International Tax Update: Mexico

In December 2016, Mexico’s Servicio de Administración Tributaria (“SAT”) issued a new rule governing intercompany transfer pricing charges. The new rule details the necessary requirements under which taxpayers are permitted to recognize revenue and expense items arising from related-party transactions.

Mexican taxpayers are permitted to recognize deductions from related-party transactions only if certain requirements are met. For example, transfer pricing adjustments are permitted only for taxpayers who timely file their tax and information returns. The returns must identify the transfer pricing adjustments, and the taxpayer must be prepared to present documentation that explains the reason for these transfer pricing adjustments. The documentation is expected to discuss whether or not a consistent transfer pricing methodology was applied.

The taxpayer must certify that the related party, who had taken the opposite side of the transaction, recognized the associated income (or expense). For example, if the Mexican taxpayer recognized a deduction, then the related party opposite to the transaction is expected to recognize income in the same period in which the related party took the deduction. Note: The rule is silent regarding the case where related parties have different fiscal years. If the related party is located in a low-tax jurisdiction, the SAT may deny the deduction.

If deductions from a related party are taken on an amended return, a Dictamen Fiscal must be issued. The Dictamen Fiscal is an elective filing for those Mexican taxpayers who would otherwise be required to file an information tax return with the SAT.

Alternatively, these taxpayers can elect to have their financial statements audited by a contador público (a “CP” is the Mexican equivalent of a CPA), who files the audited financial statements with the SAT. The CP attaches to the audited financial statements a statement of opinion as to whether or not the taxpayer complied with its federal tax obligations. The CP is required to disclose any failure to comply with federal tax obligations by the taxpayer. Thus, the Dictamen Fiscal is a tax opinion issued by a CP. For MNE groups that file consolidated returns with the SAT, the deadline to file the Dictamen Fiscal is generally July 15.

The SAT is known to use the Dictamen Fiscal in transfer pricing examinations. If a taxpayer's transfer pricing study does not tie to the Dictamen Fiscal, the SAT is likely to ask why and propose adjustments based on the Dictamen Fiscal. Generally, taxpayers who issue the Dictamen Fiscal should consider it to be definitive. Transfer pricing studies should generally use the audited numbers in the Dictamen Fiscal. Thus, for taxpayers who use the transactional net margin method, the Dictamen Fiscal’s figures should fall within the range of profit level indicators from the comparable companies.