Transfer Pricing Regulations in Mexico
Since 2000, Mexico’s Tax Administration Service (SAT) has required the filing of an informative return on transactions with related parties, which reflects the agreed-upon amounts for each type of transaction and for each related party. This requirement is based on Articles 215 and 86, sections XII and XV, of the Income Tax Law (LISR). These provisions state that transactions conducted by taxpayers with related parties must be valued in accordance with the arm’s-length principle. To this end, the SAT established the methods for valuing such transactions, which are derived from the applicable OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administrations.
The transfer pricing regulations for corporations are set forth in Articles 76 (first paragraph), Sections IX, X, and XII; 76-A, Sections I, II, and III; and Articles 179, 180, 181, 182, and 184. Regulations for individuals: Articles 90 and 110, Section X of the Federal Tax Code (FFC), and Article 34-A.
For the maquiladora sector in Mexico, there are specific compliance rules regarding transfer pricing. Articles 181 and 182 of the Income Tax Law (LISR) establish the rules for avoiding permanent establishment, as well as the method by which taxpayers participating in maquila programs must calculate their payments to the parent company.
Relationship Rules in Mexico
· Article 179 of the LISR states the following: Two or more persons are considered related parties when one participates directly or indirectly in the management, control, or capital of the other, or when a person or group of persons participates directly or indirectly in the management, control, or capital of such persons.
· In the case of joint ventures, their members, as well as the individuals comprising them, are considered related parties.
· The parent company or other permanent establishments of the same, as well as the persons referred to in the preceding paragraph and their permanent establishments, are considered related parties of a permanent establishment.
· Unless proven otherwise, transactions between residents of Mexico and corporations or entities subject to preferential tax regimes are presumed to be between related parties in which the prices and amounts of consideration are not agreed upon in accordance with those that independent parties would have used in comparable transactions.
For the interpretation of the provisions of this Chapter (179), the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organization for Economic Cooperation and Development in 1995, or any guidelines that replace them, to the extent that they are consistent with the provisions of this Law and the treaties entered into by Mexico.
Formal Obligations: Informative Tax Returns
Informative Return in Mexico
Pursuant to Section X of the Income Tax Law (LISR), taxpayers must file, together with their tax return for the fiscal year, information on transactions with related parties carried out during the immediately preceding calendar year. This return is included in Annex 9 of the Multiple Informative Return (DIM).
Technical Study or Supporting Documentation
Taxpayers required to obtain and retain supporting documentation for transfer pricing shall be, in accordance with Sections IX and XII of Article 76 of the LISR, those who:
- Subsection IX. Those who enter into transactions with related parties residing abroad.
- Subsection XII. Those that enter into transactions with related parties (including domestic ones).
In the case of taxpayers engaged in business activities, they are required to do so when the income earned in the immediately preceding fiscal year exceeded 13 million pesos;
For taxpayers whose income derives from professional services, this obligation applies when their income in the immediately preceding fiscal year exceeds 3 million Mexican pesos.
Individuals, on the other hand, are required to conduct their income and expense transactions with domestic and foreign related parties at market value, as established in Article 90 of the Income Tax Law (LISR).
For the maquiladora sector in Mexico, there are specific compliance rules regarding transfer pricing. To this end, Articles 181 and 182 of the LISR must be analyzed, as they establish the rules for avoiding a permanent establishment, as well as the method by which taxpayers with maquila programs must calculate their payments to the parent company.
New Informative Returns
Mexico began implementing structural changes to its tax legislation, driven by the BEPS (“Base Erosion and Profit Shifting”) phenomenon, incorporating new informative returns as set forth in Article 76-A of the LISR, which states that taxpayers who engage in transactions with related parties residing abroad must provide the tax authorities, no later than December 31 of the year immediately following the relevant tax year, with the following related-party informational returns:
- Master Informative Return: Description of related parties within the multinational enterprise group, including the organizational structure of the taxpayer’s multinational group, a description of the activities of the companies comprising the group, a description of the group’s intangible assets, financial transactions with related parties, as well as the financial and tax status of the group’s companies.
- Local Informative Return: Information on related parties, which shall include a description of the organizational structure, activities, and business strategies, as well as a detailed list of transactions with related parties, the methodology used for the analysis, and the valuation results. As well as the financial information of the reporting taxpayer and of the transactions or companies used as comparables in its analyses.
- Country-by-Country Report: Information on the multinational enterprise group, which must include information at the tax jurisdiction level regarding the global distribution of revenue and taxes paid, indicators of the location of economic activities in the tax jurisdictions where the multinational enterprise group operates during the corresponding fiscal year, and, additionally, a list of all entities comprising the multinational enterprise group.
This country-by-country report must be filed by taxpayers when they fall under either of the two circumstances listed below:
- They are residents of Mexico.
- They have subsidiaries, as defined under financial reporting standards, or permanent establishments, that are resident or located abroad, as applicable.
- They are not subsidiaries of another company resident abroad.
- They are required to prepare, file, and disclose consolidated financial statements in accordance with financial reporting standards.
- Report in their consolidated financial statements the results of entities resident in one or more other countries or jurisdictions.
- Have reported consolidated revenue for accounting purposes in the immediately preceding fiscal year equal to or greater than 12 billion pesos.
- Are legal entities resident in the national territory or resident abroad with a permanent establishment in the country, which have been designated by the controlling legal entity of the multinational business group resident abroad as responsible for providing the country-by-country report referred to in this subsection.
It is important to note that the regulations specifying how these new obligations are to be fulfilled have not yet been issued.
Deadline for Filing Annual Tax Returns.
Annex 9 of the Multiple Informative Return (DIM) must be filed no later than the date set for filing the annual return, for individuals required to have their financial statements audited by a certified public accountant or who have elected to have their financial statements audited, no later than the date on which they are required to file the audit report on their financial statements.
On the other hand, in Mexico there is no official deadline for preparing transfer pricing documentation; however, it is recommended that it be prepared before the annual tax return for the fiscal year in question is filed, in order to minimize the risk of subsequent adjustments to transactions between related parties
Penalties for Noncompliance
Penalties for noncompliance with transfer pricing regulations are established in the Federal Tax Code (CFF), including the following: Art. 76 of the CFF, Art. 81-XVII, Art. 81-XL, Art. 83-XV, and Art. 179, second paragraph.
Article 76 of the CFF: When the commission of one or more violations results in the total or partial failure to pay taxes, including those withheld or collected, and such violations are discovered by the Tax Authorities through the exercise of their powers, a fine of 55% to 75% of the unpaid taxes shall be imposed.
Tenth paragraph. In the case of failure to pay taxes due to noncompliance with the obligations set forth in Article 179 of the Income Tax Law (transfer pricing), the fines shall be 50% less than those provided for in the preceding paragraph.
Article 81-XVII: Failure to file, or filing an incomplete or erroneous informational return regarding transactions with related parties residing abroad (Article 76, subsection X) for the immediately preceding calendar year will result in a fine ranging from 68,590 to 137,190 Mexican pesos.
Article 81-XL: Failure to provide the information regarding related-party disclosures referred to in Article 76-A of the Income Tax Law (LISR), or providing such information in an incomplete manner, contains errors or inconsistencies, or is provided in a manner other than that specified in the tax provisions, will result in a fine ranging from 140,540 to 200,090 Mexican pesos.
Article 83-XV: Failure to identify transactions with foreign-resident related parties in accounting records will result in a fine of $1,000 to $3,000 Mexican pesos for each unidentified transaction.
Article 179, second paragraph: In the event of noncompliance with Article 76, sections IX and XII, the Tax Authorities may determine taxpayers’ taxable income and allowable deductions by establishing the price or amount of consideration in transactions between related parties, taking into account for such transactions the prices and amounts of consideration that independent parties would have used in comparable transactions.
The 2022 Tax Reform introduces changes to the scope of transfer pricing obligations. The main changes are:
- Related parties residing abroad, as well as domestic related parties, are required to report transactions with related parties (Annex 9 of the DIM). Previously, Sections IX and X of Article 76 established this obligation for related parties residing abroad.
-Change to the filing deadline for Annex 9 of the DIM and the local informational return to align them with the filing deadline for the tax opinion. The aligned deadline is May 15. - It establishes the obligation to comply with the arm’s-length principle for transactions involving foreign residents with a source of wealth in Mexico (Title V of the Income Tax Law), in the determination of their income, gains, profits, and deductions arising from transactions with related parties.
-The fourth paragraph of Article 179 is amended to establish the requirement to use financial information from comparables for a single fiscal year, except in cases where the business cycle spans more than one fiscal year. It should be noted that the use of comparables for the fiscal year corresponds to the fiscal year under analysis.
