Taxing authority and tax law
Tax authority: The Central Administration of Transfer Pricing Audits of the Mexican Tax Administration Service (SAT) is in charge of enforcing transfer pricing rules, audits and the APA Program.
Tax law:
- Articles 86-XII, XIII and XV, 215, 216, 216-BIS and 217 of the Mexican Income Tax Law (MITL)
- Article 34-A of the Federal Fiscal Code (FFC)
- Article 216-BIS of the MITL provide special rules for maquiladoras
Additionally, questionnaires related to the tax review by the registered external auditor (external CPA) as part of the Financial Audit Report are published as Miscellaneous Tax Resolutions in the Federal Register (Diario Oficial de la Federación). Four of such questionnaires relate to inter-company transactions and require a great deal of detail.
Relevant regulations and rulings
Tax regulations are issued by the Ministry of Finance and approved by Congress. The SAT publishes administrative rules on a regular basis, and few rules and regulations deal with transfer pricing issues.
OECD guidelines treatment
The OECD guidelines can be relied upon for interpretation of the rules as long as they do not contradict the MITL or International Tax Treaties.
Priorities/pricing methods
The transfer pricing methods in Mexico are the CUP, Resale Price, Cost Plus, Profit Split, Residual Profit Split and TNMM. Effective 2006, there is a best method rule and a hierarchy of methods. The CUP and other traditional transactional methods are preferred to profit-based methods. No alternative methods are acceptable.
Transfer pricing penalties
No specific penalties are applied when taxpayers do not maintain contemporaneous transfer pricing documentation. However, the SAT has taken the position, confirmed by a tax court case, that failure to comply with the documentation requirements results in non-deductibility of the corresponding payments to non-resident related-parties. There are also penalties for failure or untimely filing of the transfer pricing information return. A penalty of US$4,100 to US$8,037 can be assessed if the information return on related-party transactions is not filed or is incomplete or incorrect.
If a transfer pricing adjustment is determined, and as a consequence unpaid contributions are established, a monetary sanction of 55% to 75% applies.
Also, if a transfer pricing adjustment reduces a net operating loss (NOL), the penalty ranges from 30% to 40% of the difference between the determined NOL and the NOL in the return. It is worth mentioning that both penalties described above will also need to be calculated based on surcharges and updates.
There are no penalties if self-correction of tax results is made before an audit and reduced penalties apply if self-correction is made during the audit but before the tax assessment. Waivers and abatements are possible under limited circumstances.
Penalty relief
According to Art76 of the Federal Fiscal Code, if the taxpayer prepares and maintains annual transfer pricing documentation, a penalty relief between 27.5% and 37.5% of the tax omitted applies (50% of the corresponding penalty). Waivers and abatements are possible under limited circumstances such as financial hardship (during 2006). Penalties may be reduced after the audit has started by self-correction procedures.
Documentation requirements
Contemporaneous transfer pricing documentation related to cross-border intercompany transactions must be maintained. Documentation must include the name, address and tax residency of the non-resident related persons with whom transactions are carried out, as well as evidence of direct and indirect participation between related-parties.
It is necessary to include in the documentation information on the functions, activities, assets used and risks assumed by the taxpayer involved in each transaction. It is also necessary to include information and documentation on comparable transactions or companies by type of transaction. Domestic intercompany transactions are also required to be documented by demonstrating that an accepted pricing methodology is being applied.
Taxpayers are required to identify non-resident related-party transactions clearly on their accounting records. Documentation must be readily available by due date of the tax return. The Multiple Annual Tax Return includes an appendix for the disclosure of information related to intercompany transactions with non-resident related-parties. Tax returns require the following information by type of transaction and by related-party:
- Names, countries and tax identification numbers of affiliates
- Types of transactions and corresponding amounts
- Transfer pricing methods
- Gross or operating margins earned on each transaction (only applicable under certain types of transactions)
Documentation deadlines
A transfer pricing study must be in place at the time the company files its annual income tax return (by the end of March of the following year) and must be kept along with the company’s accounting records for five years after the filing of the last tax return for each year.
The external auditor of each Mexican taxpayer is required to disclose the company’s compliance with all tax obligations, including those related to transfer pricing. This disclosure is made through the Financial Audit Report (Dictamen Fiscal) that must be filed by certain companies by 30 June every year.
In order to issue the Financial Audit Report, the auditor must verify, among other things, that the company’s transfer pricing documentation is in place for the fiscal year under analysis and that it complies with the requirements stated in the MITL and complete extensive questionnaires, four of which deal with inter-company transactions, as follows:
- Attachment 5: Segmented Profit and Loss Statement (not required for the Financial Audit Report for fiscal year 2008 but compulsory for fiscal year 2009)
- Attachment 34: Information regarding related-party transactions, such as:
- Tax ID
- Tax Name
- Country of residence
- Amount of the intercompany transaction
- Transfer Pricing Methodology
- Profit Level Indicator
- Assessment regarding transfer pricing compliance
This information is required for all intercompany transactions (i.e., with foreign and local related-parties, per party and type of transaction). This questionnaire is intended to verify compliance with MITL not only to verify transfer pricing aspects, per se, but also deductibility transfer pricing requirements of all tax deductions.
- Attachment 34.1: Questionnaire on Related-Party Transactions. This questionnaire includes the following sections:
- Advance Pricing Agreement (if applicable)
- Transfer Pricing Documentation compliance and filing date of Informative Tax Return
- Cost of Sales Segmentation
- Related rules regarding Pro-rata charges
- Information regarding financial derivative operations
- Maquiladora rules compliance
- Transfer Pricing Questionnaire related to the review conducted by the external auditor. More than 90 questions regarding dealing with all aspects related to cross-border and domestic intercompany transactions.
Additionally, an information return on related-party transactions must be filed electronically along with the annual income tax return. Transfer pricing documentation must be readily available as part of the accounting records by 31 March. The SAT has taken the position that failure to comply with the documentation requirements results in non-deductibility of payments to non-resident related-parties.
Statute of limitations on transfer pricing assessments
The statute of limitations on assessment in Mexico is five years. The term is affected by amended returns with respect to items changed, and it is suspended by audit. The SAT has two years to complete a transfer pricing audit.
Return disclosures/related-party disclosures
Mexican taxpayers must submit a transfer pricing return to the SAT (Exhibit 9) which is due contemporaneously with the submission of the annual tax return. Information to be disclosed includes non-resident related-parties’ tax address and tax identification number, transaction classifications, amounts, methods to be applied for analyses and profit or loss obtained. The information return must be filed by 31 March of each year.
Audit risk/transfer pricing scrutiny
High audit risk focusing on business restructuring (limited risk structures, migration of intangible property and centralization of functions and risks in favorable tax jurisdictions), highly leveraged structures, cost-sharing agreements, and pro-rata based management fees.
APA opportunity
Unilateral and bilateral APAs are available under Article 34-A of the Federal Fiscal Code and Mexico’s tax treaties. Unilateral APAs can cover the fiscal year of the application, the three subsequent fiscal years and a one-year rollback.
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