The transfer pricing regime in Mexico has once again undergone modifications to remain a valid instrument for tax supervision and effective revenue collection by the tax authorities. On September 8, 2021, the Executive Branch presented a decree amending, adding, and repealing various provisions of the Federal Tax Code (CFF), the Income Tax Law (LISR), the Value Added Tax Law (LIVA), and the Special Tax on Production and Services Law (LIESP). The decree introduces new and aggressive rules for taxpayers under this regime. In summary, the main changes are as follows:
The Regime Now Applies to Domestic Intercompany Transactions
The tax reform proposal, in accordance with regulatory criteria 32/ISR/N, 34/ISR/N, 35/ISR/N, and the Miscellaneous Tax Resolution in rule 3.9.5, confirms that the regime applies to transactions carried out between related parties residing in Mexico. Consequently, a modification to Title VI, Chapter II of the LISR is proposed to rename it as “Multinational Enterprises and Transactions with Related Parties.” Documentation requirements for transactions with both domestic and foreign related parties would be standardized (LISR 76-IX), and domestic taxpayers would also be required to submit an informative return on related-party transactions. This would oblige them to disclose to the tax authorities:
- The intercompany transactions carried out.
- The transaction amounts.
- The related parties involved.
- The transfer pricing method used.
- Whether the transaction was conducted on an arm’s length basis.
- If applicable, any adjustments to prices, consideration amounts, or profit margins.
Review of Criteria for Transfer Pricing Analysis
To confirm that a transaction is conducted on an arm’s length basis (i.e., to demonstrate that the intercompany transaction was carried out under terms that would have been agreed upon with independent third parties), a comparability analysis is required. This analysis considers the relevant attributes of the intercompany transaction, including the characteristics of the transaction, functions, assets, risks, contractual terms, and economic conditions, as prescribed in Chapter III of the OECD Transfer Pricing Guidelines and Article 179 of the LISR.
Previously, the comparability analysis typically focused on the entity under review. However, the proposed legal reform will require that the perspective of all parties involved in the transaction be considered (LISR 76-IX,b). Additionally, the proposal restricts the period for evaluating prices, consideration amounts, or profit margins, mandating a year-by-year comparison unless the taxpayer can demonstrate a business cycle in the analyzed transaction (LISR 179).
Furthermore, when applying any of the transfer pricing methods prescribed by Article 180 of the LISR, taxpayers will be required to provide details of comparability adjustments related to accounting, capital, and country risk (LISR 76-IX,d). The results must be presented using the interquartile range, the method agreed upon in a mutual agreement procedure, or, if applicable, the method proposed by the tax authorities through general regulations (LISR 180).
Use of Confidential Taxpayer Information for Benchmarking (Secret Comparables)
One of the mechanisms available to the tax authorities to confirm the arm’s length nature of intercompany transactions is the use of data from transactions conducted with or between independent third parties in possession of the Mexican Tax Administration Service (SAT). The tax reform proposal re-evaluates this provision, allowing taxpayers to access this information by designating two representatives. This would enable them to correct their situation, dispute findings, clarify omissions, or challenge imposed tax assessments (CFF 46).
New Deadline for Transfer Pricing Informative Returns
The proposed reform establishes a new deadline for submitting the informative return on related-party transactions (both domestic and foreign), setting it at May 15. This may be problematic, as financial information from public companies related to the prior fiscal year might not yet be fully available by that date. On the same deadline, local reports must also be submitted by taxpayers required to do so under Articles 32-A, second paragraph, and 32-H, sections II, III, and IV of the CFF (LISR 76-X, 76-A). However, the master file for multinational enterprise groups and the country-by-country report will still be due on December 31 of the fiscal year following the one being reported (LISR 76-A).
Elimination of Advance Pricing Agreements (APAs) for the Maquiladora Regime
One of the most notable changes is the elimination of Advance Pricing Agreements (APAs) for maquiladora companies. The authorities argue that taxpayers under this regime have abused this option by adopting aggressive tax positions. Consequently, maquiladoras and shelter companies will now be limited to using the Safe Harbor method (6.9% on costs and expenses, 6.5% on assets) to avoid creating a permanent establishment in Mexico, which would significantly increase their operational costs. Additionally, failing to submit the informative return for manufacturing, maquiladora, and export service companies (DIEMSE) in June of the relevant year would result in the establishment of a permanent establishment in Mexico (LISR 182).
Tax Fraud in Intercompany Transactions?
Since transactions with related parties do not have the same negotiation incentives as those between independent third parties, taxpayers may engage in transactions that misrepresent their nature or, in the worst case, simulate transactions that do not actually exist. In response, the reform proposal incorporates into the CFF a mechanism similar to that previously established in Article 177 of the LISR, allowing tax authorities to determine whether legal acts in intercompany transactions are simulated. If taxpayers are found to be in such a situation, they would be subject to tax fraud penalties (CFF 109, IV, CFF 42-B).
Other Modifications Impacting the Transfer Pricing Regime
Beyond the previously discussed reforms, the federal government also proposes changes to provisions that, while not directly related to transfer pricing, do have an impact on it. For example, deductions for interest payments that fail to comply with thin capitalization rules will be restricted for taxpayers who, despite not being licensees or contractors, deduct interest from financing used for constructing, operating, or maintaining infrastructure related to strategic sectors or electricity generation. Likewise, interest deductions will be restricted for non-regulated Multiple Purpose Financial Institutions (SOFOMES ENR) that conduct most of their activities with related parties (domestic or foreign), arguing—albeit not always correctly—that the lender is often based in tax havens (LISR 28-XXVII).
Additionally, the transfer pricing regime will be involved in new requirements related to business purpose in corporate restructurings (LISR 24, I, VII), backed loans (LISR 11, V, 5th paragraph), deductions for technical assistance, technology transfers, or royalties when provided through intermediaries (LISR 27-X), beneficial owner regulations (CFF 32-B ter, quater, quinquies), and the requirement to include a transfer pricing study when demonstrating the market value of stock sales with a source of wealth in Mexico (LISR 24-161, VII). Moreover, taxpayers engaged in transactions with related parties will be excluded from the new simplified tax regime (LISR 206).
Conclusions
It is evident that transfer pricing will be one of the key mechanisms used by tax authorities to increase revenue collection in Mexico. Given the scale and depth of these proposed changes, taxpayers will need to conduct a thorough review of their supporting documentation. Failure to comply with the new requirements may expose them to significant penalties, including the loss of intercompany expense deductions or the recalculation of their taxable bases. In soccer terms, the tax authorities are not only attacking but also playing the offside trap. Taxpayers must act promptly and responsibly in response.
