מחירי העברה: מקסיקו- פברואר 2012

MEXICO- FAVOURABLE TRANS FERPRICING RULING

In May 2011 a ruling was issued by the Federal Tax Court (TFJFA), which is important for transfer pricing purposes, because it creates a precedent in this area, especially in relation to the relevant application of the appropriate methods, the use of adequate comparability adjustments and above all, what is allowed under Mexican legislation.

Background
The taxpayer had transfer pricing documentation from the year 2004 which indicated that its transactions with related parties resident abroad were carried out as if they involved independent third parties; however, a review by the Mexican tax authorities identified certain issues, which are described below:

• In their opinion, the application of the Resale Price Method contained certain deficiencies.
• They questioned some of the comparability adjustments made.
• They identified relative differences in the levels of accounts receivable and inventories.
• There was a lack of consistency in the comparables used, because companies which had previously been used were eliminated.
• They strongly contested the use of information from certain years, because according to the authorities only information and prices from the year 2004 should have been considered.

The tax authorities therefore concluded that in the inventory purchase transactions, the taxpayer paid a higher price than that which would have been used by or between independent parties, and raised an assessment for underpaid tax.

Dispute
The taxpayer appealed against the ruling, bearing in mind the following:

• It accepted the application of the method used by the tax authorities and incorporated the comparables which the tax authorities used in their analysis.
• It argued that the business cycle of its industry was three years, taking into account the production and billing cycles.
• It considered the specific levels of the operating expenses of the taxpayer compared to those of the comparables and carried out comparability adjustments.

Ruling
The Second Metropolitan Regional Court analysed the evidence presented by the taxpayer and the tax authorities, and included the opinions of experts called by both parties, and those of an independent third party expert, on which basis it issued the following conclusions:

• None of the experts was able to provide sufficient evidence to demonstrate that the adjustment for the level of operating expenses could not be appropriate, so the Court considered that the adjustments were appropriate in accordance with the relevant terms of the law.
• The ruling took into account that article 215 of the Income Tax law states that certain adjustments may be made to eliminate differences which could affect results.
• Furthermore, Mexican laws contemplate the use of the Transfer Pricing Guidelines issued by the Organization for Economic Cooperation and Development (OECD). In accordance with such guidance, when the resale price method is applied, the gross margin obtained is a representation of the amount which the reseller could use to cover his operating expenses, based on the assets, functions and risks that it assumes.
• According to the argument of one expert, based on the economic logic of any business, a distributor establishes his price based on the production costs and operating expenses necessary to obtain a certain level of profit.
• Bearing in mind the adjustments for the level of the operating expenses, it might be concluded that the taxpayer was in compliance with the arm’s-length principle.
• For the purposes of the Court, to ensure the adequate application of the resale price method it is essential to consider the comparability adjustments (accounts payable, inventories and level of operating expenses).
• It considered that the use of several fiscal years would have been considered not only to reflect the consistent comparability of the results, but also because they are useful to normalize results, especially in a period where there are price variations.

Pursuant to the foregoing, the Court concluded that the purchases of products for distribution made by the taxpayer from a third party complied with the arm’s-length principle; i.e., they were made under the same terms and conditions that would have been applied by independent parties in similar economic circumstances.
Accordingly, the ruling which resulted in an unpaid tax liability was improperly made, and violated the principle of legality established in Mexican laws1.

Conclusions
Some points which the ruling confirms are as follows:

• Given the complexity of this issue, the arguments presented based on the merits of the case were effectively considered by the tax court.
• The viewpoint of the tax authorities in the review was very important; however, it was not definitive.
• The ruling in favour of the taxpayer, overturning a supposedly unpaid tax liability, creates a legal precedent which could be used to resolve other cases of a similar nature.
• Nevertheless, there is the possibility of an appeal by the tax authorities, but this case sets an important precedent, because the ruling took into account the work of experts to carry out a specialized transfer pricing analysis.

JAIME ZAGA

jaimezaga@bdomexico