On Wednesday, June 11, 2018, the Second Resolution of Amendments to the 2018 Tax Miscellany (RMF) was published in the Official Gazette of the Federation. This resolution introduces new rules regarding transfer pricing adjustments. The changes are as follows.
Conceptualization of Transfer Pricing Adjustments
The RMF defines the concept of “adjustments in transfer pricing.” For these purposes, it establishes that a transfer pricing adjustment will be: “any modification to the prices, amounts of consideration, or profit margins corresponding to the transactions carried out by the taxpayer with its related parties, made to ensure that the taxable income or authorized deductions derived from such transactions are determined considering the prices and amounts of consideration that would have been used with or among independent parties in comparable transactions, even when no cash or other material resources are exchanged between the parties.” (Rule 3.9.1.1., first paragraph). When transfer pricing adjustments have fiscal and accounting effects, they are considered real, but if they only affect tax matters, they are considered virtual. Both modalities may include the following variables: voluntary or compensatory; primary; national or foreign correlative; and secondary (Rule 3.9.1.1., second paragraph, addition). Regarding taxpayers who recognize their income upon collection of the agreed price or consideration, adjustments to their transactions will have a tax effect only when they are effectively collected or paid, as applicable (Rule 3.9.1.1., penultimate paragraph, addition). The last paragraph of Rule 3.9.1.1. emphasizes that transfer pricing adjustments will maintain the same concept or nature as the adjusted transaction.
Mechanism for Increasing or Decreasing Income or Deductions from Transfer Pricing Adjustments
Rule 3.9.1.2 provides a procedure for increasing “A” or decreasing “D” income or deductions from transfer pricing adjustments, depending on whether the price, amount of consideration, or profit margin of the transaction increased or decreased (Rule 3.9.1.2., addition).
The following applies:
Voluntary or Compensatory and National or Foreign Correlative Adjustments
Mexican residents and foreign residents with a permanent establishment in Mexico, depending on an equivalent adjustment amount:
| INCREASES | DECREASES |
|---|---|
| When taxable income was obtained [and it was lower than its arm’s length value], the income must be increased. If the transfer pricing adjustment is voluntary or compensatory, the increase will be considered nominal income in the month it is made. | When taxable income was obtained [and it was higher than arm’s length values], authorized deductions may be increased (via discounts or rebates) by meeting the requirements in Rules 3.9.1.3., 3.9.1.4., and 3.9.1.5. of the 2018 RMISC (3.9.1.2., B. I). |
| When deductions were made [and those deductions were for an amount lower than their arm’s length value], they may be increased if the requirements of Rules 3.9.1.3., 3.9.1.4., and 3.9.1.5. of the 2018 RMISC are met. | When deductions were made [and they were higher than arm’s length values], authorized deductions may be decreased by the equivalent amount of the adjustment. |
For adjustments affecting withholding tax on a foreign resident without a permanent establishment, the withholding agent may:
- Remit an amount equal to what should have been withheld considering the adjustment.
- Compensate the resident with an amount equal to the excess withholding (only if it is a real transfer pricing adjustment). This mechanism will apply to withheld amounts, or
- Subject the adjustment amount to taxation under the ISR Law, if lower withholding rates were applied under double taxation treaties, only if the adjustment is virtual.
Regarding VAT and IEPS, adjustments and tax credits must also be made. The creditable tax originally considered as meeting the requirements for crediting will be reduced in the relevant month by an amount equivalent to multiplying the original creditable tax by the factor resulting from dividing the adjustment amount by the unadjusted transaction amount.
Deduction of Adjustments in the Year of Recognition
Taxpayers who increased their deductions based on voluntary or compensatory adjustments must (Rule 3.9.1.3., addition):
- Submit informative returns, normal or complementary declarations, expressly stating the transfer pricing adjustment.
- Obtain and retain:
- All documentation and information demonstrating that the originally adjusted transaction did not consider the prices, amounts of consideration, or profit margins that would have been used with or among independent parties in comparable transactions.
- A signed statement from the person who prepared the documentation explaining why the originally agreed prices, amounts of consideration, or profit margins did not match market values.
- A signed statement from the person who prepared the documents explaining the consistency or inconsistency in the application of transfer pricing methodologies and the search for comparable transactions or companies, at least in relation to the previous fiscal year, with respect to the adjusted transaction.
- All documents and data corroborating that the adjustment ensured the transaction considered the prices, amounts of consideration, or profit margins that independent parties would have used. This must include the arithmetic calculation of the adjustment.
Notification to the SAT
Taxpayers making a voluntary or compensatory transfer pricing adjustment after the deadlines established in Rule 3.9.1.3., third paragraph, may deduct it in the fiscal year in which the income or deductions from related-party transactions that originated them were recognized, provided they first submit a notification meeting the requirements set in procedure file 130/ISR “Prior notice of transfer pricing adjustments made under Rule 3.9.1.4., first paragraph,” contained in Annex 1-A (Rule 3.9.1.4., addition).
Additionally, taxpayers seeking to make a national correlative transfer pricing adjustment as a result of a primary adjustment to their counterparty under Rule 3.9.1.1. may deduct it, provided it results from a fiscal correction of their counterparty and they first submit a notification meeting the requirements set in procedure file 134/ISR “Prior notice of transfer pricing adjustments made under Rule 3.9.1.4., second paragraph,” contained in Annex 1-A. The tax authority may exercise verification powers over the information presented in these notifications as provided in the CFF.
Conclusions
The incorporation of rules on transfer pricing adjustments is undoubtedly a step towards providing legal certainty to taxpayers. These rules clarify that the implementation of domestic correlative adjustments is possible and show an effort by the authority to prevent double taxation arising from both domestic and cross-border related-party transactions. However, these new rules also impose additional obligations on taxpayers and their tax advisors, particularly in preparing sworn statements detailing the nature of the adjustment, its underlying circumstances, and its proper implementation. The use of forms 130 and 134 for prior notification of adjustments to tax authorities is also highly relevant. It will be essential to monitor the practical implementation of this new regulatory framework and any feedback from tax authorities regarding its application.
