Article 76-A of the Income Tax Law (ISR) Implications for transfer pricing

I)       Introduction. 

Mexico, as a member of the Organization for Economic Cooperation and Development (OECD) as well as the Group of 20 of the most industrialized countries (G20) and other international organizations, is committed to participating and implementing in its legislation the international agreements reached regarding cooperation in the exchange of information and coordination of efforts in fiscal matters.

To this effect, the OECD and the G20 (primarily) have developed 15 lines of action to combat what is known as “Base Erosion and Profit Shifting (BEPS)”, which are intended to limit the opportunities for transfers of capital through strategies or (principally intercompany) transactions that tend to reduce the tax burdens of Multinational Groups. 

In particular, the objective of the 13th line of action listed in the BEPS is to require taxpayers to prepare a complete “package” of information regarding their operations with related parties, allowing Tax Authorities (TAs) to: i)evaluate their risks in terms of transfer pricing, ii) have sufficient information to appropriately direct their taxation efforts, and iii) make effective use of the auditing resources and efforts they have deployed.

II)      Obligation in Mexico.

Article 76-A of the income tax law (Ley de Impuesto Sobre la Renta, or LISR) establishes the obligation to submit informative declarations on transfer pricing for the taxpayers indicated in article 32-H paragraphs I, II, III and IV of the Federal Tax Code (Código Fiscal de la Federación, or CFF). The three new declarations that must be presented are the following:

1)     Master File – Provides the TA with global information about the Multinational Enterprise Group (MNE) to which the (local) taxpayer belongs. It must contain information about the MNE’s activities and lines of business, about its global transfer pricing policy, and about the global distribution of its revenues between countries and economic activities.  

2)     Local File – In contrast to the Master File, this declaration provides the TA with very specific information about the local taxpayer. It is primarily focused on transfer pricing analysis of transactions carried out with related parties in other countries, taking into account the nature or the materiality of each transaction in the context of the local taxation system. This declaration could contain financial information for each intercompany transaction supported by an appropriate comparability analysis and evidence of the appropriate selection and application of the analytical transfer pricing method employed in the analysis of transactions made with related parties. It is important to note that this declaration is not very different from the current declarations about transactions with related parties.

3)     Country-by-Country. This declaration provides the TA with aggregated fiscal information about the global distribution of revenues within the MNE, its fiscal obligations, and payment of taxes, as well as a list of its subsidiaries and the countries in which they are located, where they report their financial information, and the fiscal jurisdiction under which they fall. Additionally, the TA must be provided with information about the principal business activity of each member of the MNE.

It is important to note that action 13 of the BEPS strategy recognizes this declaration as an element that allows TAs to evaluate transfer pricing risks in their jurisdiction and is in no way recommended to be used as a global transfer pricing report (i.e. Core Global Documentation). It does not allow for consistent evaluation of the local taxpayer’s functions, assets, and risks, and therefore does not provide sufficient elements for an appropriate comparability analysis.

It is important to mention that these declarations must be presented beginning in the month of December following the year to which they correspond. In Mexico, the first fiscal year for which these declarations are required is 2016, so they will be presented in December of 2017.

III)    Implications for taxpayers in Mexico.

To view this group of informative declarations from a purely local perspective and only considering its effects for taxpayers in Mexico would be a mistake. As stated above, they are the result of a multilateral effort and will be implemented not only in Mexico, but in all of the countries belonging to the OECD, the G20, and other international organizations that have participated (and will continue to do so) in the BEPS strategy, such as the International Monetary Fund (IMF), the United Nations (UN) and the Interamerican Center for Fiscal Administrations (CIAT for its initials in Spanish), among others.

The implementation of these new informative declarations is a necessary step toward the objective of building a multilateral system of automatic information exchange between Tax Authorities around the world, and it is therefore imperative for them to be included in the legislation of each participating country.

As Mexico is a member of the Fiscal Affairs Committee of the OECD, it is obligated to implement the provisions of the 13th line of action of the BEPS strategy in its legislation, as it has been one of the most active members and has been very participative in order to obtain internationally harmonized fiscal information.

In our opinion, failure to present these new declarations could send a negative signal to the local TA, which could potentially increase the risk of revision for the taxpayer, or the possibility of facing audit actions.

It must be taken into account that, being a multilateral effort, the information contained in these declarations must be presented not only to the local TA in Mexico, but also to the TA in any other country that is likewise implementing them and requires them from their taxpayer which is a related party of the taxpayer based in Mexico. In other words, even if the taxpayer decides not to submit these declarations in Mexico, they will be obligated to prepare the information for another TA abroad. We insist that this is a multilateral taxation effort where international agreements for the exchange of information come into play.

Finally, before taking any action (legal or otherwise) against the creation and submission of these new informative declarations, our recommendation is to wait for the TA in Mexico to issue the electronic forms in which they are to be presented, which is scheduled to happen at some point this year (2016).