Article 76-A of Mexico’s Income Tax Law establishes three Transfer Pricing information returns: Master File, Local File, and Country by Country Report, in line with Action 13 of the OECD’s BEPS project.
In the United States, the equivalent report is filed using Form 8975. For multinational groups with a presence in both countries, it is essential to determine who must file the report and how the exchange of information works.
Who must file the report?
In Mexico, the Country by Country Report must be filed by the multinational controlling entity resident in the country that meets, among other requirements, the following criteria:
- It is not a subsidiary of a foreign entity.
- It is required to prepare consolidated financial statements.
- It has group entities in other jurisdictions.
- It had consolidated revenue of 12,000 million Mexican pesos or more in the previous fiscal year.
A Mexican entity designated by the foreign parent company may also file the report. Additionally, the SAT may require a Mexican subsidiary or permanent establishment to file the report when it cannot obtain it through international exchange mechanisms.
In the United States, Form 8975 generally applies to the ultimate parent company of a U.S. multinational group with revenue of $850 million or more.
A U.S. subsidiary of a group with a parent company in Mexico is not required to file Form 8975 locally, as the United States does not have a general mechanism for local filing by groups with foreign parent companies.
Automatic Exchange Between the Two Countries
Mexico and the United States have an agreement for the automatic exchange of Country by Country Reports.
Thus, when a U.S. parent company files Form 8975, the IRS can transmit the information to the SAT if the group has entities in Mexico. Conversely, the SAT can share with the IRS the report filed by a Mexican parent company with a presence in the United States.
However, the group must verify that the report has been filed correctly, that all entities are identified, and that there are no failures in the exchange.
Consistency and Traceability
In Mexico, the information in the Country by Country Report must be consistent with the Master Tax Return, the Local Tax Return, and the group’s financial statements.
In the United States, the reporting entity must maintain records supporting the information on Form 8975, although there is no specific requirement to prepare formal reconciliations with tax returns or financial statements.
Even so, it is advisable to document differences arising from exchange rates, accounting policies, tax periods, or consolidation adjustments.
Risk Assessment Tool
The Country by Country Report allows tax authorities to assess general risks related to Transfer Pricing and base erosion.
However, it does not replace a functional analysis, a comparability study, or a detailed review of related-party transactions. Nor does it, on its own, constitute conclusive evidence that Transfer Pricing complies or does not comply with the arm’s-length principle.
Coordination between Mexico and the United States requires correctly identifying the reporting entity, verifying the automatic exchange of information, and ensuring the traceability of the reported information.
At TPC Group, we advise multinational groups with a presence in Mexico and the United States on determining their Country by Country Report obligations, reviewing the automatic exchange of information, and ensuring the consistency of their Transfer Pricing documentation.
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