Mexico’s Tax Reform Decree, published in the Daily Official Gazette on November 18, contained legislation requiring certain multinational taxpayers to submit comprehensive information returns pertaining to their transfer pricing arrangements. The returns will enable Mexican tax authorities to identify multinational enterprises (MNEs) to be audited for perceived transfer pricing abuses and provide a significant portion of the information needed to conduct such an audit.
On October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) produced its final reports addressing 15 different action items under its Base Erosion and Profit Shifting (BEPS) initiative. The OECD’s BEPS project was commissioned in 2013 by the group of 20 countries to curb perceived tax abuses by MNEs. Action Item 13 of the BEPS initiative covers revision of the transfer pricing documentation requirements in Chapter V of the OECD’s Transfer Pricing Guidelines. The final deliverable, which significantly expanded the scope of the OECD’s transfer pricing documentation requirements, contained a three-tiered approach to transfer pricing documentation: master file, local country file and country-by-country (CbC) report.
Mexico is one of the first countries to adopt the BEPS transfer pricing documentation measures. Under the new regulations, all Mexico-based MNEs with worldwide revenues in excess of €750 million (approximately U.S. $812 million) must file the CbC report, which contains detailed financial information on each MNE’s global subsidiaries. Per the OECD’s documentation directive, the CbC report should be filed with the tax authority in the taxpayer’s home country. (Many countries have yet to formally enact legislation requiring the CbC report or preparation of the master and local country files; legislation is pending or proposed in a number of countries that adhere to the OECD transfer pricing rules.) Under the new rules, if the Mexican entity is a subsidiary of a taxpayer subject to the CbC reporting requirement in its home country, the CbC report can be shared among various tax jurisdictions through an automatic exchange mechanism, assuming a tax treaty exists with Mexico. If the MNE head office isn’t in a treaty country, Mexican tax authorities can request the CbC report from the local Mexican entity.
Taxpayers meeting any of the following requirements will be required to file their master file and local country file:
- Taxable income of more than U.S. $37 million
- Publicly traded
- Companies under optional tax regimes for corporate groups
- State-owned entities
- Mexican tax residents
The master file is a high-level document providing an overview of the MNE group’s business and industry, its legal entity structure, transfer pricing positions, financial information, discussion of its intangible property and functional and risk analysis. The master file is intended to offer tax authorities a comprehensive overview of the MNE group’s transfer pricing arrangements and supply chain in their entirety, rather than just the local country viewpoint that historically has been the focus of transfer pricing documentation prepared by MNEs. The local country file is a detailed recap of the MNE’s local country positions related to transfer pricing and is essentially a local country transfer pricing study.
The new laws took effect January 1, 2016, and apply to the 2016 tax year. The information returns must be filed by December 31, 2017. Noncompliance will result in taxpayers being unable to conduct business with the Federal Public Administration or Office of the Federal Attorney General. Penalties range from 140,540 to 200,000 pesos (U.S. $7,600 to $10,820) for taxpayers failing to file the requisite forms under Article 76-A.
MNEs with operations in Mexico should immediately begin preparing their master and local Mexican country files. For more information on how these new requirements could affect your organization, contact your BKD advisor.