On December 23, 2016, the Mexican Senate approved new regulations governing transfer pricing adjustments for Mexican resident taxpayers and foreign entities with permanent establishments in Mexico as part of the Miscellaneous Tax Resolution for 2017 (MTR 2017). The new rules, effective January 1, 2017, and contained in chapter 3.9, section 3.9.1 of MTR 2017, introduce the concept of a transfer pricing adjustment (rule 18.104.22.168) and outline tax implications of transfer pricing adjustments on the income and deductions of taxpayers (rule 22.214.171.124). They also introduce 10 new requirements taxpayers must meet to recognize self-initiated transfer pricing adjustments that reduce income or increase deductions of the taxpayer (rule 126.96.36.199). Finally, the new rules address timing requirements related to the recognition and reporting of transfer pricing adjustments.
Existing rules require taxpayers to disclose certain transfer pricing adjustments. Form 76 attendant to article 31-A of the Mexican Federal Tax Code requires taxpayers to disclose certain related-party transactions, transfer pricing adjustments and transfer pricing methodologies employed to justify such adjustments. But until recently, a formal transfer pricing adjustment definition didn’t exist in Mexican tax regulations. A transfer pricing adjustment is defined in rule 188.8.131.52 as “any change in prices, consideration, or profit margins corresponding to the operations carried out by the taxpayer with its related parties, made for the purpose of determining that the cumulative income or the authorized deductions derived from such operations are commensurate with the prices or consideration that would have been used with or between independent parties in comparable transactions, even when there is not an exchange between the parties of cash or other material resources.” In other words, the rule describes any adjustment made to ensure that the intercompany transfer prices occur at arm’s length. For example, this includes adjustments made with the transactional net margin method/comparable profits method to ensure the net profit indicator/profit level indicator of the relevant tested party is within the arm’s-length range of results.
Within rule 184.108.40.206, Mexican taxpayers making transfer pricing adjustments that increase their cumulative income are obliged to recognize for tax purposes any additional income commensurate with the adjustment. However, for transfer pricing adjustments that decrease taxable income, the new rules provide additional requirements. Taxpayers only can recognize the adjustment as an increase in their tax deductions if they comply with the 10 requirements set forth in rule 220.127.116.11:
- File in a timely manner the applicable tax returns, normal or amended, which must expressly contain the related transfer pricing adjustment.
- Obtain and keep any information and documentation through which the taxpayer determined the original prices, consideration or profit margins (transfer prices) were not commensurate with those that would have been established by independent parties in comparable circumstances, i.e., didn’t comply with the arm’s-length principle.
- Obtain and keep a sworn statement explaining the reasons why the original transfer prices didn’t comply with the arm’s-length standard.
- Obtain and keep a sworn statement explaining the inconsistency of the original transfer pricing methodology and selection of comparables to produce arm’s-length results for the compensation related to the transfer pricing adjustment.
- Obtain and keep any information allowing for corroboration the transfer pricing adjustment will produce arm’s-length results. Such information and documentation must include the arithmetic calculations of the transfer pricing adjustment.
- Have a digital tax invoice (CFDI) of the original transaction with the relevant related parties to which the transfer pricing adjustment relates.
- If the transfer pricing adjustment causes an accounting adjustment, taxpayers must have or issue a CFDI referencing the original CFDI. This CFDI must include a description of the adjustment, amount of the original consideration, fiscal year to which the adjustment applies and transfer pricing adjustment.
- Properly record the transfer pricing adjustment in the books of account and any accounting and tax reconciliations for income tax purposes.
- Certify that the counterparty to the transfer pricing adjustment recognized the adjustment in a commensurate manner for the corresponding fiscal year-end and certify that such adjustment doesn’t represent income subject to a preferential tax treatment.
- Comply with the withholding tax obligation for adjustments to transactions subject to withholding tax and report it in the applicable period.
The transfer pricing adjustments within rule 18.104.22.168 only can be recognized for the fiscal year the original transactions took place and should be reported along with the filing of the applicable tax returns. The only adjustments recognized after the tax filing deadlines with the new transfer pricing adjustment regulations are those that result from a resolution with the Mexican tax authority.
The new rules stress the importance of Mexican taxpayers maintaining the appropriate documentation to meet local transfer pricing requirements, including those specifically required to support adjustments decreasing Mexican income. Moreover, the new rules highlight the need to establish and properly implement transfer pricing policies, so as to minimize the need to record adjustments that decrease income, as these adjustments will significantly increase the compliance requirements for taxpayers.
Contact your BKD advisor for more information.