{"id":1126,"date":"2024-05-07T21:41:48","date_gmt":"2024-05-07T21:41:48","guid":{"rendered":"https:\/\/qcgtransferpricing.com\/en\/?p=1126"},"modified":"2026-04-14T12:12:54","modified_gmt":"2026-04-14T18:12:54","slug":"intercompany-transactions-and-the-market-value-trap","status":"publish","type":"post","link":"https:\/\/qcgtransferpricing.com\/en\/blog\/intercompany-transactions-and-the-market-value-trap\/","title":{"rendered":"Intercompany transactions and the market value trap"},"content":{"rendered":"\n

<\/a>The most important obligation for taxpayers under the transfer pricing regime is to demonstrate that transactions were conducted in accordance with the arm\u2019s length<\/em> principle, as established in Article 9 of the Model Tax Convention of the Organisation for Economic Co-operation and Development (OECD), which states:<\/p>\n\n\n\n

“Where conditions are made or imposed between the two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.”<\/em><\/p>\n\n\n\n

In Mexico, the arm\u2019s length<\/em> principle is set forth in Article 179 of the Income Tax Law in its first paragraph, which states:<\/p>\n\n\n\n

“Taxpayers under Titles II and IV of this Law who engage in transactions with related parties are required, for purposes of this Law, to determine their taxable income and authorized deductions, considering for such transactions the prices, amounts of consideration, or profit margins that they would have used or obtained with or between independent parties in comparable transactions.”<\/em><\/p>\n\n\n\n

Unfortunately, the Mexican provision is not equivalent to Article 9 of the OECD Model Tax Convention. The Mexican regulation requires taxpayers to demonstrate, through the analysis of a specific condition evaluated using a transfer pricing method (price, amount, or margin), that the transaction was agreed upon at arm\u2019s length<\/em>.<\/p>\n\n\n\n

This difference in the approach to the arm\u2019s length<\/em> principle has led to a simplistic interpretation of the regulation. Often, instead of analyzing whether taxpayers replicated the negotiation dynamics that independent third parties would have followed, it appears sufficient to simply demonstrate a “market price” through a transfer pricing method. However, nothing could be further from the truth. Under this perspective, Mexican taxpayers could engage in transactions that, while not in their best interest, would be considered compliant with the transfer pricing regime merely because they were at market value. This assumption is fundamentally flawed.<\/p>\n\n\n\n

This issue becomes evident in ongoing transfer pricing audits, where disputes extend far beyond the mere establishment of price. For example, the allocation of risks during negotiations between related parties is a frequent point of contention\u2014risks that are ultimately rejected as deductible if they are not those that an independent third party would have accepted in a comparable transaction.<\/p>\n\n\n\n

In summary, in any intercompany transaction, if the conditions imposed between the parties differ from those that would have been negotiated by an independent third party, the transaction is NOT arm\u2019s length<\/em>, regardless of whether the transaction price is at market value.<\/p>\n\n\n\n

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