General assumptions about Transfer Price Study elaboration

One of the tax obligations not modified by the fiscal reforms of 2014 in Mexico is the obligation to document and to support physically and legally all intercompany operations carried out by any entity and individuals and assure they are performed as per marketing standards by the issuance of a transfer price study, therefore, its compliance shall be yearly compulsory to applicable taxpayers.

Dear Clients and Friends,

One of the tax obligations not modified by the fiscal reforms of 2014 in Mexico is the obligation to document and to support physically and legally all intercompany operations carried out by any entity and individuals and assure they are performed as per marketing standards by the issuance of a transfer price study, therefore, its compliance shall be yearly compulsory to applicable taxpayers.

In view of the above, this bulletin is aimed to review the main details to be considered in order to comply with such tax obligation.

What is a transfer price study and why is it necessary? The income tax law (“LISR”) (acronyms in Spanish) states that individuals performing operations with related parties have the obligation to determine the amount of their taxable incomes and authorized deductions of such transactions considering the prices and the amounts of counter operations which have been agreed with or among independent parties in similar operations as well as maintaining and prevailing the corresponding evidence document support. Fiscal authorities, on their own, are entitled to presume the incomes and deductions arisen from such transactions, if the taxpayer did not have the support indicated by the Law (referring to the transfer price study).

The Transfer Price study is a resource to analyze and verify the compliance of mentioned regulations, likewise, it is part of the evidence that each taxpayer shall preserve in its records. In some cases, the Transfer Price study is part of a fiscal, operative and legal planning, that allows to obtain in advance the documental support of a transaction that will be performed in a near future and also considering the legal due terms.

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The study has three main parts: functional analysis, economic analysis and conclusions. The functional analysis is a narrative about the company’s operative and functional characteristics, as well as on the incurred risks. Based on this information an economic analysis is performed by each class of transaction, which is analyzed by any of the different methods indicated by the Income Law Tax (LISR), whereby a group of companies or transactions potentially comparable are analyzed and a profit margin range or counter operations are considered. The result is compared with the mentioned range (and if necessary adjustments are performed to increase comparability) and it is concluded if analyzed transactions are performed similar to the one already performed with or among third parties in similar situations (which are not related parties to the company).

What are related parties? The Income tax law (LISR) considers that two or more individuals are related parties, when one participates directly or indirectly in the control, management or capital of such parties. In joint ventures, their partners are considered as related parties.

On the other hand, in financial terms, there will be considered as related parties all individuals or legal companies, other than the informant (issuer of the financial statements), who directly or indirectly control, is controlled by or is under common control with the reporting company. Likewise if the reporting entity has a significant influence on the person, if a joint venture or if a close family member or key management personnel were involved between the entities holding transactions.
We now can state that the term “related parties” leads us to confirm its existence in cases where a company depends on another company, depends on the shareholding or decisions arising from another, affects others, or the level of dependence between them in the administrative or operational level (exercise of effective control).

Should companies have a Transfer Pricing study only for operations with related parties resident abroad? It is commonly believed that because of the contents of the Income Tax Law it is necessary only to analyse transactions with related parties residing abroad and obtain the respective supporting documentation. However, on several occasions the tax authority has manifested on the understanding that there is no distinction between domestic related parties and foreign related parties to require fulfilment of this task. In this sense, all transactions with related parties, either abroad or national should be analysed for purposes of transfer pricing.

As always, our specialists are at your service to diagnose operations, have clearness as to the application of the provisions related to this study and assist to comply with the obligation described in this newsletter. We also have the technological tools with which our results reflect sufficient and conclusive information to support a healthy and complete fulfilment of this task with strict adherence to fiscal provisions.
Feel free to contact us.