At its March 19, 2014 session, the Second Chamber of the Mexican Supreme Court (“Supreme Court”) resolved an amparo action that analyzed the constitutionality of Article 32(XVIII) of the Mexican Income Tax Law (MITL) in effect through 2013, which prohibited the deduction of pro rata expenses paid abroad. The ruling constitutes an important precedent for transnational companies that distribute their costs under a pro rata approach, as the Supreme Court judgment found that the absolute prohibition contained in the article was unjustified, since the transfer pricing rules require taxpayers to adjust their transactions with related parties residing abroad to arm’s length values. Furthermore, the OECD Transfer Pricing Guidelines also allow the use of “cost contribution agreements" (pro rata expenses), defined as arrangements whereby associated enterprises companies distribute their costs, provided that they meet the arm’s length principle.

The Supreme Court found that the MITL provided legal mechanisms to verify pro rata expenses and audit related-party transactions, making it unnecessary to prohibit the deduction of pro rata expenses paid abroad, when the expenses are strictly indispensable for the taxpayer’s activity.

The Supreme Court found that, although the absolute prohibition contained in Article 32(XVIII) of the MITL is unjustified, this does not mean that it is unconstitutional, since, in order to deduce pro rata expenses paid abroad, the following requirements must be met:

  • The expense must be strictly indispensable.
  • There must be a reasonable relationship between the expense incurred and the benefit received or expected to be received.
  • The taxpayer must demonstrate that the price or consideration agreed upon by the related parties falls within the range of prices that would have been used by unrelated parties in comparable transactions (the arm’s length principle).

The Supreme Court further found that taxpayers that pay pro rata expenses abroad must also:

  • Provide the tax authority with accurate information on transactions undertaken abroad with related parties, such as: a) the related parties’ taxpayer data; b) the activities carried out in the transaction by each party and, as applicable, the assets used and the risks assumed for each type of transaction; and c) the method applied to determine that the price or consideration was at arm’s length (pursuant to Article 86 of the repealed MITL and Article 76(IX) of the Income Tax Law currently in force).
  • Have documentation demonstrating: a) the type of transaction carried out; b) the contractual terms; c) the transfer pricing method selected and applied; and d) comparable transactions or companies for each type of transaction.
  • Have documentation demonstrating that the pro rata expense was taken on the basis of objective tax and accounting elements, and not arbitrarily or randomly by the taxpayer. To do this, it must be considered that all pro rata transactions must prove to have a business reason pursuant to the OECD Transfer Pricing Guidelines.

If the pro rata expense incurred abroad fails to meet any of the above requirements, the tax authority may validly disallow the expense.


The aforesaid precedent acknowledges the need to allow companies to deduct the payment of pro rata expenses made abroad, provided that such expenses meet the above requirements. This accords greater legal certainty to taxpayers that make this kind of payment, since the tax authority will have to verify whether these requirements are met before disallowing the deduction outright simply for being a pro rata expense paid abroad.