In recent years, the SAT (Servicio de Administración Tributaria – Tax Administration Service) of Mexico has intensified its Transfer Pricing audits, focusing on related-party transactions. It mainly aims to ensure that these transactions are at the Arm’s Length Principle, i.e., on terms comparable to those among independent entities under similar circumstances.
SAT’s Focused Areas
The SAT has focused on industries such as steel, food, automotive, beverages, tobacco, mining, pharmaceuticals, manufacturing, real estate, finance, technology, oil, and tourism. In addition, it has focused on specific concepts and behaviors, including:
- Cross-border related-party transactions.
- Corporate restructurings.
- Equity valuations.
- Valuation of intangibles.
- Recurring loss analysis.
- Financing transactions.
These areas are scrutinized to ensure proper compliance with tax Transfer Pricing obligations.
Solid Defense Importance
Against this scenario, Mexican companies must prepare a solid defense to reduce risks in possible Transfer Pricing audits. It implies:
- Arm’s Length Principle Compliance: Ensuring that related party transactions are at Arm’s Length conditions. In this regard, Article 76 of the Income Tax Law (ITL) establishes that taxpayers must “Obtain and keep the supporting documentation, if they enter into related-party transactions, to demonstrate the amount of their income and deductions were based on the prices and amounts of considerations or profit margins, which they would have used or obtained with/among independent parties in comparable transactions.”
- Exhaustive documentation: Maintaining detailed documentation supporting the nature and conditions of the intercompany transactions, which, according to Article 76 of the ITL, must obtain the following data:
- The name, denomination, or corporate name, domicile, and tax residence of the related persons with whom transactions are entered into, as well as documentation supporting the direct and indirect participation among the associated parties.
- Information on the functions or activities, assets used, and risks assumed by the taxpayer and the party(ies) related to which transactions are entered into for each type of transaction.
- Information and documentation on related party transactions and their amounts for each related party and type of transaction according to the classification, as well as with the data and elements of comparability established in Article 179 of the ITL.
- The method applied under Article 180 of the ITL, including the information and documentation on comparable transactions or companies for each type of transaction and the detail in the application of the adjustments that, if applicable, have been made under the terms of Article 179.
- Comparability analysis: Perform studies supporting that transactions are at market practices.
- Review of internal policies: Evaluate and, if applicable, adjust Transfer Pricing policies to align them with current regulations.
Adequate preparation and a well-structured defense are fundamental to facing the SAT successfully audits in this area.
Get Advice from TPC Group!
At TPC Group, we are Transfer Pricing specialists committed to assisting your company in complying with Mexican tax regulations. Our experienced team will provide customized advice to strengthen your defense against possible SAT audits.
Contact us today for a consultation and ensure optimal compliance with your tax obligations!
Source: Mondaq