Key Aspects of the Transfer Pricing Forum Held on January 15, 2019, at Universidad Panamericana to Discuss Recent Non-Binding Criteria and Frequently Asked Questions on Transfer Pricing
On January 15, 2019, at the Universidad Panamericana, Mixcoac Campus in Mexico City, the forum titled “Towards the Search for Consensus on Comparability Adjustments and Non-Binding Criteria” took place.
This event was organized as a response to the publication of clarifications on frequently asked questions related to the implementation of comparability adjustments in transfer pricing on November 21, 2018, and the publication in the Official Gazette (DOF) on November 30, 2018, of Annex 3 on “Non-Binding Criteria”, specifically Criteria 39/ISR “Recognition of Unique and Valuable Contributions” and 40/ISR “Modifications to the Value of Related-Party Transactions Within the Interquartile Range”.
The forum was technically attended by members of the Transfer Pricing Commission of the National Federation of Economists, who, through various panels, analyzed the implications of the tax authority’s stance. The authority was represented by Carlos Pérez Gómez Serrano, Central Administrator for Transfer Pricing Audits, and Óscar Fernando Trujano Sandoval, Transfer Pricing Administrator. Both provided their perspectives and engaged in a technical debate on each of the aspects under review.
Next, Jesús Aldrin Rojas, Partner at QCG Transfer Pricing Practice, outlines the key aspects of each panel.
Implementation of Comparability Adjustments
This panel included Carla Herrera from Élan Zaak, Argel Romero from BDO, Allan Pasalagua from Baker McKenzie, Édgar Antúnez from PWC, and was moderated by Marisol Oregel from RSM.
The discussion covered fundamental concepts such as comparability (i.e., two or more transactions can be considered comparable for transfer pricing purposes as long as there are no significant differences that affect the examined condition under the transfer pricing method—price or margin). The panel reviewed which types of comparability adjustments can be implemented in transfer pricing and considered whether these adjustments actually improve transfer pricing analysis or potentially distort comparisons once applied.
The discussion also focused on identifying significant differences that could impact pricing and therefore must necessarily be identified and eliminated through adjustments, versus differences that are not material or have no impact on the analyzed condition under the applied transfer pricing method.
The panel then examined some of the most commonly implemented comparability adjustments, particularly those related to working capital. Currently, in transfer pricing methods based on profitability—such as resale price methods, cost-plus methods, and transactional net margin methods—working capital adjustments are frequently used. These adjustments stem from the assumption that differences in accounts receivable, accounts payable, or inventories between the analyzed entity and comparables may affect profitability. Such differences, if present, must be quantified and eliminated.
The panel reviewed the adjustment formulas proposed by the Mexican government and those suggested by the Organisation for Economic Co-operation and Development (OECD) in its 2017 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Differences between these approaches were identified, and the need to properly establish interest rates for implementing these adjustments, in accordance with the comparable entities’ cost of capital, was emphasized.
Alternative Discussions on the SAT’s Country Risk Adjustment
This panel featured Carlos Pérez Gómez Serrano, Central Administrator for Transfer Pricing Audits at SAT, Ricardo M. Cruz Sánchez from EY, Miguel A. Trejo López from Andersen Tax & Legal, David S. Barrón Tovar from LawBiz Consulting Group, and was moderated by Jesús Aldrin Rojas from QCG Transfer Pricing Practice.
The discussion focused on the proposal to implement a “country risk” adjustment and potential alternatives to it. From the tax authority’s perspective, when taxpayers use transfer pricing methods that compare their profitability margins (gross or operating) with those of independent third parties—particularly comparable companies from developed economies such as the U.S.—an adjustment is necessary to reflect how the comparables’ profitability would be affected if they operated in the same country as the analyzed entity (Mexico, in the case of a domestic taxpayer).
The adjustment proposed by SAT is based on Article 179, third paragraph, of the Mexican Income Tax Law (LISR), which states:
“Operations or companies are considered comparable to the analyzed transaction when there are no differences that significantly affect the price or compensation amount, or the profit margin referred to in the methods outlined in Article 180 of this law. If differences exist, they must be eliminated through reasonable adjustments.”
Based on this, the tax authorities propose eliminating profitability differences attributable to country risk through the following formula:
ARP = AOPComp * RPMexico
Where:
- ARP = Country risk adjustment
- AOPComp = Average operating assets of the comparable
- RP = Country risk in Mexico
Application:
SalesComp + ARP
As can be seen, the key factor in this formula is country risk, which quantifies the likelihood of default in an emerging economy compared to another, typically the U.S. The Emerging Market Bond Index (EMBI)—a measure developed by JP Morgan—represents the interest rate spread between U.S. Treasury bonds and dollar-denominated bonds issued by developing countries.
Panelists presented several viewpoints, including:
- OECD guidelines (paragraph 3.53) caution against considering comparability adjustments as automatic or routine.
- Empirical evidence does not show a positive correlation between risk and profitability in the context proposed by SAT.
- The proposed adjustment could lead to an artificial increase in comparable companies’ profitability, without accounting for possible negative exposure to risk that could even lead to losses.
Adjustments Within the Interquartile Range
This panel, composed of Mario Barrera from Thomson Knight, Ricardo Cruz from EY, Guillermo Villaseñor from Sánchez Devanny, Óscar Trujano from SAT, and moderated by Yessica Valor from Best Buy, analyzed the implications of criterion 40/ISR/CNV “Modifications to Transaction Values Within the Interquartile Range”.
SAT considers it inappropriate to revalue transactions already within the interquartile range to extreme points in the range for the purpose of maximizing intercompany revenues or deductions. Failure to comply with this criterion could lead to the tax authority disregarding the transaction’s effects, impacting the taxpayer’s taxable base.
The panel concluded that intra-range adjustments are permissible as long as they are made before the fiscal year closes. However, if adjustments occur between January 1 and March 31 (the deadline for filing the annual tax return), they must comply with specific tax regulations.
Recognition of Unique and Valuable Contributions
The final panel included Fernando Pliego from Grant Thornton, Yoshio Uehara from Chévez Ruiz Zamarripa, Jesús Aldrin Rojas from QCG Transfer Pricing Practice, Óscar Trujano from SAT, and Guillermo Villaseñor from Sánchez Devanny as moderator. It analyzed Criterion 39/ISR/CNV regarding the recognition of unique and valuable contributions in transfer pricing analyses.
Mexican tax regulations require related-party transactions to be analyzed considering the prices and compensation amounts that would be used between independent parties in comparable transactions. The panel emphasized the importance of accurately determining whether an entity’s contributions are unique and valuable and ensuring compliance with OECD transfer pricing guidelines.
[1] Se agradece el apoyo en la elaboración del presente en específico al licenciado David Barrón, socio de precios de transferencia de LawBiz Consulting Group y en general a los miembros de la Comisión de Precios de Transferencia de la Federación Nacional de Economistas.
[2] https://www.gob.mx/sat/acciones-y-programas/preguntas-frecuentes-en-materia-de-precios-de-transferencia-con-respecto-a-ajustes-de-comparabilidad?tab=
[3] Por las siglas en inglés de development, enhancement, maintenance, protection and exploitation. Es decir, desarrollo, mejora, mantenimiento, protección y explotación, con respecto a las actividades que pudiera realizar el contribuyente mexicano con respecto a activos intangibles.
[4] Art. 180, fracciones II, III y VI de la LISR
[5] Art. 180, fracción V de la LISR
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