Mexican taxpayers are obliged to determine their taxable income and authorized deductions derived from related party transactions considering the prices that would have been used in comparable transactions with or between independent parties. This is, in Mexico the arm's length principle is recognized for tax purposes.
In the previous administration1, the transfer pricing department within Mexico's Tax Administration ("SAT" for its acronym in Spanish) had an important consolidation going from a mere documentation compliance matter to an strategic risk assessment tool for Multinational Companies ("MNEs").
The latter may be observed not only with the inclusion of new transfer pricing related provisions and obligations such as the local file, master file and country by country report, among others, but with the requirements regarding the economic substance and materiality that have been observed within tax audit procedures in the last years.
In connection with intercompany transactions, taxpayers have to demonstrate not only the compliance with the arm's length principle and with formal requirements such as having the transfer pricing contemporaneous documentation and have submitted the diverse informative tax returns to which they are obliged, but to demonstrate the economic substance and materiality of the transactions carried out with its related parties, both domestic and foreign.
There are certain related party transactions that the tax authorities have been paying special attention to, requiring taxpayers to demonstrate that such transactions have economic substance. In general, these transactions include payment for services rendered abroad, royalty payments and interest payments. Moreover, there are transactions carried out with unrelated parties such as advertising and promotion which also require this kind of documentation.
Specifically regarding the payment for services rendered abroad, elements such as the following have to be taken into consideration to analyze the economic substance of the transaction: i) demonstrate the economic benefit of the transaction for the Mexican taxpayer (either by demonstrating an increase in revenue of by an increase in profitability), ii) demonstrate the capabilities of the service provider, iii) analyze and prove the non-duplicity with other services received by the Mexican taxpayer or with activities performed by the Mexican company, and iii) demonstrate that the services were effectively...