Mexico: Changes introduced by new transfer pricing regulations

New transfer pricing regulations, introduced following the 2022 tax reform, include significant changes with regard to certain technical matters for taxpayers to consider when conducting a transfer pricing analysis, but also concern procedural elements that taxpayers and the tax authorities alike need to take into account during a tax examination or as part of an advance pricing agreement (APA), a mutual agreement procedure (MAP) request or an administrative or litigation procedure.

Transfer pricing documentation requirement for domestic and cross-border intercompany transactions

Article 76, section IX of the Mexican income tax law (effective for FY 2022) expressly requires taxpayers to include in their transfer pricing documentation, all cross-border and domestic intercompany transactions.

KPMG observation Taxpayers previously included domestic intercompany transactions, even though not expressly required under the law; thus, this new expressed requirement may not represent a significant change from a technical and an operational transfer pricing perspective.

Functional analysis

As part of the transfer pricing analysis of an intercompany transaction, taxpayers are now required to perform a functional analysis on a “dual basis” meaning that the functions, assets, and risks of the entity that records the income and the counterparty that books the expense must be fully described in the report.

Transfer pricing information return

Taxpayers must file their transfer pricing information tax return (referred to as “DIM’s Appendix 9”), no later than 15 May of the following fiscal year. In the case of intercompany transactions held during FY 2022, these transactions would need to be communicated to the Mexican tax administration (Servicio de Administración Tributaria (SAT)) no later than 15 May 2023. In the transfer pricing information return, taxpayers must disclose the details of both domestic and cross-border intercompany transactions.

Deadline for Local file submission

Taxpayers must submit the Local file return to the SAT, no later than 15 May 2023. In the past, the deadline for filing the Local file was 31 December; thus, the new date represents a shorter timeframe for taxpayers to prepare this document. The deadline for the Master file and the country-by-country report submission is still 31 December.

Corporations and individuals

Article 179 of income tax law (effective for FY 2022) clarifies that corporations and also individuals must rely on the arm’s length principle when pricing a controlled transaction.

KPMG observation This rule was already contemplated in Article 90, paragraph 11 of the income tax law as previously in effect, so the modification is merely a clarification.

Business cycle

Article 179, fourth paragraph of the income tax law (in effect for FY 2022) now states that the parameters and information to be considered in the transfer pricing economic analysis is only to be associated to the fiscal year under scrutiny. Only in instances when taxpayers could prove that the business cycle or the market penetration of a product took longer than a year, would taxpayers be eligible to consider comparable economic information from two or more fiscal years prior to (or after) the year under examination.

KPMG observation This amendment may represent a significant challenge for practitioners and taxpayers, given that the information and parameters related to the fiscal year under analysis are usually not publicly available by the deadlines when taxpayers are required to produce their transfer pricing documentation.

Interquartile range

As part of the economic analysis, Article 180, second paragraph of the income tax law (as in effect for FY 2022) 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. Taxpayers may be able to consider another type of statistical method for evaluating their intercompany transactions pricing in accordance with the arm’s length standard, when a tax treaty is available, but only within the scope of a bilateral negotiation with a foreign jurisdiction’s competent authority.

Maquiladoras are no longer eligible to pursue an APA

Article 182 of the income tax law (as in effect for FY 2022) contemplates a safe harbor as the only available option maquiladoras currently have to satisfy their transfer pricing requirements for Mexican purposes. In that sense, APA are no longer available for maquiladoras. Read TaxNewsFlash

KPMG observation Accordingly, there may be significant differences between the results maquiladora entities may have under the safe harbor approach versus the prices that comparable uncontrolled entities would agree to in similar economic circumstances.

Permanent establishments in Mexico and the arm’s length principle

In accordance with Article 153, second paragraph of the income tax law (as in effect for 2022), 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.

Suspension of the statute of limitation

Article 67, fourth paragraph of the federal tax code (as in effect for FY 2022) now provides that the five-year statute of limitations will be suspended as of the date when a taxpayer files an APA request until the earlier of (1) when there is official notification of resolution of the APA application by the SAT; or (2) when the taxpayer files its petition with the SAT to withdraw the request for an APA.

Surcharges reduction, penalty waiver, administrative appeals, and MAPs

Taxpayers seeking relief from double taxation through a MAP are no longer eligible for the surcharge reduced benefit contained in Article 70-A of the federal tax code and also no longer able to seek the relief of a penalty waiver pursuant to Article 74.

Also, in accordance with Article 121, fourth paragraph of the federal tax code (as in effect for FY 2022), the timeframe to file an administrative appeal is suspended in the event the taxpayer elects to pursue a MAP. The suspension will start when the taxpayer files its MAP request and lasts 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.

MAPs and bond posting

In accordance with Article 142 of the federal tax code (as in effect for FY 2022), taxpayers seeking double taxation relief through a MAP are now required to post a bond on the tax adjustment, as determined by the SAT’s office in charge of the tax examination procedure.
 

Read a March 2022 report prepared by the KPMG member firm in Mexico