Context of Transfer Pricing Adjustments in Mexico

December 12, 2022

Concerning the 2022 Tax Reform of the Income Tax Law, the Transfer Pricing obligations for taxpayers were broadened, and several issues assumed that had not been previously addressed in the law were clarified. Thus, the new rules explain that taxpayers must include a breakdown of the adjustments used to eliminate differences in comparable companies and that Transfer Pricing analyses must compare the information of the analyzed party for the corresponding fiscal year with the results of a year of comparable companies.

1. Comparability Adjustments

Distortions in the supply chain of the manufacturing industry affect the financial information of companies, mainly at the operating level. Therefore, comparability adjustments are necessary to maintain the mandatory standards for a truthful Transfer Pricing analysis. 

2. Adjustments Justification

The OECD Guidelines and the Transfer Pricing Implications Recommendations during the COVID-19 pandemic provide a basis for justifying adjustments for unusual results in a context with economic distortions, especially when the risks assumed by companies differ in ways affecting the reliability of the results.  

3. Categories based on Operating Profits

Comparability adjustments should be considered only if these increase the comparability between observations in a Transfer Pricing analysis. Even though these economic distortions affect the conditions to be examined, it would seem that the situation is worth the application of these adjustments.   

In this regard, comparability adjustments for the Transfer Pricing analysis based on operating profit can be classified into two categories: 

  • Adjustments to the tested party; and,  
  • Adjustments to the comparable observations. 

Some of these adjustments include: 

  • Accounting adjustments; 
  • Equity adjustments; and,  
  • Adjustments for extraordinary expenses. 

Likewise, some adjustments applicable to comparable observations include: 

  • Adjustments for tax/economic incentives or stimulus; and,   
  • Adjustments at the Industry level. 

In this matter, the adjustment options discussed have been limited to manufacturing companies with an equity stake in the Mexican supply chain. The options are limited, and the conditions to apply them are extensive and specific. However, there is an additional entity within the Mexican manufacturing industry where Transfer Pricing is essential to its operation: the maquiladoras.  

Until 2021, the Transfer Pricing compliance provisions in the Law for entities with maquila activity in Mexico were limited to two modalities: 

  • Safe Harbor; and,  
  • Advance Pricing Agreements

Concerning the comparability adjustments that could be applied under these modalities, only one appears according to the SAT: Idle capacity, with a cap of 20% with open APA processes and no cap for those under the Safe Harbor assumption. 

Source: 05/12/22