The First Amendment to the Miscellaneous Tax Rules (MTR) was published in Mexico's Federal Official Gazette on 15 May 2017, containing among other things rules on the new transfer pricing information returns.
The Organisation for Economic Co-operation and Development (OECD), in response to the express request of the G20, designed a plan to attack base erosion and profit shifting (BEPS) among companies residing in different countries. As a party to both organizations, and with the purpose of preventing international income tax avoidance strategies, in places where the value is created and the wealth generated, Mexico amended Article 76-A of the Mexican Income Tax Law (MITL)1 under the guidelines of BEPS Action 13, with respect to the transfer pricing documentation and information to be filed by taxpayers forming part of a multinational group, which engage in related-party transactions and either:
1. Derive taxable income of more than $645 million pesos;2
2. Are publicly traded;
3. Are companies under the optional tax regime for corporate groups;
4. Are state-owned entities; or
5. Are nonresidents with a permanent establishment in the country.
After the entry into force of the MITL, the publication of rules for complying with these rules was left pending. The rules are published as part of the MTR. A novel procedure was followed in their drafting; they were based on a public consultation organized by Mexico's tax ombudsman, gathering, analyzing and classifying the opinions and comments made by interested parties in public and private hearings with representatives of the Tax Administration Service, multinationals, tax specialists, consulting firms, and representatives of chambers of commerce, professional colleges and academic associations. This process resulted in the final and definitive version of the rules recently published in the Federal Official Gazette.
The requirements for filing the Annual Related-Party Information Returns are summarized below:
3.9.11. Taxpayers required to file the annual related-party information returns must send them through the Portal, using the tool provided by the SAT for these purposes on the corresponding form, with the e-signature or portable e-signature in effect, and comply with various requirements.
The SAT email taxpayers the filing acknowledgment with the digital stamp generated by the agency.
3.9.12. Taxpayers under suspension of activities may request the e-signature provided that they evidence the suspension of activities.
3.9.13. Taxpayers required to file the master file and country-by-country return, which are part of the same MNE group, may file a single Annual Information Return jointly. For this purpose, it shall suffice for any taxpayer required to file, belonging to the group that is to file the return, to select the joint return option and state the company name or business name and the taxpayer identification number of the taxpayers filing the joint return.
3.9.14. The taxpayer (resident or nonresident entity with a permanent establishment in the country), designated by the controlling entity of the MNE group as responsible for providing the country-by-country information return, may file the notice of its designation with the tax authorities when the Country-by-Country return form is filed, providing the information requested on said return within the prescribed periods.
In the case that the fiscal year close of the nonresident controlling entity of the MNE group does not coincide with the calendar year close, the entity to which the preceding paragraph refers may file the Country-by-Country Return according to the closing month of the controlling entity's fiscal year close.
The information from the Country-by-Country Return may also be filed in a currency other than domestic currency. If the information was obtained in foreign currency and converted to domestic currency, the conversion exchange rate must be indicated.
Master File Return
3.9.15. The Master Return corresponds exclusively to multinational groups and must contain:
a) Legal organizational structure of each business unit.For purposes of this section, the definitions in the Financial Reporting Standards issued by the Mexican Financial Reporting Standards Research and Development Board shall apply.
b) General description of the business activity of the MNE group, with:
1. Description of the group's business model, with the business and operating strategies and other business data, as well as the cost structure and revenue flows showing the viability of the business.
2. Description of the group's value drivers, reflecting the value-generating business attributes, as manifested through the intangibles created or used.
3. Description of the supply chain of the five main types of products or services of the group.
4. List and description of the relevant aspects of the main intragroup service agreements (other than research and development services).
5. Description of the main geographical markets where the group's main products or services are marketed.
6. Description of the main functions, assets and risks of the different entities that make up the group.
7. Description of transactions relating to business restructurings, as well as business acquisitions and sales made by the group in the reporting year.
c) Intangibles of the MNE group, consisting of the following:
1. Description of the global strategy for the development, ownership and exploitation of intangibles.
2. List of the group's intangibles or sets of intangibles, including the names of their legal owners.
3. List of the main intragroup agreements involving intangibles.
4. Description of the main transfers of rights to intangibles among related parties.
d) Information relating to the MNE group's financial activities:
1. Description of how the group obtains financing, including that obtained with unrelated parties.
2. Names of the group entities that engage in centralized financing/cash pooling.
3. Description of the group transfer pricing policies for related-party financing transactions.
e) Financial and tax position of the MNE group:
1. Consolidated financial statements corresponding to the reporting year.
2. List and description of unilateral advance pricing agreements and other rulings.
Taxpayers required to file the Master Return may submit the information prepared by a foreign entity forming part of the group, provided that it is filed by the taxpayer required to do so in Spanish or English, using the tool provided by the SAT.
For purposes of the preceding paragraph, when the fiscal year close of the foreign entity that prepared the Master Return does not coincide with the calendar year close, it may be filed considering the periods prescribed by Rule 3.9.14.
Local File Return
3.9.16. The local return shall provide information and documentation in the Spanish language, demonstrating compliance with the arm's length principle in accordance with the provisions of Article 179 and 180 of the MITL, and shall include the following:
a) Information on the structure and activities of the taxpayer required to file:
1. Description of the administrative and organizational structure, as well as a list of the individuals who depend hierarchically on local management and the country in which said persons have their principal office.
2. Detailed description of the business activities and strategies of the taxpayer required to file, including local or cross-border business restructurings, as well as transfers of ownership or rights to intangibles during the reporting year or in the previous fiscal year.
3. Description of the value chain of the group to which the taxpayer belongs.
4. List of main competitors.
b) Information on related-party transactions:
1. Detailed description of the taxpayer's transactions with resident and nonresident related parties, including the nature, characteristics and amount, by type of transaction.
2. Description of the transfer pricing policies, by type of transaction.
3. Description of the strategy for the development, enhancement, maintenance, protection and exploitation of the group's intangibles (the so-called DEMPE functions).
4. Copy, in Spanish or English, of contracts executed by the taxpayer with its related parties.
5. Justification of the selection of the tested party and the reasons for rejecting the counterpart as the tested party.
6. Analysis of the functions, assets and risks of the taxpayer required to file and its related parties, for each type of transaction analyzed, as well as the comparability analysis for each type of transaction analyzed, which must include the analysis of the DEMPE functions performs by the taxpayer and its related party in the transaction.
7. Justification of the selection of the transfer pricing method applied.
8. Detail and justification of the use of financial information of comparable enterprises.
9. Detail of the search and selection process for comparable enterprises or transactions.
10. Financial information (segmented) of the taxpayer required to file or the tested party, and of the comparable enterprises.
For these purposes, the step-by-step detail of the calculation of the profit level indicator of both the tested party and each comparable used in the analysis, as well as the mathematical processes and formulas used, must be provided.
1. List of unilateral, bilateral or multilateral APAs and other rulings, to which the Mexican tax authority is not party, and which relate to any of the related-party transactions carried out during the reporting year. Provide a copy of those rulings in the taxpayer's possession.
c) Financial information:
1. Individual and consolidated financial statements, as applicable, corresponding to the reporting year of the taxpayer required to file or the tested party selected.
2. Financial and tax information of the foreign related-party counterparts in each transaction analyzed, consisting of current assets, fixed assets, sales, costs, operating expenses, net profit, taxable basis and taxes paid, specifying the currency in which such information is being provided.
3. Financial information of the taxpayer required to file, or the tested party selected, to apply the transfer pricing methods.
If segmented financial information is used, it must include all segments covering the types of related-party transactions of the taxpayer required to file or the tested party selected, whose total matches the financial information.
The taxpayer must also identify the transactions in each segment, and explain how it carried out the segmentation of the financial information.
1. Relevant financial information of the comparable enterprises used, as well as the sources of such information and the date of the database used in the search.
The information must indicate the preparation date, the taxpayer identification number of the preparer and advisor, whether the transactions are in accordance with the arm's length principle, whether such documentation shows any adjustment, and as applicable provision clarifications with respect to the adjustments.
Taxpayers that have an APA in effect for the reporting year, pursuant to Article 34-A of the Federal Tax Code for one or more related-party transactions, or in the case of IMMEX companies [maquiladoras] under Article 182 of the MITL, may elect not to file the information corresponding to the local return.
The local return may give rise to an excess that could be regarded as outside the law. In this regard, the taxpayer may choose to raise the respective defense measures, to have a court decide whether or not the rules are illegal.
Multinational enterprises with related-party transactions that generate consolidated annual income of 750 million euros ($12,000 million pesos)3 or more must file:3.9.17. The Country-by-Country return must contain, with respect to the reporting year of the multinational holding company, on an aggregate basis and by country or tax jurisdiction:
a. The total income of the MNE group, broken down by that obtained with related parties and with third parties, including income from the sale of inventories and property, stock, services, royalties, interest, premiums and other items, but not including dividend income.
b. Book earnings or losses before income tax for the reporting year.
c. Income tax actually paid, actually incurred and paid by the entity in its tax jurisdiction of residence, and in any other tax jurisdictions, including taxes withheld by related parties or third parties.
For these purposes, the income tax actually paid does not include any income tax covered with credits or reductions, except when the payment was made via offset.
In the case of corporate taxes other than the income tax, the nature of the tax in question must be clarified.
a. Amount of income tax incurred. This item corresponds to the income tax or corporate tax incurred for tax purposes in the reporting year.
When corporate taxes other than the income tax are stated, the nature of the tax in question should be clarified in the additional information section.
a. Amount retained earnings or accrued losses, for book purposes, from prior tax years, as of the closing date of the reporting year.
b. Amount of capital stock or equity subscribed and paid as of the close of the reporting year.
c. Number of employees in the reporting year.
d. Material assets corresponding that the sum of the net book values of inventories and fixed assets, not including cash, cash equivalents, intangibles, financial assets and net accounts receivable.
e. List of the company names of the entities residing in each tax jurisdiction where the group has a presence, including an identification of permanent establishments and an indication of the main business activities performed by each.
f. All additional relevant information and an explanation, if necessary, of the source and integration of the data included in the country-by-country return.
Penalties for Noncompliance
The potential consequences of failure to comply with these obligations can include the possible disallowance of the deductions corresponding to the related-party payments, implications regarding VAT certification, limitations on federal government contracting and fines.
As described by the OECD, the 2013 BEPS Action Plan adopted by its member countries and the G20 participants recognizes that, to improve transparency for tax administrations by providing them with adequate information for a high-level analysis of transfer prices and other BEPS risks, it is crucial to address the issue of base erosion and profit shifting. In this sense, Mexico's commitment to adopting minimum standards is reflected in various changes to the MITL and to the double tax treaties, through the Multilateral Instrument. A clear example of this is the new information returns; in addition to being included by more than 50 countries around the world, they are also accompanied by a Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports. This new agreement will lead to the mass sharing of multinational group information by governments, for purposes of targeted transfer pricing inspections.
1 Effective 1 January 2016.
2 The amount will be adjusted for inflation, according to Mexico's National Consumer Price Index (INPC).
3 The amount in Euros will be revised in 2020 by the OECD; the amount in pesos will be revalued by the Mexican Congress for each fiscal year in the Federal Revenue Law, to be increased each year according to the general rules issued by the SAT.