The Mexican tax authorities on April 3 issued final administrative rules to implement the transfer pricing documentation and country-by-country reporting scheme set out in Action 13 of the OECD/G20 base erosion and profit shifting (BEPS) plan agreements.
The new rules, referred to in article 76-A of the Mexican Income Tax Law, are the result of a public consultation on draft rules conducted through the Mexican Taxpayer’s Ombudsman (PRODECON). The final provisions were established in the First Resolution of Modifications to the 2017 Miscellaneous Tax Resolution.
Mexico’s implementation of BEPS
In general, Mexico has been an early adopter of OECD/G20 base erosion profit shifting (BEPS) plan initiative, enacting its first laws based on the project’s recommendations in an amendment to the Mexican Income Tax Law (MITL) which entered into force on January 1, 2014.
Derived from the transfer pricing documentation recommendations included in Action 13 of the BEPS Project, the MITL for 2016 was amended to include a provision which obliges certain taxpayers to file three information returns.
The master information return of related party members of a multinational enterprise (master file) must include information on the multinational’s organizational structure, business, intangibles, financial activities among related parties, and financial and tax position.
The local information return of related parties (local file) must include a description of the organizational structure, business strategies, related-party transactions, financial information and the comparable companies or transactions used in the multinational’s transfer pricing analysis.
The country-by-country information tax return of the multinational enterprise (country-by-country return) must include an overview of the allocation of income, taxes, and business activities by jurisdiction and list of all the constituent entities members of the multinational enterprise.
The MITL established that the Mexican tax authorities should issue administrative rules and forms for filing the three transfer pricing information returns.
The new administrative guidance specifies that the transfer pricing information returns (master file, local file, and country-by-country reporting) rules apply to fiscal year 2016, and that they apply in addition to the transfer pricing contemporaneous documentation requirements established by the MITL.
In general, the new transfer pricing scheme applies to a Mexican taxpayer that, in the immediately preceding fiscal year, carried out transactions with related parties and that declared taxable income equal to or exceeding MXP $644,599,005 on its annual tax return.
Such taxpayers are required to file no later than December 31 the aforementioned information returns. Derived from the recently published rules, these information returns require that broad list of information be provided to the Mexican tax authorities.
In general, the information requested for the master file is aligned with the suggestions of Action 13 of the BEPS project.
In fact, the rules establish the possibility for the obliged Mexican taxpayer to submit a master file prepared by a foreign-based related party, provided that it complies with the requirements of Action 13 of the BEPS project and that it is submitted in English or in Spanish.
Notwithstanding the aforementioned, there is specific information requested for the Mexican master file that is not aligned with BEPS Action 13. The Mexican rules, for example, require disclosure of the termination or significant renegotiation of agreements.
This request may create uncertainty for a Mexican taxpayer that provides a master file prepared abroad since no definition “significant renegotiation” is provided, besides the fact that the information might not be included in a master file prepared abroad aligned with Action 13.
Moreover, Mexico’s new master file rules do not provide specific guidance for situations such as Mexican joint ventures formed by two competitors. Specifically, the rules do not establish whether such JVs must file a master file for both groups to which the JV belongs or for just one of them.
From a practical and economic point of view, it seems unlikely that such JVs would have information — such as trade secrets and value drivers — needed to fill out the master files of both groups.
In addition, there is some information required by the local file that might be impossible to obtain by some Mexican taxpayers.
For example, the administrative rule requires financial and tax information for all foreign-based related parties that are counterparty to each transaction carried out by the Mexican taxpayer. It also requires a list of unilateral and bilateral advance pricing agreements or mutual agreement procedures not involving Mexican tax authorities that concern intercompany transactions carried out during the declared fiscal year.
Mexico country-by-country reporting
The information required for the country-by-country return generally follows the BEPS Action 13 suggestions.
It is important to keep in mind that, as an exception to the obligation to file the country-by-country return, Article 76-A establishes that Mexican taxpayers that qualify as multinational controlling entities (ultimate holding resident in Mexico) should submit the country-by-country return when annual consolidated revenue of the multinational group in the immediate previous fiscal year is above $12 billion pesos (~ 750 million euros).
In addition, the Mexican tax authorities may obtain from other foreign tax authorities the country-by-country report through an exchange of information mechanism.
The MITL requires that Mexican tax authorities to issue the forms for filing the abovementioned information returns; but these have not yet been issued.
It will be necessary to analyze the forms to determine if the specific information required exceeds what it is suggested by Action 13 of the OECD BEPS project or if the filing of such information returns is impossible for certain taxpayers.
Likewise, the applicability of potential legal remedies should be analyzed on a case-by-case basis and, in general, such legal remedies would be applicable to a specific requirement or a specific rule rather than to the entirety new issued rules.
Following the 2016 MITL amendments establishing the new three-tier transfer pricing obligation in Mexico, several taxpayers filed an amparo complaint, which is a constitutional remedy to challenge a legal provision considered issued in violation of human rights. The taxpayers requested constitutional protection from the obligations imposed by section 76-A of the MITL.
In general, the taxpayers argued that there is no certainty regarding the information that should be provided to the tax authorities by means of this new obligation and that the provision thus violates the legal certainty guarantee.
Taxpayers also argued that providing the information required by the new information returns implies an imminent exercise of the audit faculties of the tax authorities and such audit faculties must comply with the legal certainty rights.
For that reason, taxpayers argued that the law violates the non-self-incrimination principle since the information that the taxpayers are obliged to provide in connection with section 76-A of the MITL could be used for future audits carried out by the tax authorities.
It was also argued that the taxpayers do not have access to the information requested in section 76-A of the MITL since the law requires information of multinational enterprises as a whole and the fact that commercial transactions are carried out between related parties does not imply that there is an exchange of tax, financial, accounting, and commercial information of related parties involved.
After a judicial procedure, these amparo complaints were rejected by the Second Chamber of the Mexican Supreme Court of Justice, which confirmed that section 76-A of the MITL is both constitutional and legal.
Nevertheless, it should be noted that this decision was issued before the new administrative rules were made public, and, as a consequence, the legality of these rules has not yet been analyzed by Mexican courts.