Mexico: Proposed tax reform to transfer pricing provisions for fiscal year 2022

In brief

The Economic Package for fiscal year 2022, submitted to the Mexican Congress on 8 September, contains a Draft Decree by means of which various tax provisions are amended, added and repealed ("Proposed Tax Reform"), including various modifications in transfer pricing matters. This tax alert describes the most relevant proposed amendments regarding transfer pricing compliance, highlighting their practical implications for taxpayers.


Contents

In depth

  • Maquiladora companies. One of the most relevant aspects of the Proposed Tax Reform is that it eliminates the option that maquiladora companies currently have to obtain an Advance Transfer Pricing Agreement (APA) in order to comply with their transfer pricing obligations and maintain the tax benefits of the maquiladora regime. Therefore, maquiladoras will only be able to comply with their transfer pricing obligations through Safe Harbor rules established in Article 182 of the Mexican Income Tax Law (MITL).

    The Proposed Tax Reform also eliminates the written notice that the maquiladora companies that apply the Safe Harbor rules currently have to file, no later than the month of March, as stated in article 182 of the MITL. With the proposed reform, the maquiladora companies must report their compliance through the informative return for manufacturing, maquiladora and export services companies (DIEMSE for its acronym in Spanish), where they will reflect that the tax profit represented at least the highest amount of applying the provisions of sections I and II of the aforementioned article.

    Consistent with the foregoing, the proposed reform to article 183-bis of the MITL (maquiladora companies under the shelter modality) eliminates the APA option to determine the tax profit of each of its clients residing abroad. Although the repeal of the APA alternative as of fiscal year 2022 constitutes a simplification measure for transfer pricing compliance, in case of approval, it would be reasonable to expect an increase to the taxable income of those capital-intensive taxpayers.
     
  • Transfer pricing study. The proposed reform contains a series of modifications to section IX, article 76 of the MITL in order to treat domestic intercompany transactions the same way as foreign intercompany transactions in the transfer pricing study. Additionally, the requirement to include a functions, assets and risks analysis is extended, not only to the taxpayer as currently regulated in the MITL, but also to the related parties involved in the transaction. Likewise, it includes the obligation to document the comparability elements and the application of the adjustments made in terms of article 179 of the MITL.

    If Congress approves these modifications taxpayers in Mexico should consider changes in the scope and content of their transfer pricing documentation, in order to guarantee compliance with the new provisions.
     
  • Informative return of transactions carried out with related parties (Annex 9 of the DIM). Consistent with the foregoing, the Draft Decree proposes the modification of section X of article 76 of the MITL, so that taxpayers include in Annex 9 of the Multiple Informative Tax Return (DIM for its acronym in Spanish) information of all transactions carried out with related parties regardless of their tax residency, this is, also including those carried out with residents in Mexico. Additionally, it proposes to modify the filing date of this informative return, which should be no later than 15 May of the immediately subsequent year of the fiscal year in question.
     
  • Annual informative returns of related parties (BEPS Returns). Amendments to article 76-A of the MILT are proposed, in order to expand the universe of taxpayers required to file BEPS Returns. In particular, derived from the proposed changes to articles 32-A (a new second paragraph) and 32-H (new section VI) of the Federal Tax Code (CFF, for its acronym in Spanish), companies required to prepare a Statutory Tax Report (Dictamen Fiscal), and their related parties performing intercompany transactions, will be required to file BEPS returns. In addition, similar to Annex 9 of the DIM, taxpayers must submit the local file return by 15 May of the immediately subsequent year of the fiscal year in question; maintaining the obligation to file the master file and country-by-country report by 31 December of the immediately subsequent year of the fiscal year in question.

    If approved, these changes represent a step closer to the homologation between the transfer pricing study and the local file, reducing compliance costs incurred by taxpayers.
     
  • Analyzed period (Year vs year). This proposed amendment to article 179 of the MITL, would obligate taxpayers to use by default information of comparable transactions corresponding only to the fiscal year under analysis and, exceptionally, the use of two or more fiscal years when the business cycle or commercial acceptance of the taxpayer's product covers more than one fiscal year.

    Through this modification, the reform seeks to incorporate into the body of the law the technical criteria that the SAT has broadly adopted in transfer pricing audits. In this way, taxpayers who routinely apply the relevant methods in their transfer pricing studies using financial information from two or more years of comparable companies, will have to evaluate the need to change the multi-year focus of their analysis to just one year, or else to robustly document the economic reasons for choosing a period longer than one year.
     
  • Interquartile range. The proposed reform to article 180 of the MITL incorporates into the text of the law the obligation to use the interquartile range, which is currently contained in article 302 of the Regulations of the MITL, when applying transfer pricing methods when two or more comparable transactions are available,. In this regard, the proposed reform only considers two exceptions to the application of the interquartile range: (i) when the application of the method is agreed within the framework of a mutual agreement procedure indicated in the treaties to avoid double taxation; or (ii) when it derives from the application of the authorized method in accordance with the general rules issued by the Tax Administration Service (SAT).

    Although the application of the interquartile range is a generalized practice by taxpayers in Mexico, the eventual entry into force of this modification could imply the reevaluation of some transfer pricing policies based on broader statistical ranges (for example, the interdecile range ) that have been established on the high degree of comparability of comparable companies or transactions.

Although the Proposed Reform has yet to be analyzed and approved by the Mexican Congress and is subject to possible modifications, it is advisable to analyze the proposed changes, and evaluate their impact on  intercompany transactions and transfer pricing supporting documentation. At Baker McKenzie we have a multidisciplinary team of lawyers, economists, financial specialists and accountants, experts in transfer pricing, who can support your company in all related matters.


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