Non-binding criteria or improper practices in operations between Related Parties
The authority published in 2018 in the Miscellaneous Tax Resolution as undue practices for transfer pricing -including the advisor, consultant, or service provider that participates in the realization or implementation-, the following (besides the payment of royalties, in certain circumstances, which was already considered as such, and which we remember here):
1.- Expenses for the payment of royalties for intangibles to its related parties residing abroad, when these originated in Mexico and:
a) They would have previously been the property of the taxpayer or of any of its related parties’ resident in Mexico and its transmission would have been made without receiving any consideration or at a lower price than the market price; or
b) When they are acquired from a related party residing abroad or this related party changes their tax residence to Mexico, unless that related party has acquired those investments from an independent one and proves that they have effectively paid their acquisition cost; or
c) When they are acquired from a third party, which in turn has acquired them from a related party residing abroad.
2.- When the unique and valuable contributions of the intercompany operation are not recognized, of the company analyzed, and/or the companies which they are compared with for the determination of the prices and amounts of consideration that would have been used with or between independent parties in comparable operations.
From the above it follows that, for the analysis of transfer pricing should be considered the existence/creation of intangibles that by their nature generate value or competitive advantage to the business (including development activities, enhancement, maintenance, projection and/or exploitation of intangibles) and, therefore, comparable businesses or operations, as well as the application of methods, should be determined from the existence of such valuable contributions.
The identification of intangibles in the company or in the operation analyzed as a generation of value, not only implies the existence of some brand, know-how, patent, etc. between related parties, but the logical identification of some argument (a function, assets involved in the operation or risks of the company) to support the comparative analysis of the company and/or the intercompany operation within the study of transfer pricing that was made; as for example, it would be necessary to have the arguments when the margin of profitability was compared at the level of gross profit (with a Cost plus) for some circumstance, having been able to compare the margin at the operational level (with an TNMM) or vice versa, or when a different range applies to the interquartile range indicated in the regulations of the MITL, or when using comparable companies different to the sector or business of the Mexican company that is being analyzed.
As observed, there are issues that are evident perhaps as an improper practice; however, the concept of a unique and valuable contribution that generates value for an intercompany operation, as it is not clearly defined in any document or law, can become very subjective, as appropriate.
3.- When it is known that the analyzed company is within the interquartile range of profitability margins of comparable companies in the sector, and for some reason, a transfer pricing adjustment is made to continue being in the interquartile range, but they aim to obtain undue benefit by increasing deductions or decreasing company income.
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