Legal

Summary of Mexican Transfer Pricing Regulations
A. Overview
In recent years, there have been significant Mexican statutory and regulatory changes with respect to transfer pricing. Effective January 1, 1997, taxpayers are required to produce and maintain contemporaneous documentation demonstrating that the income and deductions arising from inter-company transactions are consistent with theamounts that would have resulted had these transactions taken place with unrelated parties under similar conditions. Accordingly, tax authorities are entitled to make adjustments and to assess penalties if they determine that there is a tax underpayment attributable to a gross misstatement pertaining to inter-company prices charged or paid.
The requirements of the Mexican Income Tax Law (“MITL”)are substantially consistent with the requirements of Section 482 U.S. IRC and the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the Organization for Economic Cooperation and Development in 1995 and supplemented in 1996 (the “OECD Guidelines”).
B. Mexican Transfer Pricing Legislation
The burden will be on the taxpayer to prove that transactionswith related parties are carried out at market value, i.e., at the prices that would have been used by independent parties in similar operations, as per internationally accepted methods (Article 215 of the MITL).
1. Official Estimation of Income
The tax authorities may consider the following when estimating income, in the case of business entities or individuals engaged in business activities(Article 215):
• Current prices in domestic or foreign markets, or appraisal values.
• The cost of goods or services considering a percentage of gross profit.
• The price at which a taxpayer sells goods acquired from another party, including the taxpayer's profit factor.
2. Related Parties
In transactions with related parties, taxable income and authorized deductions must be determined on thebasis of the prices that would be agreed with independent parties in comparable transactions (Article 215 of the MITL).
For this purpose, operations are understood to be comparable when there are no differences that significantly affect the price or profit margin referred to in the methods authorized by the MITL for determining transfer prices. The following elements will be considered indetermining said differences:
• If the operations are of a financial nature, the elements are: solvency, term, guarantee, etc. In the case of services, consideration must be given to the nature and the technology involved; in the case of leasing, the elements are quality and availability; in the case of intangibles, the elements are technology, brand, duration and level of protection;
• Functions oractivities, including assets used and risks assumed;
• Contractual terms;
• Economic circumstances; and
• Business strategies, such as penetration, permanence and market expansion.
Two or more parties are considered to be related when one participates directly or indirectly in the management, control or capital of the other or when a party or group of parties participates in the management,control or capital of said parties.
C. Documentation Requirements
Article 86, Fraction XII of the MITL contains a long list of accounting, reporting, and record keeping obligations for corporate entities in Mexico. Under prior law, there were no requirements to document the arm’s length nature of transfer prices on related party transactions. As the law now stands, Fraction XII of Article 86requires entities that transact with foreign related parties to collect and keep documents which prove that their income and deductions are consistent with the prices charged in similar transactions between unrelated parties.
The MITL also requires the presentation of general information such as:
• the name, address and taxpayer identification number of the taxpayer;
• the name of the related...