• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 4/29/2014

Mexico - Transfer pricing implications of pro-rata expense decision  

April 29: A decision from Mexico’s Supreme Court of Justice—declaring as unconstitutional, a provision of Mexican income tax law that, until 2014, prohibited a deduction of what are called “pro-rata expenses” incurred abroad and involving persons or entities that are not Mexican taxpayers—has transfer pricing implications.


The Second Chamber of the Supreme Court (Suprema Corte de Justicia de la Nación) declared as unconstitutional, Article 32, Section XVIII of the Mexican income tax law (effective until 31 December 2013) prohibited the deduction of "pro-rata expenses” if incurred abroad by entities that were not subject to Mexican income tax. Read TaxNewsFlash-Americas (21 April 2014).

Transfer pricing implications

The high court’s declaration of unconstitutionality, however, is not “absolute” because the judgment itself requires taxpayers to satisfy certain requirements to qualify for a deduction of claimed expenses and further explains that the tax authority must verify whether such taxpayer compliance with these requirements (as briefly outlined below) is met before rejecting a deduction for this type of expense:

  • The expenditure is strictly necessary—for example, if the pro-rata expense concerns intra-group services, the taxpayer must have evidence that the services were effectively provided and that they have a “close relationship” with the activity and the taxpayer.
  • There is a reasonable relationship between the expenditure that was incurred and the benefit received, or to be received—that is, there must be evidence of the economic benefits obtained.
  • If the expenditure was made between related parties, it must shown that the agreed price complies with the arm’s length principle—i.e., the price that would have been agreed to between independent parties in comparable transactions—and complies with applicable Mexican transfer pricing rules.
  • The taxpayer has possession of supporting documentation showing that the amount of the payment took into account fiscal elements, as well as technical and financial objectives, and was not arbitrarily or capriciously agreed to by the taxpayer. In other words, the taxpayer must apply a methodology that demonstrates that a logical and consistent procedure was performed over time.

KPMG observation

Tax professionals have observed that this decision is undoubtedly relevant for taxpayers in Mexico, but it is noted that the decision cannot be interpreted to have the same effect in all instances of pro-rata expenses. Thus, the implications of the decision need to be analyzed by each taxpayer.

For more information, contact a KPMG tax professional in Mexico or in KPMG’s Mexico center in New York:

M. Teresa Quinones

+ 52 (55) 5246-8347

Manuel Llaca

+ 52 (55) 5246-8464

Jose Manuel Ramirez

+1 212 872 6541

Contact a tax professional with KPMG's Global Transfer Pricing Services.

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