Transfer Pricing Obligations in Mexico - FY 2018

I) Obligation to document (Transfer Pricing Study).

Article 76, sections IX and XII of the Income Tax Law (LISR for its initials in Spanish) establishes the obligation on behalf of the taxpayer to produce and retain documentation proving that its transactions involving revenues or deductions carried out with related parties were in compliance with the Arm’s Length principle¹, as well as the legal requirements with respect to transfer pricing (TP study).

• Section IX: Related parties residing abroad.
• Section XII: Local related parties

a)Taxpayers subject to these obligations

Article 76 section IX paragraph II lists the taxpayers exempted from this obligation:

1. Taxpayers with business activities whose revenues in the prior fiscal year did not exceed MX$13’000,000.00 pesos are exempt.
2. Taxpayers whose revenues derived from the provision of professional services in the prior fiscal year did not exceed MX $3’000,000.00 pesos are exempt.
3. Taxpayers that, despite not exceeding the aforementioned revenue thresholds, are presumed to carry out transactions with companies or entities subject to preferential fiscal regimes are not exempt. (Article 179, penultimate paragraph of the LISR).

Although Article 76 section IX paragraph II of the LISR establishes which taxpayers are exempt from the obligation to produce and retain a transfer pricing study, it does not completely excuse them from all obligations with respect to transfer pricing matters; in the event of an audit by the Tax Authority (TA), it will be necessary to prove that transactions carried out with related parties were in compliance with the Arm’s Length principle. 

b)Related parties

Article 179 of the LISR, paragraphs V and VI, indicates that those taxpayers that are considered to be related parties are obligated to retain information regarding any intercompany transactions they may have carried out in order to ensure compliance with the Arm’s Length principle and facilitate audits by the TA.  

c)Transfer pricing methods

Article 180 of the LISR lists the transfer pricing methods (approved by the OECD) for the determination of prices, amounts, or margins for considerations made between related parties in accordance with the Arm’s Length principle.  

Section II of that same Article indicates that, through statistical measures, a market value range must be calculated in order to determine whether or not the price, consideration amount, or profit margin obtained by the taxpayer falls within it.  If so, the intercompany transaction is regarded as though it had been carried out between independent parties. In the event that the taxpayer falls outside the adjusted market range, the median of said range will be assumed to be the price or consideration amount that independent third parties would have agreed upon.

Section III of Article 180 of the LISR sets forth a hierarchical order to be followed in the application of the transfer pricing methods for the analysis of transactions between related parties. 

d)Powers of review

The powers of review with respect to transfer pricing matters are established in Article 46 section IV (transfer pricing review) of the Federal Tax Code (CFF for its initials in Spanish). If the taxpayer does not possess the transfer pricing study, it may be liable for infractions and fines for failure to meet this obligation.

II) Submission of informative declarations or Fiscal Dictum.

a)Multiple Informative Declaration (DIM for its initials in Spanish) Appendix 9

In accordance with the stipulations of Article 76 section X of the LISR, those taxpayers that carried out transactions with related parties residing abroad must submit Appendix 9 of the DIM. 

b)Fiscal Status Information (ISSIF for its initials in Spanish)

In accordance with the established in the Article 32-H of the CFF, the taxpayers who are located in some of the following assumptions will be forced to present the ISSIF; the same that includes information about the diverse operations realized with related parts:

1. Those who file under Title II of the Income Tax Law (LISR), who, in the prior fiscal year in which they filed taxes, reported income taxable under the Income Tax Law greater than or equal to an amount equivalent to MX $755’898,920.00 pesos in their normal tax returns, as well as those that, as of the end of the prior fiscal year, had publicly traded shares held by investors in the stock market and do not meet any of the other descriptions listed in this article.
2. Business partnerships that belong to the optional fiscal regime for groups of partnerships in terms of Chapter VI Title II of the Income Tax Law (LISR).
3. Federally administrated para-state enterprises.
4. Entities residing abroad that have permanent establishments in Mexico, only for the activities carried out by these establishments.
5. Any taxpayer in Mexico, regarding to the operations carried out with residents abroad.

The TA does not require submission of the ISSIF from those taxpayers indicated by Section V of Article 32 of the CFF when the total amount of the transactions carried out with related parties residing abroad does not exceed MX $100´000,000.00 pesos².

c)Fiscal Audit (Sipred for its initials in Spanish)

In case the taxpayer chooses to present the Sipred in accordance with the arranged in the Article 32-A of the CFF; that is to say, those taxpayers which cumulative incomes during 2016 has exceeded $109’990,000. 00 or that the value of its assets is superior to $ 86’ 892,100. 00 or when at least 300 of its workpeople have given them its services in each of the months of the year consider; it will have to include in the annexes designated for this situation, information about the realized operations with related parties.

The taxpayers who perform this option, will assume the obligation to present ISSIF.

d)BEPS Informative Declarations

Article 76-A of the LISR stipulates that the taxpayers indicated in Article 32-H Sections I, II, III and IV of the CFF, must submit the following informative declarations regarding related parties no later than December 31 of the year immediately following the fiscal year in question:

• Article 76-A Section I. Master file on related parties in the multinational enterprise group. (Master File). This requirement does not apply to domestic enterprise groups that do not have related parties residing abroad.
• Article 76-A Section II. Informative declaration on local related parties (Local File). This requirement applies to all taxpayers indicated in Article 32-H Sections I, II, III and IV of the CFF that have related parties in Mexico and/or abroad.
• Article 76-A Section III. Country-by-country informative declaration (CbC or Country-by-Country). This declaration must only be submitted by taxpayers that fall into either of the following categories:

a)Multinational controlling legal entities.

b)Legal entities residing in Mexico or abroad with permanent establishments in Mexico that have been designated by the controlling legal entity of the multinational group residing abroad as responsible for providing the country-by-country declaration.

III) Infractions and fines.

In the event that the TA determines that the taxpayer omitted information or failed to comply with their obligations with respect to transfer pricing in accordance with Mexican law, the latter will be liable for fines in accordance with the type of infraction committed. Some of the sanctions for non-compliance are listed in the table below:   

Table 1

Transfer pricing: infractions and fines, FY 2018

Source: Our work based on information provided in the CFF for FY 2018

Consult the most up-to-date amount issued by the Tax Authority (SAT for its initials in Spanish).

¹ The “Arm’s Length” principle is internationally accepted by the OECD and requires that intercompany prices be consistent with the prices agreed upon by independent companies in comparable transactions under similar circumstances, in such a way that the intercompany relationship has no effect on the determination of the prices.

² Miscellaneous Fiscal Resolution (RMF for its initials in Spanish) for 2018, miscallaneous rule 2.19.4