by Juan Carlos Ceballos & René Allet Acuña, Aptis Global LLC
The Mexican tax authority on July 11 issued guidance revising Mexico’s transfer pricing regime for multinationals. Included are significant changes to Mexico’s transfer pricing adjustment rules and clarifications to filing deadlines.
The new guidance will impact the taxation of domestic and cross-border related party transactions effective July 12.
Mexico transfer pricing adjustments
Mexico requires taxpayers to price their related-party transactions using the arm’s length principle. To the extent an adjustment is necessary to set a transaction at arm’s length price, the new guidance provides taxpayers with an enhanced set of transfer pricing adjustment rules. It is important to note that there is no need to physically exchange cash or merchandise to perform an adjustment complying with the new rules.
Under the new guidance, transfer pricing adjustments are defined as follows:
Changes to the prices, amounts of consideration or profit margins corresponding to the operations carried out by the taxpayer and its related parties. The purpose of those changes is to determine if the cumulative income or authorized deductions derived from intercompany transactions were by the arm’s length principle.
The newly amended guidance then expands on this definition, defining two broad types of transfer pricing adjustments: real transfer pricing adjustments, which are adjustments that have tax and accounting effects, and virtual transfer pricing adjustments, consisting of adjustments that have only have an accounting impact.
Moreover, the guidance provides for five sub-categories that further characterize a transfer pricing adjustment.
- Voluntary transfer pricing adjustment: This type of adjustment is a taxpayer initiated retroactive transfer pricing adjustment disclosed in a regular or amendment tax return in connection to the fiscal year of the transfer pricing adjustment.
- Primary transfer pricing adjustment: This adjustment is determined because of an audit and could trigger correlative adjustments either at a national level or with foreign tax jurisdictions.
- Correlative national transfer pricing adjustment: An adjustment determined by a domestic-related party transaction because the related party was subject to a transfer pricing adjustment.
- Correlative foreign transfer pricing adjustment: An adjustment determined by a foreign party with a permanent establishment in Mexico because the related party was subject to a transfer pricing adjustment.
- Secondary transfer pricing adjustment: An adjustment characterized as a fictional dividend when applying Articles 11, Fraction II; 140, Fractions III y VI y 164, Fraction I of the Mexican Income Tax Law.
The new transfer pricing guidance provides that, for tax purposes, the nature of the transfer pricing adjustment will be in line with how the covered transaction is defined.
Adjustments follow the nature of the transactions
A voluntary transfer pricing adjustment can have only two types of effects on the price, transaction amount transacted, or margin: an upward effect or a downward effect (resulting in an increase or decrease in the Mexican taxpayer’s taxable revenue), the new guidance states.
A transfer pricing adjustment can also be applied only to affect income or deduction. The guidance explains the tax consequences for either scenario.
Further, rule 184.108.40.206 of the new guidance requires taxpayers to file specified supporting documents when a transfer pricing adjustment results in a decrease in the Mexican taxpayer’s taxable revenue.
A company must increase income by the same percentage as the transfer pricing adjustment, the guidance states. If the transfer pricing adjustment was voluntary, the increase would be considered nominal income in the period the adjustment was made, as stated in Article 14, third paragraph of the Mexican Income Tax Law.
On the other hand, a company may, but is not required to, increase its deductions in the same percentage as the transfer pricing adjustment, only if the company is in line with rules 220.127.116.11, 18.104.22.168, or 22.214.171.124.
In the case of a voluntary transfer pricing adjustment that results in a correlative foreign transfer pricing adjustment for a foreign related party with no permanent establishment, the domestic taxpayer must pay to the tax authority the actual amount of income tax it should have withheld from the foreign company for the related transaction by complying with rule 126.96.36.199., Fraction XI.
A company may characterize a downward effect to income as a deduction only if the company is in line with rules under sections 188.8.131.52, 184.108.40.206. or 220.127.116.11, the guidance states.
The company must lower the deduction amount in the same percentage as the transfer pricing adjustment.
In the case of a voluntary transfer pricing adjustment that results in a correlative foreign transfer pricing adjustment for a related foreign party with no permanent establishment, the domestic taxpayer, to compensate the foreign related party for the excess amounts retained in the name of the tax authority, the taxpayer may pay the foreign entity by reducing future retained amounts.
Moreover, if the transfer pricing adjustment is virtual and if the taxpayer applied lower withholding rates than those established in the Mexican Income Tax Law because of enforcing a treaty to avoid double taxation, the adjustment amount for those retentions must be in accordance to the Mexican Income Tax Law, the guidance states.
It should be noted that these adjustments also apply to indirect taxes (VAT) and other taxes stipulated in the Mexican Income Tax Law.
Information Requirements and Timing
For a Mexican taxpayer to be permitted to increase deductions derived from a voluntary transfer pricing adjustment, the taxpayer must do the following:
- Present correctly and promptly the annual information requirement, or the complementary format, requested by the Mexican tax authority.
- Prepare and maintain all information regarding the analysis where the transfer pricing adjustment was estimated.
- Prepare and maintain a written memo, signed by the person responsible for the documentation and the information stated in items 2 and 5, explaining the voluntary transfer pricing adjustments.
- Prepare and maintain a written memo, signed by the person responsible for the documentation and information stated in items 2 and 5, with a comparison between original and current OECD transfer pricing method, along with the initial and current comparable search, if applicable.
- Prepare and maintain all documentation and information essential to corroborate that a voluntary transfer pricing adjustment was required for the transactions to meet the arm’s length principle.
- Retain the digital tax invoice that has the requirements stated in Articles 29 and 29-A.
If a transaction is associated with the acquisition of imported merchandise, the company must be able to confirm that the VAT and the Special Tax on Production or Services was also paid.
When a transfer pricing adjustment is classified as real transfer pricing adjustment, the company must have the corresponding digital tax invoice.
Taxpayers must also book a voluntary transfer pricing adjustment in their accounting and tax records ultimately reconciling accounting and tax accounts, prepare a written statement from the counterparty stating that it changed its income or deductions in accordance to the transfer pricing adjustment obtained by the company, and comply with the withholding tax obligation in the applicable period by Article 27, fraction V of the Mexican Income Tax Law..
The company will only be able to make a deductible voluntary transfer pricing adjustment, under the terms of this rule, in the same fiscal year that it was recognized.
Therefore, the voluntary transfer pricing adjustment must be reflected in the income tax or statutory tax report, the latter if it applies to the company.
Deductions of transfer pricing adjustments prior notice before the SAT
If a company wishes to make voluntary transfer pricing adjustment that is deductible outside the timeframe established above, form 130/ISR must be filed with the tax authorities. Also, if a company wants to make a correlative national transfer pricing adjustment, the taxpayer is required to submit form 134/ISR.
Moreover, if the transfer pricing adjustment is a result of an advanced price agreement, the taxpayer can ask the tax authorities for an exemption to the timeframe established in general rules; however, the new timeline cannot exceed the duration of the APA resolution.
Revised filing deadlines
The new guidance also revises the deadlines to submit information on foreign related parties for taxpayers.
Taxpayers that file a statutory tax report (dictamen fiscal) under Article 31-A of the Mexican Federal Tax Code taxpayers and elect to append Appendix 9 of the multiple information tax return, must file Appendix 9 and the transfer pricing local file by the due date for filing of the statutory tax report, the new guidance states. As such, for 2018, the filing deadline is expected on July 30, 2019, for general accounts and August 31, 2019, for consolidated accounts. Needless to say, the tax authorities in Mexico have historically issued extensions as deadline approaches.
Taxpayers that do not elect to send Appendix 9 with the statutory report should file Appendix 9 the same date as the annual tax return and should file the local file no later than December 31, 2019.
The deadline to submit information on foreign related parties by taxpayers who do not present a statutory tax report has also been clarified.
If a company does not opt or is not obliged to provide a statutory tax report and the data stated in Appendix 9 of the multiple information tax return is consistent with the data in the company’s local file, then the company must send Appendix 9 of the multiple information tax return by June 30 of the year after the fiscal year ended and/or must send the company’s local file on the same date as Appendix 9.
The due date to file Appendix 9 of the multiple information tax return for fiscal year 2018 is March 31, 2019, and the due date to submit the local file for 2018 December 31, 2019. Therefore, a company must send Appendix 9 of the multiple information tax return and/or the local file, for the fiscal year 2018 by June 30, 2019.
If a company does not opt for this benefit, then the company should file Appendix 9 the same date as the annual tax return; and should submit the local file no later than December 31, 2019.
While the new rules provide additional requirements and administrative guidance, we believe that taxpayers will continue to avoid Mexican transfer pricing adjustments.
Proactive management of transfer prices should be best practice, including regular monitoring of the terms and conditions of intercompany transactions, especially if income tax rate differences between the Mexican taxpayer and its foreign related parties are material.
If related party transactions are not at arm’s length, one practical solution is to book self-initiated adjustments on the local taxpayer’s last month of the current fiscal year (i.e., December) before the books are closed. Otherwise, taxpayers should proceed with caution, paying close attention to the requirements listed above, which are comparably burdensome relative to similar rules and guidance in other countries.
We expect that taxpayers and practitioners may find it difficult to interpret how to apply some of the new transfer pricing adjustment rules in specific circumstances.
For example, it is not entirely clear how the customs provisions interact with the new rules, how the formula to estimate provisional taxes is affected by the presence of a transfer pricing adjustment, what are the procedural requirements of setoff transactions as well as what circumstances or conditions constitute an acceptable transfer pricing adjustment.
Considering these types of open questions and looming changes in the tax administration’s priorities and staff, we strongly suggest seeking local expert advice if a transfer pricing adjustment in Mexico is likely necessary.