One of the greatest challenges faced by legal entities conducting transactions with related parties is complying with the transfer pricing regime. The cornerstone of this regime is adherence to the “Arm’s Length” principle, which requires that controlled transactions (those carried out between related parties) replicate the negotiation dynamics that independent third parties would observe in comparable transactions.
To better understand this matter, it is necessary to refer to Article 179 of the Income Tax Law (ISR), which states that taxpayers engaging in transactions with related parties must determine their taxable income and authorized deductions based on the prices and compensation amounts that would have been used with or between independent parties in comparable transactions. To demonstrate that an intercompany transaction complies with this article, a transfer pricing analysis must be conducted, applying one of the methods outlined in Article 180 of the same law, in the order prescribed, namely:
- Uncontrolled comparable price method
- Resale price method
- Cost plus method
- Profit split method
- Residual profit split method
- Transactional net margin method
Additionally, this article specifies that for the interpretation and application of Chapter II, “On Multinational Enterprises,” the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, approved by the Council of the Organization for Economic Co-operation and Development (OECD), will be applicable.
It is important to consider that obtaining transfer pricing documentation must align with the requirements of Article 28 of the Federal Tax Code (CFF), which defines accounting as comprising books, systems, and accounting records, working papers, account statements, special accounts, corporate books and records, inventory control and valuation methods, disks, tapes, or any other processable data storage medium, as well as electronic fiscal registration systems and their corresponding records. Additionally, it includes all supporting documentation related to compliance with tax obligations, proof of income and deductions, and any other documents required by law. The Regulations of this Code establish the specific documentation and information necessary for compliance with this requirement and the additional elements that integrate accounting records.
Since transfer pricing documentation is part of accounting records, it is essential to understand its required scope. Section IX of Article 76 of the ISR Law mandates that legal entities “obtain and retain supporting documentation when engaging in transactions with related parties residing abroad, to demonstrate that the amount of their income and deductions was determined according to prices or compensation amounts that independent parties would have used in comparable transactions.” Section X requires them to report transactions with related parties residing abroad, and Section XII obligates legal entities to “determine their taxable income and authorized deductions, considering for these transactions the prices and compensation amounts that would have been used with or between independent parties in comparable transactions.”
Failure to provide supporting documentation for transfer pricing would lead to the loss of the intercompany expense deduction.
Non-compliance with Sections X and XII constitutes a violation (Article 81, Section XVII of the CFF), even if the documentation is incomplete or contains errors. In any case, the fine ranges from $77,230.00 to $154,460.00 (Article 82, Section XVII of the CFF). It is essential to note that the Federal Court of Administrative Justice has ruled in previous cases that the lack of supporting documentation for transfer pricing would result in the loss of the deduction for intercompany expenses, based on the following reasoning:
“(…) Taxpayers engaging in transactions with related parties residing abroad are required to obtain, retain, and provide (…), supporting information and documentation demonstrating that the deduction of payments made to related parties was determined according to prices or compensation amounts that would have been used with or between independent parties in comparable transactions, meaning at market prices. Otherwise, the deduction in question will be deemed inadmissible, as the absence of such information and documentation prevents certainty regarding the existence of the relevant transactions and, consequently, the prices or amounts considered for the deduction determination (…)” [1]
Our Firm Leads the Certification Process for Transfer Pricing Professionals
For the insurance and reinsurance sector, these regulations are not overlooked by lawmakers. According to the Single Circular on Insurance and Bonds (CUSF), to comply adequately with the obligations imposed by law on insurance institutions, these entities are allowed to contract with third parties or related parties for necessary services, such as underwriting, customer service, risk management, asset management, actuarial services, IT systems and technology, legal and administrative services, reinsurance, among others. In this regard, the CUSF, in Title 12, “On Contracting Services with Third Parties and Transactions with Related Entities,” Chapter 12.2, specifies that when insurance institutions conduct transactions with related parties, they must obtain a transfer pricing study conducted by an independent and expert third party, which must be submitted to the National Insurance and Bonding Commission (CNSF) during the first quarter of each year. This study confirms that the transactions conducted during the immediately preceding calendar year were agreed upon under terms comparable to those that would have been established by independent third parties, thereby complying with the Arm’s Length principle.
It is worth mentioning that our firm leads the certification process for transfer pricing professionals, initiated by the National Federation of Economists, as a professional association. Furthermore, our lead partner is currently the only expert witness in transfer pricing matters assisting the Judicial Branch of the Federation’s First Circuit in specialized cases, as stated in the publication of the Official Gazette of the Federation dated December 13, 2019 [2], making him the only professional to achieve this prestigious distinction.
About QCG
QCG is a consulting firm specializing in transfer pricing, international taxation, and foreign trade. Through our advisory services, more than 300 multinational companies worldwide fulfill their tax obligations, optimize their operations, and improve their business outcomes. Our practice is structured into multidisciplinary teams grouped by industry, with highly qualified professionals experienced in transfer pricing and international taxation.
This bulletin is for informational purposes only and does not constitute or should not be interpreted as the provision of services or advisory. QCG assumes no responsibility for the use and content of the information provided. Please consult qualified specialists before making any decisions that may impact your business operations.
[1] Consideraciones plasmadas en la Tesis V-P-2aS-492 derivada del Juicio Contencioso Administrativo 23787/03-17-09-9/371/05-S2-09-02. Disponible en: RTFJA, 5ª Época, Año VI. Número 68, Agosto 2006, p. 20. Tesis al rubro: DEDUCCIONES POR PAGOS REALIZADOS A PARTES RELACIONADAS RESIDENTES EN EL EXTRANJERO. PARA QUE PROCEDA ES NECESARIO QUE EL CONTRIBUYENTE PROPORCIONE LA INFORMACIÓN Y DOCUMENTACIÓN QUE DEMUESTRE QUE EL MONTO SE DETERMINÓ DE ACUERDO A PRECIOS DE MERCADO.
[2] Disponible en: https://www.dof.gob.mx/nota_detalle.php?codigo=5581885&fecha=13/12/2019
