MEXICO Trends and Developments Contributed by: Ángel Escalante, Gabriel Rojas, Uzziel Rodríguez and Daniel Colunga, Escalante & Asociados
structured and multidisciplinary approach, integrating tax, legal and operational considerations. Substance, Materiality and Related-Party Transactions A defining feature of the current Mexican tax envi - ronment is the increasing emphasis on economic substance and materiality, particularly in relation to related-party transactions. General Anti-Avoidance Rule (GAAR) This approach is anchored in the introduction of the General Anti-Avoidance Rule (GAAR) under Article 5-A of the Federal Fiscal Code (FFC), which allows tax authorities to disregard or recharacterise transactions that lack a valid business purpose and generate a tax benefit. Transfer pricing rules In addition, transfer pricing rules under Articles 179 and 180 of the MITL require that transactions between related parties be conducted in accordance with the arm’s length principle, consistent with OECD stand - ards. Scrutiny of intercompany transactions In practice, Mexican tax authorities have significantly increased their scrutiny of intercompany transactions, particularly those involving: • place of effective management (POEM) and admin - istrative services, where the benefit to the recipient is often questioned; • royalties and licensing arrangements, especially in cases involving intangible assets with unclear ownership or value creation; and • financial transactions, including loans and guaran - tees. A key aspect is the concept of materiality, which requires taxpayers to demonstrate that transactions have a real economic impact and are not merely for - mal arrangements designed to achieve tax benefits. This has led to a more substance-driven analysis, where tax authorities evaluate:
• whether the transaction would have been entered into by independent parties; • whether it generates a measurable economic ben - efit; and • whether it aligns with the functions, assets and risks (FAR analysis) of the entities involved. This approach is closely aligned with OECD trans - fer pricing guidelines, particularly the emphasis on value creation and DEMPE functions (development, enhancement, maintenance, protection and exploita - tion) in relation to intangible assets. In cross-border contexts, this has resulted in increased challenges to structures involving: • low-substance entities in foreign jurisdictions; • back-to-back arrangements; and • centralised service or IP holding structures. As a result, taxpayers are increasingly required to maintain adequate documentation and functional analyses, and to ensure that their structures reflect genuine economic activity. Evolving Interpretation of “Business Activities” Another important development in Mexican tax prac - tice is the evolving interpretation of “business activi - ties”, which plays a central role in determining the tax treatment of cross-border income. Under Articles 14 and 16 of the FFC, business activi - ties are broadly defined to include commercial, indus - trial, financial and service activities, among others. This broad definition has allowed tax authorities to adopt an increasingly expansive interpretation of what constitutes business activity. This concept is particularly relevant in the context of: • the determination of business profits under tax treaties; • the identification of a PE; and • the classification of income as active or passive. In recent years, Mexican tax authorities have adopted a more substance-oriented approach, focusing on the actual conduct of the taxpayer rather than formal
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