed to

the publication of the requirements included in Rule 3.3.1.27. of

the MTR regarding the information that must be complied by a

Mexican entity to consider the expenses assigned on a pro-rata

basis, as deductible, which are explained in detail

in 11.3 Unique Transfer Pricing Rules or

Practices.

Finally, in February 2018, in an isolated ruling, a Collegiate

Circuit Court ruled that the tax invoices issued in connection with

transfer pricing adjustments must correspond to the tax year in

which the transfer pricing adjustments were effectively performed.

(February 2018- Court precedent number I.1o.A.190 A (10a.))

15. Foreign Payment Restrictions

15.1 Restrictions on Outbound Payments Relating to

Uncontrolled Transactions

The ITL closely aligns with the OECD Transfer Pricing Guidelines

and treats them as a source of interpretation.

Currently, the only uncontrolled transactions subject to

restriction are expenses that are assigned on a pro-rata basis, as

explained in 4.3 Cost Sharing/Cost Contribution

Arrangements, which in general are considered as a

non-deductible item unless several requirements are complied

with.

In addition, payments made to an individual or entity subject to

a preferential tax regime (REFIPRE per its acronym in Spanish)

which will be subject to a withholding tax rate of 40% with no

deductions allowed. This would apply regardless of whether the

transaction is controlled or uncontrolled.

A jurisdiction is considered as REFIPRE if the income is subject

to an effective income tax rate lower than 75% of the Mexican

income tax rate, which is 30%. Therefore, a jurisdiction with an

income tax rate below 22.5% would be considered as a REFIPRE. This

applies even if Mexico has a tax treaty in force with such

jurisdiction.

Furthermore, since year 2020, deductions have not been allowed

from transactions considered as hybrid mechanisms, which occur when

a payment, person, legal entity, income or an asset’s owner is

recharacterised and, therefore results in a tax mismatch. In this

sense, if a transaction results in a deduction for the taxpayer in

Mexico and the related party does not recognise the transaction as

subject to income tax in the foreign jurisdiction, a hybrid

mechanism would be present. This would apply regardless of whether

the transaction is controlled or uncontrolled.

15.2 Restrictions on Outbound Payments Relating to

Controlled Transactions

As of today, Mexican transfer pricing provisions limit payments

made to an individual or entity subject to a REFIPRE; these will be

subject to a withholding tax rate of 40% with no deductions

allowed. As mentioned in 15.1 Restrictions on Outbound

Payments Relating to Uncontrolled Transactions, this would

apply regardless of whether the transaction is controlled or

uncontrolled.

15.3 Effects of Other Countries’ Legal

Restrictions

As of today, Mexican transfer pricing provisions do not have any

restrictions regarding the effects of other countries’ legal

restrictions.

16. Transparency and Confidentiality

16.1 Publication of Information on APAs or Transfer Pricing

Audit Outcomes

In Mexico there are no publications regarding APAs or transfer

pricing audit outcomes.

The OECD periodically publishes the APA and MAP statistics of

its member countries.

16.2 Use of “Secret Comparables”

Any information to which the tax authorities have access may be

used in an audit process, which mainly consists of public

information. However, the tax authorities have used secret

comparables in certain audit processes, which are

case-specific.

17. COVID-19

17.1 Impact of COVID-19 on Transfer Pricing

Overall, the COVID-19 global pandemic did not modify or affect

the transfer pricing landscape in Mexico, since the corresponding

tax authorities did not issue any specific position regarding the

measures that would be taken.

However, as a practiced recommendation, taxpayers had to gather

all the information regarding how COVID-19 affected their policies,

supply chains, etc, to prepare solid defence documentation that

support changes stemming from COVID-19 effects.

Additionally, certain transfer pricing policies and agreements

(eg, leasing, royalty and financing transactions) had to be

reviewed to determine whether adjustments would be necessary or

even cancelled certain transactions with the purpose of reflecting

the applicable market conditions.

17.2 Government Response

The Mexican tax authorities did not establish measures to be

considered due to the COVID-19 global pandemic, therefore there

were no relieved payment obligations, nor were standards relaxed

due to this situation.

The analyses made, as well as the filing dates of the various

tax returns regarding transfer pricing documentation remained

without changes, as established for previous years.

17.3 Progress of Audits

There were no formal publications by the tax authorities to

limit their actions to address the pandemic situation, that is, as

a general practice, no home-office or suspension policies were

applied, and for certain specific sectors an increase in the number

of audits carried out was observed.

In this sense, it may be understood that transfer pricing audits

did not stall due to the COVID-19 pandemic, since all the deadlines

continued as established in tax provisions.

Originally Published by Chambers and Partners

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.