Transfer pricing in Mexico refers to the pricing of goods, services, and intellectual property exchanged between related entities within a multinational company. Mexico’s transfer pricing rules are governed by the Mexican Income Tax Law (LISR) and are enforced by the Servicio de Administración Tributaria (SAT). These regulations ensure that transactions between related entities are conducted at arm’s length, preventing tax avoidance practices such as profit shifting.

This blog will provide you with all the key information you need to understand the Mexico transfer pricing laws, including the arm’s length principle, documentation requirements, and the potential consequences of non-compliance.

Overview of Transfer Pricing in Mexico

Mexico Transfer pricing is a set of regulations governing the prices charged in transactions between related parties, such as subsidiaries or affiliates. These rules ensure that such transactions adhere to the arm’s length principle, meaning they are priced as if conducted between independent entities in the open market.

The goal of Mexico’s transfer pricing laws is to ensure that intercompany transactions reflect the prices that would be agreed upon between independent businesses operating under similar circumstances. To comply with these rules, businesses are required to maintain detailed documentation justifying their transfer pricing methods and ensuring alignment with market values.

Non-compliance with Mexico’s transfer pricing rules can lead to significant tax adjustments, penalties, and scrutiny from the SAT. 

Transfer Pricing Rules and Regulations in Mexico

Let’s take a look at the details related to the transfer pricing rules and regulations in Mexico. 

Key Laws and Regulations

Mexico’s transfer pricing laws are primarily governed by the Mexican Income Tax Law (LISR) and the Federal Tax Code, specifically Article 76. Mexico transfer pricing rules regulate transactions between related parties to ensure fairness and transparency. Mexican tax authorities strictly enforce the arm’s length principle in related-party transactions. 

Moreover, businesses operating in Mexico may be required to submit transfer pricing documentation to the Servicio de Administración Tributaria (SAT) to verify compliance with the country’s regulations. This documentation must include a functional analysis, economic analysis, and the methodology used to set transfer prices. Failure to comply with these requirements can lead to penalties, tax audits, and adjustments to taxable income.

OECD Guidelines and Mexico’s Alignment

Mexico’s transfer pricing rules are largely aligned with the OECD transfer pricing guidelines, especially regarding comparability analysis, transfer pricing methods, and documentation standards. However, Mexico has some specific provisions, including local rules for transactions involving intangibles and cost-sharing agreements.

Businesses operating in Mexico must ensure compliance with both domestic regulations and the OECD guidelines, particularly when engaging in cross-border transactions. Non-compliance with either set of standards can result in double taxation and disputes with tax authorities in both Mexico and foreign jurisdictions.

A key factor in Mexico’s transfer pricing regulations is determining whether entities are considered related parties or associated enterprises. This classification is crucial as it dictates how transactions between such entities are assessed for compliance with the arm’s length principle under Article 76 of the LISR. Looking for help to simplify transfer pricing?

Commenda can help simplify Mexico’s transfer pricing documentation by offering automated compliance solutions. This ensures that businesses meet the requirements set out by the SAT and avoid potential penalties associated with non-compliance.

Definition of Associated Enterprises in Mexico

Under Mexico’s transfer pricing regulations, entities are considered associated enterprises when they share common ownership or control, which affects how transactions between them are priced. The LISR, specifically Article 76, defines associated enterprises as entities that are related through direct or indirect control or through common control by a third party.

Key Conditions for Associated Enterprises

  • Ownership Control: One entity must own at least 25% of another entity’s voting stock or equity, or have significant influence over the decision-making process.
  • Common Management or Control: Entities with overlapping directors, executives, or other decision-makers who can influence pricing or business operations are considered associated enterprises.
  • Intercompany Transactions: Significant transactions between related entities, such as goods, services, royalties, or financing arrangements, are subject to the arm’s length principle under Mexico’s regulations.

Example

Suppose a Mexico-based parent company owns 60% of a subsidiary in Brazil and provides it with software licenses. In this case, SAT requires that the pricing for the license transactions follow the arm’s length principle to ensure fair taxation and compliance with Article 76 of the Mexican Income Tax Law.

Once entities are classified as associated enterprises under Mexico’s transfer pricing rules, the next step is to determine whether their intercompany transactions comply with the arm’s length principle. The SAT prescribes specific methods to evaluate and ensure fair pricing in such transactions.

Methods for Determining Arm’s Length Price in Mexico

Mexico transfer pricing regulations require related-party transactions to adhere to the arm’s length principle. Businesses must determine the correct arm’s length price to comply with Mexico’s guidelines. 

To determine the arm’s length price, Mexican legislation prescribes the following methods, prioritized as listed:​

  • Comparable Uncontrolled Price (CUP) Method: This method compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction under similar conditions.​
  • Resale Price Method: This approach begins with the price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. The resale price is then reduced by an appropriate gross margin, representing the amount out of which the reseller would seek to cover its selling and other operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make an appropriate profit.​
  • Cost Plus Method: This method starts with the costs incurred by the supplier of goods or services in a controlled transaction. An appropriate cost-plus mark-up is then added to this cost, to make an appropriate profit in light of the functions performed and the market conditions.​
  • Profit Split Method: This method identifies the combined profit to be split for the associated enterprises from a controlled transaction and then splits those profits between the associated enterprises based on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm’s length.​
  • Residual Profit Split Method: This approach first allocates routine profits to each party based on the returns that would be expected for routine functions. The residual profit (or loss) is then allocated based on the relative value of each party’s contributions of intangible property to the transaction.​
  • Transactional Net Margin Method (TNMM): This method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction. It is then compared to the net profit margins realized by independent enterprises in comparable transactions.​

Commenda can help streamline Mexico transfer pricing rules and compliance for your business by automating arm’s length price determination. Read more on Transfer Pricing.

Transfer Pricing Documentation Requirements in Mexico

Under Mexico’s transfer pricing rules, businesses are required to maintain proper documentation to justify intercompany pricing and ensure compliance with Mexican tax regulations. Mexico follows a three-tiered documentation system that aligns with OECD guidelines, with some specific requirements under Mexican tax law. Fo

Master File

The Master File provides an overview of the multinational group’s global operations, transfer pricing policies, and business structure.While it is not strictly mandatory under Mexican law, multinational companies typically prepare the Master File to comply with both Mexican regulations and international standards.It includes organizational structure, financial information, and global transfer pricing practices to give a comprehensive view of the multinational’s overall operations.

 Local File

The Local File contains detailed documentation on intercompany transactions involving Mexican entities. This documentation must be prepared in advance and made available to the SAT upon request. It is essential for defending transfer pricing arrangements during audits and ensuring compliance with Mexican transfer pricing regulations.

Country-by-Country Reporting (CbCR)

CbCR applies to multinational groups with global revenue exceeding MXN 12 billion (approximately €500 million) in the prior tax year. The CbCR report must be filed SAT as part of the parent company’s annual tax return.The report includes detailed financial and tax information for each country where the group operates, such as revenue, profits, taxes paid, and number of employees in each jurisdiction.

Form 3 (Declaración Informativa sobre Precios de Transferencia)

Form 3 is a specific filing requirement in Mexico for entities engaging in cross-border transactions. This form provides details of ownership structures, intercompany transactions, and other relevant financial data.

Annex 9 

An additional reporting requirement for taxpayers who engage in related-party transactions. It contains detailed information on the pricing methodologies applied and supports compliance with transfer pricing regulations.

Documentation Requirements

Taxpayers with income exceeding certain thresholds are obligated to prepare and maintain a transfer pricing study. This is specifically applicable to taxpayers with taxable income exceeding MXN 13,000,000 in the previous fiscal year who must prepare a transfer pricing report. It is also applicable to taxpayers providing professional services with income exceeding MXN 3,000,000 in the previous fiscal year must also prepare this report. 

Note: Non-compliance can result in tax adjustments, penalties of up to 75% of the underpaid tax, and increased audit risks.risk fac

Next, let’s look at the risk factors and common challenges businesses face in Mexico with regard to transfer pricing.

Risk Factors and Common Challenges in Mexico

Businesses operating under Mexico’s transfer pricing rules and compliance face several risks, including SAT audits, tax adjustments, and penalties for improper intercompany pricing. Failure to adhere to the arm’s length principle and maintain adequate documentation can lead to significant financial consequences.

SAT Audits and Enforcement Trends

The SAT conducts aggressive audits on multinational companies, focusing on high-value transactions, intangible assets, and cost-sharing arrangements. A key area of scrutiny is the transfer pricing of intellectual property, such as patents and trademarks.

Compliance Challenges

The arm’s length principle in Mexican transfer pricing regulations requires detailed benchmarking studies, which can be complex and costly. Companies must also comply with both Mexican tax laws and OECD transfer pricing guidelines, which can create additional compliance challenges, especially when navigating differing requirements in Mexico and other jurisdictions.

Double Taxation & Dispute Risks

Disputes over intercompany pricing between Mexico’s SAT and foreign tax authorities can result in double taxation. To address these issues, businesses may need to use bilateral Advance Pricing Agreements (APAs) or initiate a Mutual Agreement Procedure (MAP) to resolve conflicts and prevent double taxation.

Commenda helps businesses reduce audit risks by automating the Mexico transfer pricing documentation for your business and ensuring compliance with OECD transfer pricing guidelines in Mexico and other countries. Learn more about Compliance, Risks, and Best Practices for Transfer Pricing.

Advance Pricing Agreements (APAs) and Safe Harbor Rules in Mexico

To minimize disputes and compliance risks with the German tax authorities, businesses can use APAs and safe harbor rules to secure tax certainty.

APAs

APAs are agreements between taxpayers and the tax authorities that establish the Mexico transfer pricing methods to be used for intercompany transactions. These agreements provide businesses with a higher level of certainty by pre-emptively agreeing on the pricing arrangements.

Benefits of APAs in Mexico:

  • Reduces the risk of Mexico transfer pricing audits and disputes with tax authorities.
  • Provides businesses with clarity on acceptable transfer pricing methods.
  • Helps businesses manage their tax exposure and avoid adjustments or penalties.
  • Strengthens relationships between taxpayers and tax authorities by fostering transparency.

Example: A Mexican parent company with a subsidiary in Brazil can secure a bilateral APA to ensure that royalty payments for intellectual property are priced at arm’s length, avoiding double taxation and potential disputes between the two countries’ tax authorities.

Safe Harbor Provisions

Safe harbor provisions offer simplified rules that businesses can apply to avoid disputes. By meeting specific conditions, businesses can use predefined Mexico transfer pricing methods, such as a set margin or return, without facing detailed scrutiny from tax authorities. This allows for a more predictable tax environment and reduces the likelihood of adjustments or penalties.

Benefits of Safe Harbor Rules in Mexico:

  • Offers businesses simplified compliance procedures and predetermined Mexico transfer pricing methods.
  • Reduces the administrative burden of preparing detailed documentation and reports.
  • Decreases the chances of disputes, audits, or penalties due to non-compliance.
  • Enhances tax certainty, allowing businesses to focus on growth rather than compliance risks.

Example: A company in Mexico named Mexican Maquiladora can use safe harbor rules by applying 6.9% on total assets and 6.5% on costs and expenses to determine its tax profit base, simplifying tax compliance without extensive documentation.

While APAs and safe harbor provisions provide valuable tools for managing transfer pricing risks, businesses must also consider industry-specific factors that can impact compliance and strategy under the Mexico transfer pricing rules.

Industry-Specific Transfer Pricing Considerations in Mexico

Industry-specific transfer pricing considerations in Mexico require a thorough understanding of local tax regulations and international guidelines.

  • Technology & Intangibles: Transactions involving intellectual property, such as patents, trademarks, and software, must follow Article 179 of the Mexican Income Tax Law. Companies must justify pricing for software and licensing agreements based on OECD guidelines to ensure arm’s length pricing.
  • Pharmaceuticals: Companies in the pharmaceutical industry must ensure arm’s length pricing for transactions involving R&D services and intangible assets. Detailed transfer pricing documentation is required, reflecting the functions, assets, and risks involved in intercompany transactions.
  • Financial Services: Financial institutions must adhere to the arm’s length principle for intercompany transactions, including loans and guarantees. A comparability analysis is required to demonstrate that pricing aligns with market rates for similar services.
  • R&D & Intangibles: Companies dealing with R&D and intangible assets must ensure their transfer pricing for intellectual property reflects the value and contributions of Mexican subsidiaries, particularly in the pharmaceutical and technology sectors.

Impact of Digital Economy on Transfer Pricing in Mexico

The rise of digital business models has created additional challenges for transfer pricing in Mexico, particularly with intangibles, data, and online transactions. Here are the key considerations:

  • Digital Business Models: The rise of digital business models complicates transfer pricing in Mexico, especially for intangibles, data, and online transactions.
  • Intellectual Property & Royalties: Mexican tax authorities closely examine intellectual property, software, and royalty payments to prevent profit shifting.
  • E-commerce & Digital Services: Stricter transfer pricing rules and compliance requirements apply to e-commerce and digital services, especially when operations lack a physical presence.
  • Economic Substance Tests: Mexico applies economic substance tests to ensure proper income allocation for digital transactions.
  • OECD’s Pillar One & Two: Mexico has not fully adopted OECD’s Pillar One and Pillar Two guidelines, but global tax discussions continue to influence enforcement policies.
  • Disputes & Dispute Resolution: Increased disputes over intangibles, e-commerce transactions, and profit allocation require businesses to manage enforcement and navigate formal dispute resolution processes in Mexico.

Dispute Resolution Mechanisms in Mexico

The dispute resolution mechanisms for transfer pricing issues in Mexico include the following:

  • Administrative Procedure: Disputes are initially addressed by the Mexican tax authorities (SAT). Taxpayers can present their arguments, provide evidence, and seek a resolution within the administrative framework.
  • Taxpayer’s Rights: If a taxpayer disagrees with the SAT’s decision, they have the right to request a review. If they are still dissatisfied with the outcome, they can appeal to the Federal Court of Administrative Justice.
  • Alternative Dispute Resolution (ADR):
  • Mutual Agreement Procedure (MAP): This mechanism allows taxpayers to resolve disputes between Mexico’s SAT and foreign tax authorities, particularly in cases involving double taxation or conflicts over the application of tax treaties.
  • Arbitration: For certain cross-border disputes, Mexico also offers arbitration as a way to resolve conflicts in a more formal, binding process.
  • Advance Pricing Agreements (APA): Companies can request an APA from the SAT to agree on transfer pricing methods in advance, reducing the risk of future disputes. This process helps establish the transfer pricing policies that will apply to intercompany transactions.
  • OECD Guidelines Influence: While Mexico has not fully adopted OECD Pillars One and Two, ongoing global tax discussions, including the OECD Guidelines, influence Mexico’s approach to dispute resolution practices and policies.

Commenda helps businesses in Mexico prevent transfer pricing disputes by automating documentation and compliance analysis, ensuring alignment with SAT regulations and OECD guidelines to minimize risks.

Penalties for Non-Compliance in Mexico

Non-compliance with Mexico transfer pricing regulations can lead to significant penalties and legal consequences. The Mexican Tax Administration Service (SAT) enforces strict rules regarding the documentation and reporting of transfer pricing practices. Companies failing to meet these obligations may face financial penalties and legal action. The key penalties include:

  • Failure to Submit Transfer Pricing Documentation: Article 81 of the LISR imposes fines ranging from MXN 86,050 to MXN 172,100 for taxpayers who fail to report their transactions with related parties as required.​
  • Incorrect or Incomplete Documentation: Article 82 of the LISR stipulates penalties ranging from MXN 172,480 to MXN 245,570 for taxpayers who submit inaccurate or incomplete related-party transaction reports.
  • Adjustment of Income or Deduction: Article 79 of the LISR allows the tax authorities to adjust income and deductions if intercompany transactions do not align with the arm’s length principle, potentially leading to additional taxes, interest, and penalties.​
  • Penalties for Underreported Income: Article 81 of the LISR also addresses underreported income due to improper transfer pricing, with fines ranging from 30% to 90% of the tax avoided, in addition to interest charges.

Conclusion

Understanding the transfer pricing rules and compliance in Mexico is crucial for businesses to avoid SAT audits, tax adjustments, and financial penalties. With increasing scrutiny on intercompany transactions, intangibles, and digital business models, companies must maintain detailed documentation and ensure their pricing strategies align with Mexican regulations and OECD guidelines.

Commenda simplifies transfer pricing compliance by automating documentation, risk assessments, and dispute resolution support, ensuring businesses meet arm’s length pricing standards while minimizing audit risks. Streamline your transfer pricing process and ensure seamless compliance. Schedule a free demo today.

Frequently Asked Questions (FAQs)

Q. What documentation is required for transfer pricing compliance in Mexico?

Companies must prepare transfer pricing documentation that supports the arm’s length nature of their transactions. This includes financial statements, a detailed transfer pricing report, and an analysis of comparable transactions. The documentation must be available for review by the tax authorities upon request.

Q. How are transfer pricing adjustments handled in Mexico?

The Mexican tax authorities can adjust the prices of intercompany transactions if they find them not to be at arm’s length. These adjustments may result in additional taxes and penalties. Companies must ensure that their transfer pricing methods comply with Mexican law and OECD guidelines to avoid such adjustments.

Q. What are the penalties for non-compliance with transfer pricing rules in Mexico?

Penalties for failing to comply with transfer pricing regulations can be significant. These include fines, additional tax assessments, and in some cases, interest on unpaid taxes. Mexico’s tax authorities are strict in enforcing these rules, making compliance crucial for businesses.

Q. Are there any exemptions from transfer pricing documentation in Mexico?

Yes, small and medium-sized enterprises (SMEs) with lower annual revenues may be exempt from full transfer pricing documentation requirements. However, they must still comply with the arm’s length principle in their related-party transactions. Larger companies are required to provide comprehensive documentation.

Q. What methods are used to determine arm’s length prices in Mexico?

Mexico allows companies to use various transfer pricing methods to determine arm’s length prices. These include the Comparable Uncontrolled Price (CUP) method, the Resale Price Method (RPM), and the Cost Plus Method (CPM), among others. The method chosen must be the most appropriate for the specific transaction.

Q. How does Mexico align with international transfer pricing standards?

Mexico follows the OECD guidelines for transfer pricing, ensuring its regulations align with international standards. This helps facilitate consistency and fairness in cross-border transactions. The OECD guidelines are used as a reference for determining arm’s length pricing and developing transfer pricing documentation.