MEXICO Law and Practice Contributed by: Edgar Klee and Joel Gonzalez Lopez, Haynes and Boone, S.C.
Recent rulings by the Tax Court have, however, denied access to treaty benefits in certain cases on the basis that technical assistance should not be regarded as a commercial activity for the purposes of the Tax Code, but rather as a service of a civil nature. This reasoning is based on the fact that the Commercial Code does not expressly list technical assistance among com - mercial acts, even though the list of commercial acts contained in the Commercial Code is not exhaustive. 4.2 Key Treaty Jurisdictions for Inbound Investment Mexico has entered into several tax treaties with other countries to avoid double taxation and promote cross- border investments. The choice of tax treaty coun - tries for foreign investors depends on various factors, including the investor’s home country, the nature of the investment, and the specific provisions of each treaty. Some countries with which Mexico has tax treaties commonly used by foreign investors include the United States of America, Canada, Spain, the United Kingdom, Germany and the Netherlands. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices The use of entities in treaty countries by non-treaty country residents, often known as “treaty shopping”, can sometimes be subject to scrutiny by Mexican tax authorities. Mexican law contains certain general anti-avoidance rules that allow tax authorities to challenge transac - tions or arrangements that have the primary purpose of obtaining a tax benefit in violation of the principles of the tax laws. Mexican authorities may scrutinise the substance and purpose of the arrangements to determine whether they comply with the intended purpose of tax treaties. If they find that the primary motive of the structure is tax avoidance rather than a genuine business pur - pose, they may challenge the arrangement and deny the treaty benefits. 4.4 Transfer Pricing Issues for Inbound Investors For inbound investors operating through a local cor - poration in Mexico, several significant transfer pricing
issues may arise. It is crucial for investors to be aware of these issues to ensure compliance with Mexican transfer pricing regulations. Some of the key transfer
pricing issues are outlined below. Documentation Requirements
Mexico has stringent documentation requirements for transfer pricing. Inbound investors need to maintain comprehensive documentation to support the pric - ing of transactions with related parties. This includes documentation on the selection of the transfer pricing method, comparability analysis, and financial informa - tion. Comparability Analysis Performing a robust comparability analysis is crucial to determining the appropriate transfer pricing meth - od. The challenge lies in finding reliable and compa - rable data for benchmarking purposes. Differences in industry practices and economic conditions between Mexico and other countries can complicate the analy - sis. Use of Profit Level Indicators (PLIs) Determining the appropriate profit level indicator (PLI) for benchmarking can be complex. In Mexico, the choice of PLI depends on the nature of the transaction, and identifying the most suitable indicator can be challenging for certain industries. Intangibles and Royalties Transfers of intangible assets and the calculation of royalties present specific transfer pricing challenges. Establishing the arm’s length pricing for the use of intangibles requires careful analysis, and ensuring alignment with the OECD Guidelines is crucial. Management and Service Fees Determining the appropriate pricing for management and service fees charged by a foreign parent to its Mexican subsidiary is a common challenge. It requires demonstrating that the services provided add value and are consistent with arm’s length principles.
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