By Ricardo Rendón (Partner, Chevez, Ruiz, Zamarripa y Cía, S.C., Mexico)
The Mexican tax authorities last month issued the Second Resolution of modifications to the 2018 Miscellaneous Tax Resolution (MTR) in which the rules regarding transfer pricing adjustments were amended and certain additional provisions were included. This article discusses the relevant modifications to the miscellaneous tax rules on transfer pricing adjustments.
Definition of transfer pricing adjustments
Even though in the miscellaneous tax rules issued effective as of January 1, 2017, it was recognized that a transfer pricing adjustment could be carried out on a cashless basis, the definition included in the 2018 MTR is broader.
Rule 3.9.1.1 establishes that when transfer pricing adjustments have effects in the tax and accounting fields, they are considered as real adjustments and when such adjustments have effects only in the tax field (cashless), they are considered as virtual adjustments.
Furthermore, the new miscellaneous tax rule 3.9.1.1 includes five different categories for transfer pricing adjustments, which are as follows: voluntary or compensatory adjustment; primary adjustment; domestic correlative adjustment; foreign correlative adjustment; and secondary adjustment.
It is the first time secondary adjustments are incorporated into the Mexican tax provisions. Specifically, these are defined as adjustments that result from the application of a contribution, in accordance with the applicable tax provisions, after having determined a transfer pricing adjustment to a transaction, which is generally characterized as a deemed dividend. Secondary adjustments are regarded for certain specific provisions in which transactions would be treated as deemed dividends.
In this regard, it should be analyzed if the inclusion of such provisions in the miscellaneous tax rule is limitative, meaning that those are the only cases in which a secondary adjustment would be applicable, or if it is illustrative and should be understood as mere examples, and thus its application, interpretation, and effects should be analyzed on a “case-by-case” basis.
Timing of adjustments
According to the miscellaneous tax rule 3.9.1.3, transfer pricing adjustments which increase authorized deductions should be applied no later than the date of the filing of the annual tax return, that is, March 31; or June 30 or July 15 for taxpayers that are obliged to file the tax situation informative return or that opted to file the annual tax report (dictamen fiscal), respectively.
In this regard, the new miscellaneous tax rule 3.9.1.4 establishes that taxpayers who perform a voluntary or compensatory transfer pricing adjustment after the above mentioned dates, may deduct it in the fiscal year in which the income or deductions were originally recognized, provided that they submit a notice to the Mexican tax authorities complying with the requirements established therein.
On the other hand, miscellaneous tax rule 3.9.1.5 establishes that taxpayers may request that the deduction of transfer pricing adjustments in a different fiscal year to the one in which the income or deductions derived from the operations with related parties that originated them were recognized, provided that it is derived from an advanced pricing agreement (APA) and the tax years are covered by such APA.
These modifications certainly grant more flexibility for taxpayers to comply with the arm’s length principle in transactions carried out with related parties and eliminates the asymmetry that the previous rules generated. The latter since based on the previous rules, the taxpayer had up to July 15 to perform a transfer pricing adjustment to increase its deductions, while the statute of limitations in general is of five years accounted from the date the last tax return was filed.
The update of the miscellaneous tax rules regarding transfer pricing adjustments provides more certainty for taxpayers that carry out transactions with related parties. Notwithstanding, detailed analysis for implementing transfer pricing adjustments is highly recommended.
The author is Partner at Mexico’s leading law firm Chevez, Ruiz, Zamarripa y Cía, S.C. He would like to thank Ignacio Mosquera for helping him in writing the article.