Taxable income and authorized deductions must be determined based on prices that would be agreed with independent parties in comparable transactions (arm’s-length values).
For this purpose, taxpayers must secure and maintain contemporaneous documentation supporting transactions with related parties residing abroad, supporting that income and deductions are based on fair market values in accordance with Mexican transfer pricing principles. The documentation must be prepared per type of transaction and must include all operations carried out with related parties.
Domestic transactions with affiliates must also be supported by the application of a recognized transfer pricing method selected in accordance with the Mexican tax legislation in connection with the particularities of the transactions.
Payments made to entities whose income is deemed to be subject to a PTR are considered non-deductible unless it is possible to support that the price of the transaction is substantially the same to the one that would have been used among non-related parties in comparable transactions. Unless otherwise supported, it is assumed that operations with companies, entities, or trusts whose income is subject to a PTR are carried out between or among related parties and that the transactions are not at arm’s length.
The sale price of shares (other than publicly traded shares) sold to a related party must be set at market value in accordance with Mexican transfer pricing provisions, and the transaction must be supported by the corresponding contemporaneous transfer pricing documentation.
Payments to non-residents of a prorated portion of expenses (i.e. allocations of expenses) are, in principle, not deductible for Mexican corporations. However, per current administrative tax rules, they may be deductible if a comprehensive set of requirements is complied with.
Payments made by Mexican residents to domestic or foreign related parties, which are in the hands of such related parties also deductible, are not deductible for the Mexican resident unless the corresponding income is included in the related party taxable income in the same or in a subsequent tax year.
Technical assistance, royalties, and interest payments In order to be deductible, payments related to technical assistance, the transfer of technology, or royalties must be made directly to companies with the required technical capabilities to provide the corresponding service and should correspond to services actually received. In some situations, the payments may be made to a third party to the extent the relevant agreement expressly includes it.
A deduction for technical assistance, interest, or royalty payments (including those treated as royalties related to industrial M&E leases) is disallowed when paid to a foreign related party entity that controls or is controlled by the Mexican taxpayer and at least one of the following scenarios is applicable:
• The recipient of the income item is a fiscally transparent entity in its residency jurisdiction, unless its shareholders or members are subject to tax for income received by such transparent entity and the payment made by the Mexican resident to the foreign entity is at arm’s length. • The recipient entity considers the payment to be disregarded for tax purposes in its residency jurisdiction. • The recipient does not include the payment as part of its taxable income in its residency jurisdiction.