Mexico introduced the transfer pricing rules in 1996, following its membership to the Organization for Economic Co-operation and Development (OECD) in 1994. A 2022 reform introduced new transfer pricing rules affecting compliance, documentation, benchmark, etc. Currently, the TP regulations align with the OECD Guidelines set by the and are incorporated into the Mexican Income Tax Law (ITL), and Hydrocarbons Revenue Law (HRL).
Arm’s Length Principle
The Mexican Income Tax Law requires that intercompany transactions between related parties must be consistent with what independent (unrelated) parties would have agreed upon under similar conditions. Transactions with entities in tax preferential regimes are treated as related party transactions, requiring arm’s length pricing. ITL allows Mexican tax authorities to adjust reported income if the arm’s length principle is found in violation.
Related Party Definition
In Mexico, they are considered related parties if one directly or indirectly participates in the management, control, or capital of the other, or if the same person or group participates in the management, control, or capital of both. Partners in partnerships and a head office with its permanent establishments are also treated as related parties.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
Prior to 2006, the selection of the method was based on the best method principle. However, since 2006 a hierarchy of methods has been provided, with CUP, RPM, and CPM to be selected, in order. If a profit-based method (like TNMM) is used, the taxpayer must explain why the other methods weren’t suitable.
Comparability Analysis
In Mexico, comparability analysis for transfer pricing follows OECD Guidelines, but Mexican rules require using Mexican Financial Reporting Standards (FRS). Usually, a local company is chosen as the tested party in cross-border deals.
Benchmarks must be based on the year under analysis unless the business has a proven multi-year cycle. The tax authorities can use secret comparables (confidential data) and also publish industry benchmark profit margins and tax rates.
Because public financial info on Mexican companies is limited, foreign comparables, especially U.S. ones, are often used. Common profit level indicators include markup on costs, return on sales, and return on assets. When using foreign data, adjustments may be needed to align with Mexican accounting rules.
Documentation Requirements
Documentation requirements for transfer prices in Mexico are based on the three-layer method of the OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
Mexican resident entities (including permanent establishments of foreign companies) with annual revenue over 1,062,919,860 pesos are required to file both a master file and a local file as part of their transfer pricing obligations. The master file contains general information about the company’s organizational structure, business activities, and operations with related parties on a global level. The local file focuses on the Mexican entity and must include a detailed description and analysis of its intercompany transactions, financial data, and transfer pricing method. The master file must be submitted by the end of the year following the fiscal year, while the local file is due by May 15 of the following year.
Country-by-Country Reporting
Mexican multinationals (MNEs) that reported a consolidated revenue of at least 12 billion pesos in the last fiscal year also have to file a CbC report. This report gives tax authorities a picture of income, taxes paid, and economic activities by jurisdiction. Mexico is a part of the Multilateral Competent Authority Agreement, which puts into play the automatic exchange of this information between other participating countries. Like the master file, the CbC report must be filed electronically by the end of the year following the relevant fiscal year.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Mexico uses both APA and MAP to manage and resolve international tax disputes, in compliance with OECD guidelines and EU directives. An Advance Pricing Agreement (APA) allows a taxpayer and the tax authority to agree in advance on the method for determining transfer prices in related-party transactions. APAs can apply to both domestic and cross-border transactions.
- A unilateral APA (between the taxpayer and Mexican tax authority only) typically covers up to five years, the current year, the next three years, and one previous year.
- A bilateral APA (involving another country’s tax authority) can cover a longer period, depending on the agreement between both countries. To obtain an APA, the taxpayer must submit detailed information and documentation about their related-party transactions.
Mutual Agreement Program (MAP)
The Mutual Agreement Procedure (MAP) allows taxpayers to present their case on issues related to the interpretation and application of international tax treaties. In Mexico, MAP is used for issues like double taxation and transfer pricing conflicts. Taxpayers put in a request for MAP if they see that a tax assessment does not conform to the terms of a treaty. They must follow certain procedures, which include the presentation of documentation and compliance with timelines as set out by the tax authorities. MAP may be used for tax issues from past or upcoming tax years, also once an agreement is reached in the procedure that goes beyond the normal statute of limitation time frame must be put into practice. Also, during the MAP, tax collection is put on hold as long as the taxpayer puts up a surety.
Approach to Transfer Pricing Audits
In Mexico, transfer pricing audits start with a request for information or a visit from the tax authorities. Companies must show their transfer pricing documents and accounting records. If they don’t cooperate, they can be fined. After the review, the tax authorities issue a report with their findings, and the taxpayer has two months (plus one extra month if requested) to respond. If the issue continues, the final tax assessment can be challenged through an appeal or court. A guarantee is only needed if the case goes to court.
Penalties
If the Mexican tax authorities adjust a company’s transfer pricing, the company may face a fine of 55% to 75% of the adjusted amount. If they wrongly reported a tax loss, the fine is 30% to 40% of the difference, but only if they used that loss. In addition to fines, interest, and inflation adjustments also apply for late payments.
Taxation at a Glance
Mexico’s tax system operates at three levels: federal, state, and municipal, reflecting the country’s governmental structure. The Federal Fiscal Code outlines the general rules for federal taxes, which include income tax, value-added tax (VAT), social security contributions, and excise taxes on production and services. These are managed by the Mexican Tax Authority (SAT). On the other hand, the state-level taxes differ from state to state, and levy taxes such as the payroll tax.
The currency of Mexico is the Mexican Peso (MXN). The official name of the Mexican tax authority is the Servicio de Administración Tributaria (SAT).
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 30% |
VAT | 16% |
Withholding tax on dividends to non-residents | 10% |
Withholding tax on interest to non-residents | 21/35/40% |
Withholding tax on royalties to non-residents | 5/25/35% |
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