Due to the reform initiative presented on December 12 by the Federal Executive to modify subcontracting rules—amending the Federal Labor Law, the Social Security Law, the Infonavit Law, the Fiscal Code, the Income Tax Law, and the Value Added Tax Law—various proposals have been made by labor and/or tax firms. These proposals include:
- Transferring the necessary personnel for executing activities inherent to the company’s corporate purpose (primary functions) to the operating companies.
- Concentrating necessary support activities in a separate entity (specialized secondary services, as proposed by the Federal Labor Law).
In this particular case, it is important to remind taxpayers that, to comply with the transfer pricing regime as proposed in sections IX and XII of Article 76 of the Income Tax Law, it must be demonstrated that the transactions carried out by these companies consider prices and compensation amounts that independent third parties would agree upon in comparable transactions. In other words, these transactions must be aligned with the arm’s length principle, which applies even to operations between related domestic parties.
To illustrate the situation, if a potential specialized secondary services company continues to operate and provides services to a related company that consolidates the group’s primary activities, the remuneration for this entity (and, eventually, profit-sharing for workers) would depend on at least the following factors:
- The way the operation is structured. What type of services will be provided? With what characteristics? Under what business model?
- The activities to be performed. What functions will be carried out—e.g., administration and finance, human resources, information technology? What will be their scope? How frequently will they be performed?
- The assets associated with the functions performed. Are there any intangible assets involved, or are they purely routine activities?
- The risks assumed by the parties. What risks exist in the operation, and to whom will they be assigned? Does the entity assuming the risks have the resources to manage them if they materialize?
These points must be considered in the contractual terms agreed upon between the service provider and the recipient, always replicating the negotiation dynamics that would be observed between independent third parties. Upon completion of this process, the corresponding prices or margins must be assigned based on the characterization of the transaction, using the transfer pricing methods established in Article 180 of the Income Tax Law in the prescribed order. It is important to emphasize that these prices or margins may vary depending on the available alternatives and the different business configurations chosen by the taxpayer.
From the authorities’ and courts’ perspective, the absence of supporting documentation for transfer pricing purposes can lead to the loss of deductibility for intercompany expenses, as such expenses would not meet the requirements outlined in Article 27 of the Income Tax Law, particularly sections V (deduction requirements for transactions with foreign related parties) and XVIII (timeframe for meeting deduction requirements set by the law). If taxable income is determined, such income would be considered as a deemed dividend (Article 140-VI of the Income Tax Law). Additionally, under the mechanism established in Article 5 of the Value Added Tax Law, the taxpayer would lose the ability to credit VAT associated with intercompany expenses that were disallowed as deductions for income tax purposes.
Furthermore, errors in structuring the transaction could result in an eventual modification of the taxable base as established in the penultimate paragraph of Article 90 and the second paragraph of Article 179 of the Income Tax Law. In other words, if the taxpayer improperly assigns the business model, leading to a reduced taxable base, they could be subject to a recharacterization of the transaction to reflect the prices and compensation amounts that would have been considered by independent third parties. In the worst-case scenario, the transaction could even be subject to the provisions of Article 5-A of the Federal Fiscal Code due to the lack of a valid business purpose.
