Transfer Pricing Guide Mexico

Early Adoption of Transfer Pricing Rules

Mexico is recognized for its early adoption of transfer pricing regulations, particularly in implementing Action 13 of the OECD’s BEPS Action Plan. Action 13 requires taxpayers to file master, local, and country-by-country reports.

Laws & Regulations

• References to OECD/EU/Local Rules: Mexico introduced transfer pricing rules in 1997, incorporating the arm’s length principle into its Income Tax Law (MITL). Specific sections of MITL, including Articles 76, 179, and 180, address transfer pricing. Regulations for the “Maquila” industry are also outlined. Tax audits in Mexico are primarily desk reviews.
• Definition of Related Party: The definition of related parties in MITL is broad, encompassing situations where parties are involved in each other’s administration, control, or equity. This wide scope results in numerous controlled transactions.
• Transfer Pricing Documentation: Mexico aligns with OECD guidelines, recognizing the importance of the OECD Transfer Pricing Guidelines for interpretation. The country implemented master, local, and country-by-country reporting requirements since 2016.

Advance Pricing Agreement (APA)

Unilateral and bilateral APAs are available in Mexico, but the process is resource-intensive and does not guarantee approval.

Audit Practice

Transfer pricing audits in Mexico have significantly increased, emphasizing the economic substance, transfer pricing methodology, and the nature of certain payments. Consistency in the information disclosed across various reports is also a focus.

Transfer Pricing Documentation

• Level of Documentation: Functional and economic analyses are required for all intercompany transactions, regardless of their significance. The taxpayer must perform these analyses with specific attention to each transaction.
• Industry Analysis: Identifying value drivers for the industry helps determine common profitability levels.
• Company Analysis: Information about local management, business structure, and business strategies is essential.
• Functional Analysis: A functional analysis assesses activities, responsibilities, assets, and risks related to intercompany transactions. This analysis is consistent with OECD recommendations.
• Choice of Transfer Pricing Method: Mexico accepts the six transfer pricing methods outlined in its legislation, with a preference for the Comparable Uncontrolled Price Method. Other methods are considered after demonstrating the inapplicability of CUP.

Economic Analysis – Benchmark Study

While there is a preference for local comparables, limited public information leads to the selection of comparables in North America. Tax authorities may accept this approach if it’s supported by the lack of reliable local information. Identifying internal uncontrolled transactions is also crucial.

Inter-company (IC) Legal Agreement

Inter-company legal agreements are essential for formalizing relationships but are of lower importance since the OECD’s 2017 Guidelines prioritize the “conduct of parties.”

Financial Statements

Taxpayers are required to submit financial statements in their transfer pricing documentation.

Record Keeping

Transfer pricing documentation should be prepared annually and is considered part of a company’s accounting records.

Penalties and Interest Charges

Various penalties apply if intercompany transactions are not at arm’s length. Mexico offers a penalty reduction if supporting transfer pricing documentation exists. Penalties are also imposed for not reporting related party transactions and not submitting informative returns.