Mexico is a leading economy in Latin America. The country’s strategic geographical location serves as a connection with Canada, the United States, Central and South America. It is also an attractive destination for foreign executives and multinational companies that are required to comply with transfer pricing local regulations.
Learn about transfer pricing in Mexico and all the key aspects you must know to comply with Mexican tax regulations while doing business in the country.
What is transfer pricing in Mexico?
Transfer pricing is a broad concept first used by the Organization for Economic Cooperation and Development (OECD), which encompasses a set of obligations for multinational enterprise groups developing commercial transactions between their member companies.
According to OECD, a transfer price is “a price, adopted for bookkeeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management, at artificially high or low levels, to make an unspecified income payment or capital transfer between those enterprises.”
Due to transfer pricing, it is mandatory to carry out every transaction between related companies in the same conditions, as if it were done with an unknown third party. The OECD issued a set of recommendations which have been progressively adopted by the member countries’ internal legislation, including Mexico.
What obligations does Mexico have regarding transfer pricing?
Transfer pricing regulations in Mexico are listed in the Income Tax Act, or LISR (Ley de Impuesto Sobre la Renta). It establishes the following obligations:
- Any company that carries out transactions with a related party located in other countries except Mexico must carry out these operations under the same values and conditions as if it were done with an unrelated party, this is known as the ‘standing arm principle’.
- Companies with revenue above USD 612.000 must keep the supporting documentation for each transaction and deliver a transfer pricing study to ensure that conditions are respecting the ‘standing arm principle’.
- Services providers with income above USD 141.000 must also comply with the transfer pricing study.
- Companies doing transactions with related parties located at lower taxation regimes must comply with the transfer pricing study regardless of the amount of the income.
Note that according to section 81 of the Income Tax Act, Mexican tax authorities will prosecute any violation of the transfer pricing regime, and will impose penalties for every wrongdoing, with fines starting at USD 3.000. The final sanction value depends on the number of transactions.
Reportable schemes
In addition to the Transfer Pricing dispositions, multinational groups operating in Mexico must be aware that from January 2021, every plan, project, proposal or activity aiming to obtain a tax benefit in Mexico by utilizing aggressive tax planning must be reported to the local tax authorities. This responsibility is transferred to the tax advisors, meaning that if the company does not report the scheme, then the tax advisor will be obliged to do so.
Mexican law does not define aggressive planning but provides examples of what should be reported. Here are some of the most relevant ones:
- Any activities aiming to prevent Mexican tax authorities from exchanging information with other tax authorities.
- Any activities involving the application of treaties to avoid double taxation on revenue that is not going to be taxed in the destination jurisdiction.
- Activities to avoid or skip the incorporation of an entity in Mexico to reduce taxes.
- When the scheme involves the restriction of information regarding the final beneficiaries.
- Transactions between related parties that involve “assets of difficult valuation”, or reorganizations or restructurings without change of cash or assets.
Companies need to work closely with their tax advisors to avoid generating liabilities for unreported activities.
The Mexican government has established a complete set of regulations that companies must follow to comply with the transfer pricing regime and avoid penalties from tax authorities. Companies that are part of a business group or have commercial relations with parties located in lower tax jurisdictions must monitor these regulations.
At Biz Latin Hub, our team of multilingual legal and tax experts can help you understand and navigate regulations for transfer pricing in Mexico and other 16 countries in Latin America. With our full suite of tax advisory services, we are equipped to provide guidance and professional advice to ensure your company remain in good standing with Mexican legislation.
Contact us today so we can empower your business with transfer pricing compliance and optimize growth opportunities.
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