In 2002, Mexican tax authorities enacted new provisions in their Income Tax Law regarding transfer pricing. These provisions are only applicable to companies doing maquila operations. The action was intended to provide foreign investors in this sector a permanent legal framework that allowed them to make long term investment decisions. However, that objective was not totally fulfilled and on Oct. 30, 2003, the president of Mexico published a decree to partially exempt these taxpayers from payment of income tax.

      This exemption represents the amount equal to the difference between the income tax derived from calculating the taxable profit that it represents. Two formulas were created to determine that amount: 6.9 percent on the total value of the assets used in the maquila operation during the tax year and 6.5 percent on the total value of all the costs and expenses used in the maquila operation on one hand, and the income tax derived from calculating said tax profit using 3 percent on the before mentioned values, in both cases, on the other hand.

      The tax authorities tried to incorporate to the Income Tax Law the fiscal dispositions that grant administrative facilities to companies doing maquila operations to allow them to fulfill fiscal obligations in matter of transfer pricing and permanent establishment and will give them a greater security with regards to the permanence of the fiscal regime in these matters. In reality, this has not been accomplished.

      As mentioned, President Vicente Fox issued a decree partially exempting the payment of income tax for these taxpayers. However, there is no certainty on the permanency of this decree, since it can be revoked by the president at any time as long as the revocation is published in the Official Newspaper of the Federation, “Diario Oficial de la Federación.” Therefore, foreign investors cannot determine with certitude the income tax that they will have to pay for the maquila operations in Mexico.

Transfer pricing concept

      A procedure called transfer pricing was created as an element of control in operations between two or more companies, with or without residence in the same country, and with the meaning of supervising that those operations are executed in accordance with the reality and that they are not mere speculations to obtain fiscal benefits.

      Transfer pricing has been used as a way to prevent strategies that allow guiding profits and losses from a country to a country with more freedom and flexibility in the handling of numbers.

      In the Mexican fiscal system, the Income Tax Law establishes the regulations that are the internal framework of transfer pricing and grants to the tax authorities the faculty to determine a taxable income or a tax deduction for the taxpayers by means of price determination on transactions celebrated between related parties.

      Under the dispositions of the Mexican Income Tax Law, the procedure of transfer pricing is applied to: entities with residency in Mexico, entities non residents in Mexico, individuals, permanent establishments in Mexico of residents abroad, when any of the before ...

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