One of the worst scenarios a taxpayer under the transfer pricing regime could face is engaging in intercompany transactions that the tax authorities classify as “simulation,” as this could lead to tax fraud with severe legal consequences.
What situations can lead to such extremes? Generally, a mismatch between the substance and form of the transaction with the intent to reduce the taxable base of one of the participants.
Consider an intercompany transaction where a service is provided. If the recipient of the service cannot demonstrate how it generates an economic benefit (for example, by relieving them of an essential activity) and the service provider fails to prove the necessary experience, infrastructure, and resources, there would be at least a reasonable doubt regarding the reality of the transaction.
Another example is when a taxpayer exploits an intangible asset, such as a brand, but there is no evidence that the owner of the intangible has invested in the necessary activities to obtain it, such as marketing expenses.
Additionally, if the brand does not contribute to generating higher revenue for the supposed beneficiary, can it truly be considered an asset?
These and many other situations impact the taxable base of the participants, either through taxable income or allowable deductions. However, in Mexico, similar cases can trigger the presumption of absolute or relative simulation, as outlined in the Income Tax Law and the Federal Tax Code, particularly when involving transactions between related parties.
For a transaction to be classified as simulated, tax authorities must determine it as such, even based on presumptive elements. However, being involved in such cases is not just a headache—it poses a serious risk for the taxpayer, as the issue could escalate to a criminal offense with penalties of up to nine years in prison in Mexico.
Do not let these risks affect your business. Our transfer pricing experts have in-depth knowledge of the complexities of intercompany transactions and the legal framework in Mexico. We will work with your organization to meticulously analyze your operations.
