Certainly, 2017 was a very active year for Mexico transfer pricing, specifically in connection with transfer pricing adjustments and transfer pricing documentation guidance.
The year 2017 was a year where important changes were made to transfer pricing provisions, including new obligations for some taxpayers, which moved Mexico to a more complex and sophisticated transfer pricing system and one that is more aligned with the OECD transfer pricing guidelines.
Transfer pricing adjustments
Mexican tax authorities issued new guidelines applicable to tax year 2017 on transfer pricing adjustments and the requirements for treatment as authorized deductions for income tax purposes.
In general, these guidelines define a transfer pricing adjustment as any change in price, consideration or profit margin regarding transactions between a taxpayer and its related parties, performed to consider that the taxable income or authorized deductions were determined at arm’s length.
The guidance establishes that if a transfer pricing adjustment results in an increase in an authorized deduction, the taxpayer must timely submit the tax returns specifying that a transfer pricing adjustment was performed. The taxpayer must also keep documentation and information demonstrating that the transaction was not originally carried out at arm´s length and is now adjusted to comply with the arm’s length principle.
Further, the guidance requires the taxpayer to demonstrate that the related party with which the transaction was carried out increased its taxable income or decreased its deductions in the same tax year and for the same amount of the adjustment, among other requirements.
Mexico transfer pricing documentation
New transfer pricing documentation rules were also issued in 2017 which aligned Mexican law with the recommendations of Action 13 of the OECD/G20 base erosion profit shifting (BEPS) project.
Under Article 76-A of Mexican Income Tax Law, applicable January 1, 2017, certain taxpayers were to file no later than December 31, 2017, three information returns for fiscal year 2016: the master file, local file, and country-by-country return.
The Mexican tax authorities followed up in May 2017 with guidance specifying the details of what must be included in the master, local, and country-by-county reports, in the First Amendment to the 2017 Miscellaneous Tax Resolution.
Furthermore, on November 1, 2017, the software required to file these information returns was made available to taxpayers through the Mexican tax authorities’ website.
The lack of a definition of a multinational group in the transfer pricing documentation guidance has caused some uncertainly regarding what information should be provided in the master file.
Also, the lack of access of Mexican taxpayers to information required for the local file has created difficulties, in particular regarding (i) the description of the value chain of the group to which the obliged taxpayer belongs to, (ii) discussion of unilateral, bilateral or multilateral advance pricing agreements and other resolutions in which the Mexican tax authority is not a party, that involve transactions carried out between related parties, and (iii) financial and tax information of foreign based related parties that are counterparties to each analysed transaction.
For 2018 and onwards, an increase in transfer pricing audits is expected because Mexican tax authorities will be obtaining new and detailed information regarding related party transactions through the local file and information of multinational groups that are in Mexico through the local and master files.
In this regard, and considering the broad amount of information disclosed, it is hoped that Mexican audit procedures will be focused on specific transactions, rather than on all intercompany transactions carried out by taxpayers, which, in many cases, are not significant.