Mexico Updates Transfer Pricing Legislation22nd February 2022
How important is transfer pricing compliance in Mexico? Judging by the country’s 2022 income tax law, it’s extremely important. The new tax legislation, which went into effect in January and updates proposals made just months ago in September 2021, includes a slew of transfer pricing changes. First, the tax reform mandates that like cross-border related-party transactions, domestic related-party transactions must also be reported in the transfer pricing return (annex 9). When it comes to transfer pricing documentation, the functional analysis is always at the heart of a robust presentation. Mexico’s new transfer pricing laws highlight the importance of the functional analysis by spelling out minimum requirements: The analysis must consider the functions, assets, and risks of all related parties, characterize the functions, and include contract terms, economic substance, and business strategies. As for the economic analysis, taxpayers must be transparent about any comparability adjustments, and tax authorities can use secret comparables to confirm arm’s length transactions. Now Mexico requires a one-year analysis (unless a business cycle covers more than one fiscal year) and the interquartile range will be considered arm’s length. The Mexican tax authorities want transfer pricing transactions noted in accounting records—the income statement and balance sheet should note the revenues, costs, expenses, accounts payable and receivable between related-party transactions. And if this seems like a lot to take in, here’s a gift: Deadlines have been extended for both the local file and the transfer pricing return to May 15.