Transfer Pricing Application in Mexico

January 2, 2022

The Tax Administration in Mexico, due to the growth of multinational companies and related party transactions, adopted the guidelines established by the Organization for Economic Co-operation and Development (OECD) in its Income Tax Law on Transfer Pricing in 1997.

In order to explain the Transfer Pricing application in Mexico, its concept must be understood as the price agreed upon with a related party for transferring goods and services to be demonstrated through pricing operation documentation these are under the Arm’s Length Principle.

Related Parties in Mexico

According to Income Tax Law Article 179, two persons, whether physical or legal, are related parties when one of them, directly or indirectly, participates in the administration, control, or capital of the other. The most common in Transfer Pricing is a shareholder company performing transactions with the other. For example, the provision of services or the purchase of inventory.

Transfer Pricing Regulations in Mexico

The Transfer Pricing regulations were established in the Mexican Income Tax Law, Tax Code, or Miscellaneous Rules. Within the Income Tax Law, specifications are enacted in Art. 76 for legal entities and in Art. 90 for individuals. Arts. 179 and 180 are considered the main articles within the Income Tax Law focusing on Transfer Pricing.

The Transfer Pricing regulations avoid mispricing to maximize profits and prevent companies from maximizing their tax deductions to reduce tax profit.

Multinational companies might have one entity in a low or no-tax country, and as a group, it benefits from the shift of profits to tax havens.

Mexican regulations aim to prevent these situations and ensure companies operate as independent third parties would.

Therefore, taxpayers have three main obligations under the Arm’s Length Principle: Operating with related parties at market prices, obtaining a Transfer Pricing study supporting transactions at market prices, and timely filing the applicable statements.

Main Transfer Pricing Obligations

  1. Agreeing at market prices means agreeing upon transactions with a third party(ies) in a comparable or similar situation as with a related party.
  2. Demonstrating to be at market prices through a Transfer Pricing study supporting the related party transactions were performed as with independent third parties.
  3. Filing, along with the annual tax return, the information on transactions carried out with related parties abroad, carried out in the immediately preceding financial year, under the forms indicated by the tax authority.