In the business world, it is increasingly necessary for companies to develop different relationships, in order to achieve their own business objectives and in many cases, this implies not only having a spectrum of customers and suppliers, but it is also necessary to collaborate and develop different interactions to be at the forefront, stay competitive and transcend in the corporate world. However, this type of operations is not exclusive to companies, as it has also become increasingly common for individuals to develop their own ventures and begin to collaborate with different actors to take advantage of business opportunities, making their way in the commercial world that has more and more participants willing to meet more and more specific needs.
Now, most companies and entrepreneurs know about their obligations regarding tax matters, but there are some aspects that have become relevant from an international perspective, which have led to updates and changes in the tax laws of our country, which for now, seem to be not so common, but that does not mean that they are not important or that they should not be complied with.
That is why, on this occasion we are going to address the subject of Transfer Pricing, which in case you have not heard it before, is one of the tax obligations that both companies and individuals who develop businesses have, but especially when such operations are carried out between related parties; before continuing, let’s define what related parties are, since they are the basis for everything that we are going to discuss in this article:
In accordance with the Income Tax Law (ISR), articles 90 and 106 state that, both individuals and companies are considered related parties when one participates directly or indirectly in the management, control or capital of the other; or when a person or group of persons participates, directly or indirectly, in the management, control or capital of the other.The taxpayer is considered a related party when a person or group of persons participates, directly or indirectly, in the management, control or capital of such persons, or when there is a relationship between them.
To understand it in a simpler way, let’s imagine that a student wants to start a business and needs financing to develop his idea; since he is a student, it is very likely that a bank will not grant him a loan, so the entrepreneur turns to his father, who in turn has his own company. The student’s father gives him the initial capital to start the business and also allows him to have access to his own company’s clients to increase the probability of success. Over time, the student’s father becomes more and more involved in his son’s business and, in addition to guidance, makes further capital contributions and assists in decision making. Under this small assumption, the father has become a related party to his own son, as he indirectly participates in the new business.
Once we have identified the type of activities that may be subject to transfer pricing, we will define what transfer pricing is:
The term transfer pricing refers to all transactions that may originate between related parties, where contracts or agreements between the parties may include the assignment of both tangible assets (tangible) and intangible assets (intangible), which may include technology, trademarks, services, financing, leasing, to mention a few examples.
Therefore, the tax regulation on transfer pricing in Mexico establishes that in the case of taxpayers that carry out business activities business activitiestaxpayers are required to comply with transfer pricing obligations, when their cumulative income in a calendar year has exceeded thirteen million pesos, and for those taxpayers whose cumulative income in a calendar year has exceeded thirteen million pesos. and for those taxpayers whose accumulable income derives from professional services taxpayers will be required to comply when their income in a calendar year exceeds three million Mexican three million Mexican pesos.
It is important to mention that the reason that gives rise to the analysis of transfer prices is to maintain healthy competition among the different actors in the market, that is to say, that those who may have related parties do not engage in advantageous practices where they take advantage of the business relationships they have. It is for this reason that individuals are obliged to agree their income and expense operations with domestic and foreign related parties at market value.. Regarding tax matters only, one of the most important changes was made in Annex 9 of the Multiple Informative Declaration, in which more detailed information is requested regarding comparables (database with information on businesses similar to the one being studied) and the results of the analysis performed, leaving less margin to the taxpayer for future modifications of its transfer pricing studies and the inclusion of transactions with related parties.
As mentioned above, the Income Tax Law defines what is considered a related party; however, it also indicates that a related party can occur when there is a connection, a situation that the customs legislation identifies in Article 68 in the following cases:
- If a natural person holds positions of management or responsibility in one company of the other.
- If they are legally recognized as business associates.
- If they have an employer-employee relationship.
- If a person has direct or indirect ownership, control or possession of 5% or more of the outstanding shares, partnership interests, contributions or securities with voting rights in both.
- If one of them directly or indirectly controls the other.
- If both persons are directly or indirectly controlled by a third person.
- If together they directly or indirectly control a third party.
- If they are from the same family.
Therefore, let us review those activities that may be subject to transfer pricing analysis:
- Financing
- Provision of services
- Lease or sale of tangible or intangible assets.
- Purchase and sale of shares
If I have identified that I have transactions with related parties, what returns must I file?
Regarding the obligations of taxpayers, we should quote the last paragraph of article 16 of the CCF:
An enterprise is considered to be the individual or legal entity that carries out the activities referred to in this article, either directly, through a trust or through third parties.Establishment shall mean any place of business in which the aforementioned business activities are carried out, partially or totally.
Therefore, as far as tax matters are concerned, persons engaged in business activities are considered companies. In this order of ideas, we present below a summary table, where the declarations that must be complied with by taxpayers regarding transfer pricing are identified:
| Statement | Validity | Obligated taxpayers | Tax basis |
| Annex 9 DIM | May 15 | Companies with related party transactions, both domestic and foreign. | Art. 76, Section X, LISR |
| Local information statement | May 15 | Taxpayers with income over $842 million pesos, belonging to the integration regime, parastatals and foreign entities with a permanent establishment in Mexico. | Art. 32-H, Fracc. VI, of the CFF |
| Companies that are related parties of taxpayers required to file tax returns. | |||
| Annex SIPRED | May 15 | Taxpayers who must file a tax return. | |
| ISSIF | March 31 | Related parties of taxpayers required to file tax returns, which as of 2022 and in accordance with rule 2.16.5 of the Miscellaneous Tax Resolution, when the value of transactions with such related parties is greater than $13,000,000 MXN for the performance of business activities, or $3,000,000 in the case of professional services. |
Supporting Documentation
In addition to filing the above mentioned returns, taxpayers that enter into transactions with related parties residing abroad, as well as residents in Mexican territory, must obtain and keep the supporting documentation with which they can demonstrate that their accumulated income and authorized deductions were agreed upon considering for those transactions the prices and amounts of consideration that they would have used with or between independent parties in comparable transactions, in accordance with the provisions of Article 30 of the Federal Tax Code (CFF); in addition, it must be in Spanish and the values must be in Mexican pesos (Art. 33, section B fraction XI of the CFF Regulations).
Penalties for noncompliance
Now, what can happen if I am a person with a business, who identified activities with related parties and I do not perform the transfer pricing study? The penalties for non-compliance in transfer pricing matters are established in the Federal Tax Code, which states that they are subject to sanctions:
Taxpayers that do not comply with the provisions of Article 90, penultimate paragraph of the Income Tax Law (transfer pricing regime).
When the commission of one or several infractions originates the total or partial omission in the payment of contributions, a fine of 55% to 75% of the omitted contributions will be applied..
Failure to file, incomplete filing or filing with errors the informative declaration of the transactions carried out with related parties residing abroad (article 76 section X) during the immediately preceding calendar year will result in the following consequences (article 76 section X) during the immediately preceding calendar year will result in a fine ranging from $99,590.00 to $199,190.00. a fine ranging from $99,590.00 to $199,190.00 Mexican pesos. Mexican pesos.
Failure to identify in the accounting operations with related parties residing abroad will be subject to a fine of $2,260.00 to $6,780.00 Mexican a fine of $2,260.00 to $6,780.00 Mexican pesos for each unidentified transaction..
The Tax Authorities may determine the taxpayers’ taxable income and authorized deductions by determining the price or amount of the consideration in transactions between related parties, considering for such transactions the prices and amounts of consideration that independent parties would have used in similar transactions.
As you can see, this is a very broad topic that must be analyzed on a case-by-case basis, so we remind you that if you have any questions or queries, please do not hesitate to contact us.
