The 2022 tax reform introduces important changes to the Mexican Income Tax Law (MITL) as well as the Fiscal Tax Code (CFF). Below we present a summary of the most important ones.
Changes in Deadlines
Based on the changes introduced in articles 76, part X as well as in article 76-A of the MITL and 32-H of the CFF, the deadlines to file the Appendix 9 Informative Return of Transactions with Related Parties and the Local File are now due by May 15, 2023.
The filing deadline for the Master File and the Country-by-Country Return continues to be December 31, 2023.
Accordingly, the Dictamen Fiscal (Tax Opinion Signed by an Independent Auditor) has also changed to May 15.
Regarding the Appendix 9, Informative Return of Transactions with Related Parties and updated transfer pricing documentation will be the basis for the filing of this return. Consistency between the documentation and Appendix 9 fundamentally focuses on:
- transactions reported;
- transfer pricing methods used;
- financial information (segmented or total);
- ranges of values;
- profit level indicators.
Taxpayers Required to File the Local and Master Files
Article 32-H of the CFF part VI, establishes now that the related parties (resident in Mexico) of the companies required to file their Dictamen Fiscal are now also obliged to file the local and master files. This means that the obligation which fell on the companies themselves now extends to the related parties. For groups of companies in Mexico, it is advisable to review this issue and determine if additional companies within the group are required to file the returns.
Reporting of Local Related Party Transactions
A change in the MITL introduced for 2022 eliminated differences on how to document and report local and foreign related party transactions. The same conditions now apply to all related party transactions in general. In practice both types of transactions were documented from a transfer pricing perspective, now both local transactions and information regarding foreign related party transactions need to be reported in Appendix 9 that previously only included information regarding foreign related party transactions.
Technical Issues Impacting your Transfer Pricing Documentation
Other 2022 changes included in the MITL and CFF address some technical issues that may affect your transfer pricing documentation and may have important implications in case of an audit procedure:
- The functional analysis must now include relevant information of all related parties involved in the different transactions, not only information of the entity documenting the transactions or the tested party. This change is in line with recent changes in the legislation to have a complete approach to evaluate and document related party transactions. Mexican tax authorities are now more focused on the business and economic substance of the transactions and have established specific criteria to consider a transaction valid, specifically establishing that tax savings are not a valid stand-alone business reason to give economic substance to a transaction.
- As of 2022, information of comparable companies must correspond with the year under analysis and the average of information of two or more tax years will be allowed only if properly supported as a business cycle or commercial acceptance of a product over several years.
- Details of adjustments to increase comparability must be included in the documentation and when applying a recognized transfer pricing methodology, the interquartile range method must also be applied
Based on the above, it is recommended to review and expand functional analysis to cover all the related parties and jurisdictions to provide a complete overview of the value chain for the transitions. Also, additional technical evaluations must be conducted in regard to economic analysis that previously used various years of information and the best possible approach should be determined based on the specifics of the case at hand.
This article was adapted from information supplied by Lavara Transfer Pricing Consulting, S.C., our partner in Mexico.
For further consultation on transfer pricing regulations and documentation, please contact our team.
Authors: Ramon Lavara, Partner at Lavara Transfer Pricing Consulting, S.C.