Recently and in several tax forums, tax authorities have mentioned new fiscalization measures focused on payments abroad carried out between related parties.
Through these revisions, authorities have established some payments made to residents abroad pertaining to the same group of companies as non-deductible.
Challenges made by the authority to support the rejection
Some arguments made by the authority are:
• The services are not strictly indispensable or they do not generate value to the company in Mexico.
• Expenses are taken in proportion at a global level (commission, marketing, insurance, training, Management Fees) without directly identifying the expense in the Mexican company.
• Transactions have not been executed at market value.
• Amounts paid during the year exceed the sums paid during previous years.
•Failure to pay the corresponding tax withholding.
• Duplication of the services rendered.
• Lack of documentary support evidencing the service was rendered.
• Payments to foreign entities where at their country of origin, these payments are not deemed taxable income or are not deemed income.
Proper supporting documentation for the transaction
It is important to have documentation evidencing the transactions between related parties were effectively carried out. Each transaction is different from others therefore the supporting documentation is not always the same in every case.
Some examples of documentary evidence of transactions, among other documents, may be:
• Service agreement between the parties, including a detailed description of the services rendered.
• Identification of the personnel rendering the service, including reports or service logs, hours invested, etc.
• Evidence the economic benefit obtained by the company by receiving the services.
• Invoices for the collection of the services. Documents which evidencing the result of the services rendered (reports on the results, memorandum, etc.)
• Transactions shall be real and performed in accordance with the corresponding agreement.
• For Technical Support, Technology transfer or Royalties, prove to tax authorities that the person who provide the knowledge has technical elements to render the services and these are not only the possibility of obtaining it, it must be effectively carried out.
• Proof of Tax Residency in the event of the application of treaties to avoid double taxation.
• Any other type of additional documentation supporting transactions.
• Analyze the taxation system (territorial or world) of the foreign entity making the payment, in order to analyze the deductibility of the transaction.
New information tax returns
It is important to mention that derived from the global changes and the new OECD initiative, Mexican companies executing transactions with foreign related parties shall submit, if they are under the obligation, 3 new information tax returns:
• Master File: This return will provide the taxing authority global information on the multinational group the taxpayer in Mexico is a part of.
• Local information tax return on related parties: As opposed to the Master File, this return will provide very specific information on the taxpayer in Mexico.
• Country by Country Tax Return: This tax return will grant the authority added tax information on the global distribution of income, as well as a list of its subsidiaries and countries where these are located, their main business activity.
These new returns shall be filed in December 2017 with information regarding the 2016 fiscal year.
It is of vital importance to have enough documentary support of transactions for services performed between related parties residing abroad; therefore, we recommend compliance with all tax and legal requirements applicable to each case in particular, as well as revision of compliance with new information returns to be submitted in 2017.
Please contact us if you need any clarification or have any question in this regard.