08 November 2016 Mexican tax authorities issue proposed regulations regarding the master file, local file and CbC report The proposed regulations would require taxpayers to submit more information than currently required by Chapter V of the OECD TP Guidelines. Taxpayers should ensure that they are able to meet the demands of the regulations once they are final because they will be required to submit information for calendar year 2016 by December 31, 2017. On October 17, 2016, Mexican tax authorities published proposed regulations regarding the "additional information" that could be requested as part of the new transfer pricing obligations, which require Mexican taxpayers to submit a master file, local file and country-by-country report (CbC report). The proposed regulations were published by the Mexican Tax Ombudsman (Prodecon) as part of a public comment process. Interested parties may provide comments by November 18, 2016. The proposed regulations seem to be consistent with the legislation enacted on January 1, 2016, that introduced new transfer pricing filings, as well as the new Chapter V of the OECD Transfer Pricing Guidelines (that incorporated the BEPS Action 13 recommendations); however, there is clearly a Mexican flavor to the rules. The proposed regulations seem to require taxpayers to provide more detailed information than contemplated in BEPS Action 13 and the Mexican Income Tax Law (MITL). It is now clear that the "Mexican" master file may be different from the master file to be prepared by the head office of the group, and that the information to be included in the local file exceeds the current requirements relating to the annual transfer pricing study. Also, it appears the final regulations may be issued before the end of 2016, which means taxpayers will be required to report information for calendar year 2016 in the transfer pricing filings due on or before December 31, 2017. Taxpayers should begin to gather the information for 2016 to ease compliance with the new filings. Mexico incorporated BEPS Action 13 in Article 76-A of the MITL as part of the 2016 tax reform. This provision establishes the obligation for certain Mexican taxpayers to submit three new annual transfer pricing information returns before December 31st of the following year. These new BEPS transfer pricing information returns are the: i) master file; ii) local file; and iii) CbC report. In general, Mexican resident companies, including subsidiaries of foreign multinational groups (MNE), must submit the master and local files if they reported accruable income greater than Mexican Pesos (MXP) $ 644,599,005, approximately USD 34 million. Specific rules apply, for instance, to government-controlled corporations and residents abroad with a permanent establishment in Mexico. Mexican multinational controlling entities with consolidated income greater than MXP $1.2 billion, are required to file the CbC report in addition to other requirements. Failure to file the required documentation could result in fines and the cancellation of the exporters and importers registry, and could prevent the taxpayer from entering into contracts with the Mexican public sector. Non-compliance also could result in the denial of deductions for payments to related parties. Article 76-A also establishes that Mexican tax authorities will issue administrative rules through which "additional information" may be requested, which is why the proposed regulations were published by Prodecon. The proposed regulations do not yet include the specifics of the means and formats through which the requested information has to be presented. Reference is made to a tool called "DAIPR" that can be accessed through the Mexican tax authorities' website. Considering the level of detail of the information requested, it is expected that the tool would allow for filing of (pdf) attachments (for instance, a copy of legal agreements, financial information, etc.). In general terms, the proposed regulations would require comprehensive, complete and detailed information and documentation, regardless of whether the information is material. For instance, where Chapter V of the OECD TP Guidelines recommends including a materiality threshold (for example as a percentage of turnover or an absolute amount) for transactions to be included in the master file, the proposed regulations do not include any such threshold. The proposed regulations, in most instances, would require taxpayers to provide a "detailed description," while the OECD TP Guidelines generally refer to a brief description. Chapter V recommends disclosure of "important" information related to "material" transfer pricing positions that are "relevant" for the transfer pricing analysis, while the proposed regulations would not include any such classification. In this respect, Chapter V establishes that taxpayers should "use prudent business judgment in determining the appropriate level of detail for the information supplied," keeping in mind that the objective of the master file is to provide tax authorities with a "high level" overview of the MNE's global operations and policies. A similar flexible approach would be recommendable for the Mexican regulations, especially in light of the potentially severe consequences of noncompliance as mentioned previously. The information required for the master file relates to the global operations of the MNE, which is not necessarily available in Mexico to a Mexican subsidiary of a foreign MNE. A Mexican subsidiary should, therefore, try to obtain the necessary information from its related parties abroad. In the case of the consolidated financial statements of the MNE, the proposed regulations (contrary to the recommendations of BEPS Action 13) would not provide flexible deadlines, if the book year closing of the foreign head office differs from the calendar year. As mentioned, the proposed regulations would require very detailed information to be included in the master file. For instance, not only would taxpayers be required to include the legal and shareholder structure of the group, considering all legal entities of the group (irrespective of their relevance for the Mexican transfer pricing analysis), they would also have to include any change in the structure compared to the previous year. The same requirement would apply to the description of the main functions, risks and assets used by all of the entities that are members of the MNE, that is, taxpayers would have to compare any change to the previous year. The proposed regulations would require more detailed information (than established in Chapter V of the OECD TP Guidelines) for purposes of the local file. For instance, the proposed regulations would require taxpayers to submit copies of all legal agreements concluded between related parties, while the OECD TP Guidelines only call for the "material" agreements. Chapter V calls for the presentation of information related to cross-border transactions with related parties, while the proposed regulations would require information on transactions with both domestic and foreign related parties. Much of the information that would be required by the proposed regulations clearly exceeds what is currently required for purposes of the contemporaneous documentation requirements (transfer pricing study) in the MITL. The proposed regulations do not yet include the CbC report format (as established in Attachment III to Chapter V). It is expected that the format would be exactly the same as the attachment, as this is an essential part of Mexico's commitment to BEPS Action 13's minimum standard. As a result of the public comment process, the proposed regulations may change. Taxpayers should carefully monitor such changes and start preparing to gather calendar year 2016 information as soon as possible to ease compliance with these new requirements, even though the information has to be presented at the end of 2017. With regard to the local file, taxpayers should evaluate the effect of the changes on their current transfer pricing documentation. With respect to the master file, taxpayers should start communicating with the head office regarding the information required to meet this obligation. Attached to this document is a translation of the proposed rule describing the information returns' requirements.
Document ID: 2016-1896 | |||||||||||||||||||||
