These proposals were passed by Mexico's Chamber of Deputies in October 2013—read TaxNewsFlash Transfer Pricing: Mexico - Proposed transfer pricing changes for related-party transactions, maquiladoras—and then passed by the Senate in early November 2013.
Limited deductions for related-party payments
Under the new legislation, payments made to a foreign company that controls or is controlled by the taxpayer will not be deductible when these payments are made with respect to interest, royalties or technical assistance, and when the foreign company that receives said payments is considered to be “transparent” and its participants do not pay tax on this income.
“Control” is defined with reference to parties that have direct or indirect influence to decide when dividends are paid.
Also, payments that are considered as “non-existent” by the payment recipient or payments not considered to be taxable income by a foreign entity also will not be deductible.
Non-deductible expenses also include payments that are made by a resident in Mexico and that, in turn, are deducted by a related-party resident or nonresident in Mexico. This restriction does not apply when the related party that deducts the payment made by the taxpayer accrues income earned by the taxpayer in the same tax year or the next tax year.
These proposals are based on the OECD project to combat base erosion and profit shifting (BEPS).
The OECD in July 2013 proposed an action plan which would require changes to tax legislation by the OECD member countries, including anti-abuse laws. Specifically, member countries need to introduce measures to counteract the effect of hybrid instruments and entities and also not allow deduction of payments that are not taxable to the recipient of the payment of for which the deduction of payment is claimed by related parties.
The legislation includes requirements for maquiladorasto comply with the provisions regarding transfer pricing. For these purposes, only two transfer pricing methods for maquiladorasare permitted:
- The "safe harbor" rule—6.5% over the total maquila costs and expenses or 6.9% of total assets used in the maquila operation, whichever is greater, or
- Request an advance pricing agreement (Acuerdo Anticipado de Precios) with the Mexican tax authorities.
Read a November 2013 booklet (English) [PDF 397 KB] and (Spanish) [PDF 462 KB] prepared by the KPMG member firm in Mexico: Reforma Fiscal 2014