¿What are the main changes made to technical matters and processes?
As a result of the tax reform 2022, new transfer pricing (TP) regulations had been introduced in Mexico, which include significant changes not just on the technical matters to consider when performing a transfer pricing analysis, but also on the procedural elements taxpayers and the tax authorities should take into account in the case of a tax examination, an advance pricing agreement (APA), a mutual agreement procedure (MAP) request or an administrative/litigation procedure.
A. Transfer pricing documentation requirement for domestic and cross-border intercompany transactions
Article 76, section IX of the Mexican Income Tax Law (MITL) in force for FY22 expressly requires including in the transfer pricing documentation all cross-border and domestic intercompany transactions. Nonetheless, taxpayers already used to include domestic intercompany transactions, even though it was not expressly required in the law. Thus, this might not represent a significant change from a technical and an operational TP perspective for Mexican purposes.
B. Functional analysis
As part of the TP analysis of an intercompany transaction, it is now required to perform a functional analysis in a dual basis, which means that the functions, assets and risks of the entity who records the income and the counterparty who books the expense, must be fully described in the report.
C. Transfer pricing informative return
Taxpayers must file the TP informative tax return (commonly known as “DIM’s Appendix 9”), no later than May 15 of the flowing fiscal year. In the case of the intercompany transactions held during FY22, those would need to be communicated to the Mexican Tax Administration (SAT) no later than May 15, 2023). In said informative tax return, taxpayers are required to disclose the details of both domestic and cross-border intercompany transactions.
D. Deadline for the local file submission
Taxpayers must submit the local file return to the SAT, no later than May 15, 2023. In the past, the deadline for the submission of this document was December 31, which may represent a significant shrinkage on the timeframe taxpayers have to prepare this document. The deadline for the master file and the country by country report submission is still December 31.
E. Corporations and individuals
Article 179 of the MITL in force for FY22 clarifies that not just corporations, but also individuals should rely on the arm’s length principle when pricing a controlled transaction (this was already contemplated in Article 90, paragraph 11 of the MITL previously in force, so the modification made is merely a clarification).
F. Business cycle
Article 179, forth paragraph of the MITL in force for FY22, now states that the parameters and information to be considered in the TP economic analysis should only be associated to the FY under scrutiny. Only in cases where taxpayers could proof that the business cycle or the market penetration of a product took longer than a year, then they would be eligible to consider comparable economic information from two or more FY prior (or after) to the year under examination. This might represent a significant challenge for practitioners and taxpayers, given that the information and parameters related to the FY under analysis are usually not publicly available by the deadlines when taxpayers are required to produce their transfer pricing documentation.
G. Interquartile range
As part of the economic analysis, Article 180, second paragraph of the MITL in force for FY22, now clearly states that taxpayers can only consider the interquartile range as the only statistical method available to evaluate if their intercompany transactions are consistent with the arm’s length standard. In case taxpayers are willing to consider another type of statistical method when evaluating their intercompany transactions pricing in accordance with the arm’s length standard, when a tax treaty might be available, it would only be possible within the scope of a bilateral negotiation with a foreign jurisdiction’s competent authority.
H. Maquiladoras are no longer eligible to pursue an APA
Article 182 of the MITL in force for FY22 contemplates safe harbor as the only available option maquiladoras currently have to fulfill their TP requirements for Mexican purposes. In that sense, APA are no longer available for maquiladoras, which might represent significant differences between the results these entities might get out from the safe harbor approach, versus the prices comparable uncontrolled entities would agree in similar economic circumstances.
I. Permanent establishments in Mexico and the arm’s length principle
In accordance with Article 153, second paragraph of the MITL in force for FY22, residents abroad with permanent establishments in Mexico are now required to determine their revenues and expenses for Mexican tax purposes (i.e., taxable revenues and deductions), consistently with the arm’s length standard.
Article 67, fourth paragraph of the Mexican Federal Tax Code (MFTC) in force for FY22, now states that the five-year statute of limitations will be suspended by the time a taxpayer files an APA request, either until the resolution of said procedure gets officially notified by the SAT, or by the time when the taxpayer unilaterally files its petition to the SAT to withdraw the request.
Surcharges reduction, penalty waiver, administrative appeals, and MAP’s
Taxpayers seeking double taxation relief through a MAP are no longer eligible for the surcharge’s reduction benefit contained in Article 70-A of the MFTC, neither to get the penalty waiver benefit contained in Article 74.
Also, in accordance with Article 121, fourth paragraph of the MFTC in force for FY22, the timeframe to file an administrative appeal would be suspended in the event taxpayers choose to pursue a MAP. The suspension will start when the taxpayer files its MAP request, until either the MAP’s Competent Authority office notifies the taxpayer the resolution of the case, or the taxpayer voluntary chooses to withdraw its MAP petition.
In accordance with Article 142 of the MFTC in force for FY22, taxpayers seeking double taxation relief through a MAP are now required to post a bond on the tax adjustment determined by the SAT’s office in charge of the tax examination procedure.
We remind you that the Partners and lawyers of the Firm's Corporate Legal Practice are more than willing to work together with you to support you in analyzing the impact of this criterion on your company's operations, as well as in any regularization activity.