The Mexican Tax Miscellaneous Resolution applicable for FY 2017, was published in the Federal Official Gazette on December 23, 2016, in which highlights the inclusion of Section 3.9.1. named "Of the Transfer Pricing Adjustments".
Under this recently added section, the Mexican Tax Authority includes four miscellaneous rules, where it defines what should be understand for "transfer pricing adjustments" (rule 220.127.116.11.), the increase or decrease effects of the transfer pricing adjustments (rule 18.104.22.168.), the additional fiscal requirements that should comply the transfer pricing adjustments that result on a deduction increase (rule 22.214.171.124.), and the treatment of the transfer pricing adjustments that derivate from a resolution issued according to article 34-A of Federal Fiscal Code (rule 126.96.36.199.).
The previous mentioned rules, will give to the taxpayers a greater legal certainty respect to the application and fiscal treatment that the transfer pricing adjustments should follow, including, the documentation that companies should obtain and keep in order to support that the adjustments performed during the fiscal year are in compliance with the Mexican tax provisions.
General Aspects of Section 3.9.1
The concept of transfer pricing adjustment.
According to rule 188.8.131.52., for purposes of the tax provisions related to this matter, it will be understood as a transfer pricing adjustment to "any modification to the prices, amount of consideration or profit margins corresponding to the transactions performed by the taxpayer with its related parties, which are done in order to reflect that the accumulated income or authorized deductions resulting from these transactions, were determined considering the prices or amounts that would have been used with or between non-related parties in comparable transactions, even when there is not an exchange of cash or any other material resource between the parties".
The effects of transfer pricing adjustments.
Rule 184.108.40.206. establishes the effects of any transfer pricing adjustment that meets the previous concept, where it is emphasized that, in the case that the adjustment increases the authorized deductions of the taxpayer in Mexico, it will have to comply with certain additional requirements for its deduction, according to rule 220.127.116.11.; meanwhile if the adjustment performed results on an increase of the accumulated income or a decrease of the Mexican taxpayer's deductions, then it will only have to increase the income or decrease its deductions (in an amount equivalent to the adjustment) without complying with additional requirements, only with those already imposed by the tax provisions currently in force.
Deductions of transfer pricing adjustments.
According to rule 18.104.22.168, the transfer pricing adjustments that result on an increase of the authorized deductions for the taxpayer in Mexico, then the taxpayer should comply with the following additional requirements:
- File the ordinary tax returns, or, if it is the case, the applicable complementary tax returns (annual tax return, form 76 "Relevant Transactions", informative tax return on the tax situation - DISIF, and/or informative return of transactions carried out with related parties abroad - exhibit 9 of DIM), where it is expressly stated the transfer pricing adjustment performed.
- Keep all documentation by which it was identified that the operation(s) originally adjusted did not consider the prices, amounts or profit margins that they would have used with or between independent parties in comparable transactions.
- Obtain and keep a statement under affirmation, explaining: a) the reason why the prices, amounts or profit margins originally agreed, did not correspond to those of the market; and b) consistency or inconsistency in the application of the transfer pricing methodology, including the search for comparable transactions or companies (at least in relation to the previous fiscal year).
- Obtain and keep the transfer pricing documentation, including arithmetic calculations, with which it is possible to corroborate that the transfer pricing adjustments considered the prices, amounts or profit margins that would have been used with or between independent parties in comparable operations.
- Have a CFDI or tax receipt that supports the transfer pricing adjustment, complying with the fiscal requirements; even when an accounting effect is also recognized.
It is important to mention, that in any case the CFDI or tax receipt should include, at least: i) a description of the adjusted transaction, ii) the original transaction amount and the fiscal year in which it was declared as an accumulated income or authorized deduction, and iii) a description of the transfer pricing adjustment, within the element "Concept", attribute "Description".
- In the case of a non-accounting fiscal adjustment, record the transfer pricing adjustments in off-balance sheet accounts and recognize them in the reconciliation between the accounting and fiscal result for Mexican income tax purposes.
- If applicable, comply with the obligation to withhold and pay the third party's Income Tax, arising from the transfer pricing adjustment.
From the foregoing, it is important to note that, in addition to the above, it will be necessary to prove that the related party (whether resident in Mexico or abroad) with which the adjusted transaction was conducted, accumulated such adjustment or decreased the deduction (for the same amount), as the case may be, in the same fiscal year in which the deduction was made.
The tax miscellaneous rule also provides that the aforementioned adjustments must be reflected at the latest in the annual tax return or, as the case may be, in the presentation of the statutory tax audit report or the DISIF, in accordance with the deadlines established in the tax provisions.
Deductions of adjustments from Advance Pricing Agreements.
Finally, rule 22.214.171.124., states that taxpayers that carry out transfer pricing adjustments after the aforementioned deadlines, these can only be considered as deductible when it is the result of a resolution in terms of article 34-A of the Federal Fiscal Code and, as the case may be, according to what is stated on the article 184 of the Mexican Income Tax Law. Emphasizing that the complementary tax returns that are filed for this case, will not compute within the limits established in article 32 of the Federal Fiscal Code.
Subject to a further analysis of the scope and implications of these rules, ,and on a case-by-case basis, it is convenient to take into account, among others, the following recommendations:
a. Keep supporting documentation, including the Transfer Pricing Study, which proves that after making the adjustment, the analyzed transaction is in compliance with the arm's length principle, that is, considering the prices or amounts that would have been used with or between non-related parties in comparable transactions.
b. The transfer pricing documentation, including the calculated market range, should be consistent with the functions performed, assets owned and risks assumed under the analyzed transaction. Also, the documentation must be consistent with the one prepared historically (i.e., in the previous fiscal years) to the extent that the functions, assets and risks are "similar" over time.
c. Obtain and keep the tax receipt that supports the amount derived from the transfer pricing adjustment performed.
d. Maintain consistency in the "information" submitted to the SAT, including, among others: annual tax return, form 76 "Relevant Transactions", DISIF, or if it is the case, statutory tax audit report; informative return of transactions with foreign related parties, and, if it is obliged, with the informative returns of related parties, to which the article 76-A of the Mexican Income Tax Law refers.
e. If applicable, perform the necessary adaptations to reflect any adjustment to the Value-Added Tax, as well as the import declaration (pedimento), including any modification to the import tax.