By Francisco Arballo, Partner, Grupo Consultor EFE, Tijuana, Mexico
In January, Mexico’s 2022 income tax law went into effect. It incorporates several changes the Mexican legislature proposed in September 2021, including various changes in transfer pricing.
The following is a brief summary of the most relevant changes in transfer pricing:
Transactions with domestic-related companies will be included in the transfer pricing information return
The tax reform modifies the wording of Article 76 of the income tax law (LISR for its acronym in Spanish) to clarify that both transactions with related parties abroad, as well as those carried out with domestic related parties, must be reported in the transfer pricing information return, known as annex 9.
Before the reform, only transactions with related parties resident abroad had to be declared in this medium.
Minimum requirements of functional analysis
The approved reform modifies articles 76 and 179 of the LISR to clarify that functional analyses within the transfer pricing studies must contemplate the functions, assets, and risks of both the taxpayer and all related parties with whom operations have been carried out.
It also explains that a functional analysis reviewing the functions, assets, and risks of each of the parties involved in each intercompany transaction must include: characteristics of the operations, functions or activities of each party, assets used, risks assumed in the .operation, contract terms, economic circumstances, and business strategies
The tax authority intends to clarify that the functional analysis should be with a transactional focus and, in the second instance, on the functions, assets, and risks of the taxpayer in its general business activities.
The tax authority is empowered to provide information to taxpayers on transactions between independent third parties (secret comparables)
The procedure for tax authorities to disclose to taxpayers confidential information on comparable transactions carried out by independent third parties (secret comparables) is included.
The taxpayer may have access to this privileged information only for the following purposes: to correct the tax situation (specifically to correct misrepresented facts or omissions) and to challenge resolutions that determine a tax credit.
It is stipulated that the taxpayer may not get copies or take photographs of such information and must sign a nondisclosure agreement.
The transfer pricing report must contain details on the application of comparability adjustments
Article 76 of the income tax law was amended to require taxpayers to disclose, in as much detail as possible, the comparability adjustments that have been made to increase the comparability between the tested party and the comparables.
The level of detail should allow the tax authority to replicate the adjustment and get the same result.
Common comparability adjustments include accounting adjustments, capital adjustments (accounts receivable, accounts payable, and inventory levels), and country risk adjustment.
Obligation to identify and segment the accounting records of transactions with related companies
Article 76 of the income tax law was changed to make it mandatory to identify in the accounting records the items corresponding to transactions with related parties, both domestic and foreign residents.
Operations should be identified at the income statement and balance sheet level (revenues, costs, expenses, accounts receivable, accounts payable).
Deadline for the submission of transfer pricing information returns
The due date for the filing of annex 9 of the multiple informative declaration (DIM for its acronym in Spanish) was changed to May 15 (section X of article 76 LISR). Previously, the due date was March 31.
The deadline for filing the local file with annex 9 of the DIM was standardized to May 15 of the fiscal year immediately following the one being reported (article 76-A section II). Previously, the deadline was December 31.
There may be extensions of the due dates of these obligations for certain taxpayers through miscellaneous tax rules for those that certify their financial statement for tax purposes by an independent CPA.
Financial information of the comparables used in the transfer pricing study
Article 179 of the income tax law was amended to establish as mandatory that, in the first instance, information from only one fiscal year of the companies selected as comparable must be used—this being the year under analysis.
Information from the last three fiscal years of the comparables may be used only when the taxpayer documents that the business cycle or acceptance of its goods and/or services covers more than one fiscal year.
Statistical method to determine arm’s length range
Article 180 of the income tax law was updated to include the word “interquartile” as the name of the only statistical method allowed to determine the arm’s length range in transfer pricing analyses. This eliminates the possibility of using the natural range or any other statistical method to determine the arm’s length range. A statistical method other than the interquartile may only be applied when the same is under a mutual agreement procedure (MAP).
Modifications to the toll manufacturing regime (maquiladoras)
The option for maquiladora companies to opt to request a special resolution under the terms of article 34-A of the Mexican federal tax code (APA) —and thus eliminate the configuration of a permanent establishment for their related party in Mexico—was eliminated.
This change eliminates the possibility of requesting an APA to seek to adhere to the QMA method the Mexican Tax Administration Service and the IRS approved in previous years, which allowed maquiladora companies to determine the income from manufacturing services to their related parties.
Therefore, the only transfer pricing compliance option for maquiladora companies is to comply through the safe harbor method. The safe harbor method comprises determining the minimum taxable income to be reported as the greater of 6.5% of the value of the total operating costs and expenses, or 6.9% of the total value of the assets, including those assets the related party owned that have been temporarily imported into Mexico for use in the maquila operation.
APAs that are in progress, however, may continue until their expiration date.
New taxpayers are required to comply with the local report and the master report
As a result of the reform, the miscellaneous tax rules establish that all taxpayers resident in Mexico that have had transactions with domestic-related parties which have accumulated income greater than MXN 1,650,490,600 (US $80,554,700 ) in the previous fiscal year, also must file their local report through the means the tax administrations defined.
Previously, only taxpayers that exceeded the income threshold the tax authority determined were subject to file the local report. With this reform, now related parties that have carried out transactions with such taxpayers also will be required to file this return, regardless of the amount of their accruable income.
New increments to penalties for non-compliance with transfer pricing obligations
With the reform, a taxpayer’s failure to comply with the transfer pricing obligations is now considered an aggravating circumstance and will face the following penalties: Taxpayers that fail to file the information return (annex 9) will face a fine of MXN 86,050 to MXN172,000 (US $4,197 to US $8,386); those who fail to file (or file with errors or omissions) the local, master or CbC returns will face a fine of MXN 172,480 up to MXN 245,570 (US $8,402 to US $11,959); and those who fail to identify related party transactions in accounting will face a fine of MXN 1,950 up to MXN 5,860 (US $95 to US $285) for each transaction.
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Francisco Arballo is a partner with Grupo Consultor EFE in Tijuana, Mexico
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