Transfer Pricing in Mexico

Concept and Regulation in Mexico

When taxpayers carry out transactions between related parties, they must be aware that they are subject to fiscal obligations established in the Income Tax Law (LISR) and the Federal Fiscal Code (CFF). These obligations are in addition to the corresponding obligations for being legal entities under Title II or individual taxpayers under Title IV, precisely because of carrying out operations with related parties.
 
Transfer Pricing in Mexico began in 1995, making it one of the countries with the longest history in implementing transfer pricing regulations. Since then, the legislation in this area has been reformed and expanded.
 
Mexico has adapted its tax regulations according to the guidelines indicated in the actions of the BEPS Plan (Base and Erosion and Profit Shifting) of the Organization for Economic Cooperation and Development (OECD), in order to combat tax avoidance or evasion.
 
Mexico’s adoption of Action 13 of the BEPS Plan is of great importance, regarding supporting documentation, which allows the different Tax Agencies around the world to exchange information of multinational groups through the Country-by-Country Reports (CBC Report). This regime is currently regulated in Articles 76, 76-A, 179 and 180 of the Income Tax Law (ITL), as well as in some articles of the Federal Fiscal Code. Likewise, there is special legislation on this matter regarding maquila and hydrocarbons.
 

Principle of Full Competence: Concept

Also known as the Arm’s Length principle, it is a fundamental pillar to follow in relation to Transfer Pricing. This principle states that prices agreed among related related parties must be agreed at market value, i.e. as if they had been made by independent parties.
 
Regarding Mexican legislation, a definition of market prices is established specifically in Title VI – Chapter II Article 179 penultimate paragraph of the Income Tax Law (LISR): “(…) Market prices shall be understood as the prices and amounts of consideration that would have been used with or among independent parties in comparable operations or when the taxpayer has been granted a favorable resolution in the terms of Article 34-A of the Federal Fiscal Code.”
 
The arm’s length principle is also mentioned in the following sections of the LISR:
 
  • Title II For Legal Entities – Chapter IX On Moral Obligations – Article 76 sections IX and XII.
  • Title IV For Individuals General Provisions – Article 90 Paragraph 11.
  • Title V For residents abroad with income from sources of wealth located in national territory – Second paragraph of Article 153.
  • Title VI For foreign entities controlled subject to preferential tax regimes of multinational companies and operations carried out between related parties – Chapter II Of multinational companies and operations carried out between related parties – First paragraph of Article 179 of the Income Tax Law.
 
 

Transfer Pricing Methods in Mexico

For the analysis of transactions among related parties, Mexican legislation has provided for six methods, which according to Article 180 of the Income Tax Law, are as follows:
 
  1. Uncontrolled comparable price method.
  2. Resale price method.
  3. Additional cost method.
  4. Utility partitioning method.
  5. Residual method of utility partitioning.
  6. Transactional profit margin method of the transaction.
 
It also establishes a hierarchy regarding the use of the methods, indicating that the Uncontrolled Comparable Price Method should be applied first, and that the other methods above may only be used to the extent that the first method is not appropriate.
 
Article 180 of the LISR also points out the priority of methods when the Comparable Uncontrolled Price (CUP) method is discarded:
 
“(…) It must be demonstrated that the method used is the most appropriate or the most reliable according to the available information, giving preference to the methods provided in sections II (Resale Price) and III (Cost Plus) of said article.”
 

Comparability Analysis in Mexico

According to the third paragraph of Article 179 of the Law, in order to determine whether a transaction among related parties is comparable to a transaction carried out by independent parties, the following comparability criteria shall be considered:

  • Characteristics of the transactions.
  • The functions or activities, assets and risks assumed in the operations.
  • The contractual terms.
  • Economic circumstances.
  • Business strategies.
Furthermore, it is important to mention that starting from the fiscal year 2022, the same article in its fourth paragraph indicates that the financial information of the companies selected as comparables for the current fiscal year to the taxpayer’s fiscal year under analysis must be used. Only when the business cycles or commercial acceptance of a product of the taxpayer cover more than one fiscal year, information from comparable operations corresponding to two or more previous or subsequent fiscal years may be considered.

Functional Analysis

According to what is indicated in article 76 section IX of the LISR, a dual functional analysis is required; that is, the Reports and the Supporting Documentation must contain information about the functions, assets, and risks assumed by the taxpayer and the related parties for each type of operation.

Formal Documentation Requested by the Authority

In accordance with Articles 76 and 76-A of the Income Tax Law, the Supporting Documentation, as well as the informative affidavits that must be filed.

Informative Statement of Transactions with Related Parties – Annex 9 of the Multiple Informative Statement (DIM)

According to Section X of Article 76 of the LISR, taxpayers must submit Annex 9 of the Multiple Informative Statement (DIM) for transactions recorded with both national and foreign related parties. The information required in this Statement includes identification details of all related parties, as well as the type and amount of transactions conducted with each. Additionally, information on the transfer pricing methodology used for each transaction must be provided, including the determined value ranges if comparables were used. Details on searches conducted in the study, adjustments made during the period, and confirmation of the availability of the transfer pricing study are also requested.

Annual Informative Statements of Related Parties:

In line with the measures outlined in BEPS Action 13, and as established in Article 76-A of the LISR, three types of additional annual informative statements were adopted for those taxpayers who engage in transactions with related parties as indicated in articles 32-A, second paragraph, and 32-H, sections I, II, III, IV, and VI of the CFF, as well as taxpayers established in article 76, sections IX and XII, in relation to article 179, first and last paragraphs of the LISR. (Described in the section of this subsection titled “Obliged to keep and/or present the supporting documentation and informative statements”). These Statements are:

  • Master Informative Statement: should contain the organizational structure of the taxpayer’s multinational group, description of the activities of the companies forming the group, description of the group’s intangible assets, financial activities with related parties, as well as the financial and tax situation of the group’s companies.
  • Local Informative Statement: Must contain the description of the organizational structure, strategic and business activities, as well as its transactions with related parties, as well as the financial information of the obligated taxpayer and the operations or companies used as comparables in their analyses.
  • Country-by-Country Informative Statement: Must include information at the tax jurisdiction level about the global distribution of income and taxes paid. Indicators of the location of economic activities in the tax jurisdictions where the multinational business group operates in the corresponding fiscal year and additionally a list of all the entities comprising the multinational business group. It is important to highlight that the country-by-country informative return must be submitted by the taxpayers mentioned in said article when they are in any of the two situations described below: 
    • They must be multinational controlling legal entities, for which they must meet the following requirements:
      • Being residents in Mexico.
      • Having subsidiaries defined in terms of financial reporting standards, or permanent establishments, located abroad, according to the situation.
      • Not being subsidiaries of another company resident abroad.
      • Being required to prepare, present and disclose consolidated financial statements in financial reporting standards terms.
      • Reporting in the consolidated financial statements the results of entities resident in one or more other countries or jurisdictions.
      • Having obtained in the immediately preceding fiscal year consolidated revenues for accounting purposes equal to or exceeding the $12 billion pesos.
    • Being legal entities resident in Mexican territory or resident abroad with a permanent establishment in the country, who have been designated by the controlling legal entity of the multinational corporate group resident abroad as responsible for providing the Country-by-Country Informative Affidavit.

Furthermore, it indicates that in cases where the Mexican tax administration cannot obtain the information corresponding to the Country-by-Country Report through information exchange mechanisms, it may require such a statement from the subsidiaries of a foreign company resident in Mexico or from non-residents who have a Permanent Establishment in Mexico.

 
 

Supporting Documentation in Mexico

Section IX of Article 76 of the Law states that it is necessary to have Supporting Documentation that the transactions carried out with related parties residing abroad have been carried out at market value.
For this purpose, the documentation must contain:
 
  • Identification data of the related parties.
  • Information on the functions, assets and risks assumed by the taxpayer in the transaction.
  • Information and documentation of transactions with related parties and their amounts for each related party and for each type of operation according to the classification, as well as with the comparability data and elements established by article 179 of the LISR..
  • The applied methodology, including information and documentation on comparable operations or companies for each type of operation, as well as the detail in the application of adjustments that, where applicable, have been made in terms of article 179, third paragraph of the LISR.
 
Nevertheless, taxpayers who meet any of the following requirements are exempt from the obligation to have such documentation:
 
  • Taxpayers, who carry out business activity, whose income in the immediately preceding fiscal year has not exceeded $13’000,000.00.
  • Taxpayers whose income derived from the rendering of professional services has not exceeded $3’000,000.00 in such fiscal year.

On the other hand, those taxpayers not listed in the preceding paragraphs a) and b); as well as those in the situation referred to in the penultimate paragraph of article 179 of the LISR and those who are contractors or assignees in terms of the Hydrocarbons Revenue Law, are obliged to have supporting documentation.

 

Obligations to Present Transfer Pricing Documentation

The conditions that obliged taxpayers must meet are established in Article 76-A Title II Chapter IX of the LISR, which points to:

Legal entities that engage in transactions with related parties and are required to have their financial statements audited by a registered public accountant according to Article 32-A of Title II of the Federal Tax Code (CFF); that is, whose declared accumulable income in the last immediate preceding fiscal year was equal to or greater than $1,779,063,820, as well as those that at the end of the immediately preceding fiscal year have shares placed among the general investing public on the stock exchange.

The amount of the quantity established in the previous paragraph will be updated in January of each year with the update factor corresponding to the period from December of the penultimate year to December of the last year immediately before the one for which the calculation is made, in accordance with the procedure referred to in Article 17-A of this Code.

(Paragraph amended DOF 12-11-2021)

Legal entities that conduct transactions with related parties and present information on their fiscal situation according to Article 32-H sections I, II, III, IV, and VI as follows:

Those who in the immediately preceding year declared in their normal income statements accumulable income equal to or greater than $974,653,950.00, as well as those that at the end of the immediately preceding fiscal year have shares placed among the general investing public on the stock exchange and are not found in any other case indicated in this article.

The amount of the quantity established in the previous paragraph will be updated in January of each year with the update factor corresponding to the period from December of the penultimate year to December of the last year immediately before the one for which the calculation is made, in accordance with the procedure referred to in Article 17-A of this Code.

(Amount of the paragraph updated by fiscal miscellaneous resolution DOF 05-01-2022, 27-12-2022).

  • Commercial societies that belong to the optional tax regime for groups of societies; that is, those that meet the requirements established in Chapter VI Title II of the LISR to be considered as integrating and integrated societies.
  • State-owned entities of the federal public administration.
  • Foreign-resident legal entities that have a permanent establishment (PE) in Mexico; only for activities they perform in those PEs.
  • Taxpayers who are related parties of the subjects established in Article 32-A second paragraph of the CFF.
  • Legal entities that conduct business activities with related parties and whose income in the immediately preceding year exceeded $13,000,000. Also obligated are residents in Mexico who have registered operations with societies or entities subject to preferential tax regimes, as well as those acting as contractors or assignees in terms of the Hydrocarbons Revenue Law. This according to Article 76 section IX and as indicated in the penultimate paragraph of Article 179 of the LISR.
  • Legal entities that conduct transactions with related parties according to Article 76 section XII.
  • Legal entities, individuals, and multinational companies, taxpayers of the LISR, who conduct transactions with related parties in relation to the first and last paragraph of Article 179 of the LISR.
 

Expiration of Transfer Pricing

Filing Schedule by Type of Obligation

Type of obligation Expirations Mexico – Fiscal Year 2023
Local Information Statement May 15, 2024
Master Information Statement December 31, 2024
Country by Country Report December 31, 2024

 

Regarding the study or documentation of transfer pricing, it must be retained by the taxpayer and made available to the Tax Administration upon request through written communication for the purposes of reviews or audits.

According to the update in the DOF (Official Federal Gazette) 12-11-2021, which amends Article 76 A of the LISR, taxpayers must annually provide the following statements concerning related parties (also called supporting documentation):

  • Master informative statement of related parties from the multinational business group.
  • Local informative statement of related parties.
  • Country-by-country informative statement from the multinational business group.
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