New transfer pricing documentation standard

One of the most visible actions of the BEPS plan is Action 13 (country by country report and transfer pricing documentation). Action 13 has taken effect, modifying Chapter V of the OECD Transfer Pricing Guidelines (OECD Guidelines) of 2017, and in Mexico, by incorporating article 76-A to the Mexican Income Tax Law (MITL) in 2016.

Tripartite standard for documentation proposed by Action 13

The action 13 establishes a a new standard for transfer pricing documentary support, suggesting the intercompany reporting via a master file, a country by country report, and a local file, all of which must be prepared annually. The information required in each of these documents is the following:

Master File. The master file provides a general overview of the group´s economic activity and its transfer pricing policies. The information requested by the master file is: i) structure of the multinational group, ii) description of each business line within the group, iii) intangibles,  iv) financing operations, and v) financial and tax positions, specifically, consolidated financial statements of the multinational group, as well as information relating to Advanced Pricing Arrangements (APA´s) and tax rulings issued by any tax authority. BEPS plan Action 13 leaves to the discretion of each country delineate the profile of multinationals that shall be requested to submit the master file. It should be noted that the master file, ideally must report an alignment of the group´s transfer pricing policies to the BEPS plan.

Country by Country report.

The Country by Country Report (CbC) requires information on regards of the distribution of income, taxes and employees in three tables: table 1 has information on the distribution of income, taxes and activities by fiscal jurisdiction, and specifically requires data relating to: i) tax jurisdiction in which the group operates, ii) income from both related and unrelated parties, as well as the total of both, iii) profit or loss before income taxes, iv) actual or effective income tax paid, v) income tax accrued throughout the year, vi) declared capital, vii) profits, viii) number of employees, and ix) active intangibles other than cash and cash equivalents.

Table 2 requires a list of entities resident in each tax jurisdiction and the business activities carried out, specifically: i) tax jurisdiction of the entity being reported, ii) entities resident in the tax jurisdiction, iii) tax jurisdiction of incorporation or organization if this differs from tax jurisdiction where it is resident, and iv) main business activities. Within this last item the company must select among one or various activities such as: R&D, ownership or management of IP, purchase or provision of goods, manufacture, sales, marketing and/or distribution, administrative or support services, provision of services to unrelated parties, internal financing of the group, regulated financial services, insurance, ownership of shares or other capital investments, even if the company has no operations or has another business activity.

Lastly, table 3 requires multinational groups to provide any information that they consider relevant in relation to their transfer pricing policies. The country by country report should be presented by all multinational companies that have a consolidated annual income greater than 750 million EUR (approximately 850 million USD or 12 billion MXN)

Local File. The local file, as stated by BEPS plan Action 13, must provide information of the group subsidiaries at the local level, in particular: i) relevant information about the organization of the subsidiary at the local level, ii) information relating to the intercompany transactions, including the confirmation of the arm’s length nature of each transaction carried out by the company and its related parties, as well as the methodology used to reach these conclusions, and iii) taxpayer financial information at the local level, specifically general financial statements and transactions of the taxpayer, as well as the financial information of the comparable transactions or companies to the taxpayer used in the analysis. As with the master file, Action 13 leaves at the discretion of each tax jurisdiction to which entities and at what terms are required to present a local file. In Mexico this requirement was addressed by requesting taxpayers who were subject to any of the cases listed in article 32-H of the Federal Tax Code (FTC), the remission of the transfer pricing analysis required by fraction IX of article 76 of the MITL, or in its absence, specific information for the local return according to the requirements released by the Mexican Tax Authorities.

CbC report automatic exchange

The OECD has proposed that the information in the CbC report must be exchanged among tax authorities. The implementation package of BEPS plan Action 13 proposes three ways to facilitate the exchange of  the reports:

1. The Multilateral Competent Authority Agreement on the Exchange of CbC reports “MCA Country by Country Reporting” (treaty signed by Mexico 27 January, 2016, along with 68 other jurisdictions)
2. Competent Authority Agreement on the Exchange of Country-by- Country Reports on the Basis of a Double Taxation Convention “DTC CAA” and;
3. Competent Authority Agreement on the Exchange of Country-by- Country Reports on the Basis of a Tax Information Exchange Agreement “TIEA CAA”

All of these mechanisms clearly establishes the scope, deadlines, and safeguards (particularly regarding the protection of reported information by multinational groups) through which the information exchange of CbC reports must be carried out.

Status of the implementation of Action 13 and the CbC report

The OECD has control over the implementation of Action 13, including the requests for disclosure of CbC reports worldwide, and has even published complimentary guidelines to facilitate their application^[2], including the appropriate use of information in the CbC report^[3] where it is emphasized that it should only be used for: i) the high level evaluation of potential transfer pricing risks, ii) the evaluation of other risks related to base erosion and profit shifting, and iii) economic and statistical analysis of taxpayer’s positions, in case that this occurs. In consideration to the inclusive BEPS framework^[4], as of 31 December 2017, more than 1400 information exchange agreements have been made.

National information requirements for the master file, country by country report, and local file in article 76-A of the MITL

In accordance to the BEPS plan, on 1 January of 2016 the obligation for corporations that carry out transactions with related parties to submit informative returns with the information of the master file, country by country report, and local file. These returns have been termed: a) master file return; b) local file return; and c) country by country return. According to the Article 76-A of the MITL, the taxpayers required to submit the master file and local file returns are those in any of the situations foreseen by the Federal Tax Code on its Article 32-H:

• Those who are taxed in terms of Title II of the MITL, that in the last fiscal year declared normal income for income tax purposes equal to or greater than an amount equivalent to $708,898,920.00[5], as well as those that at the close of the immediately preceding fiscal year have shares placed among the great investment public, on a stock exchange and that are not in any other case listed in this article.
• Corporations that belong to the optional tax regime for groups of companies under the terms of Chapter VI, Title II of the MITL.
• State-controlled entities under federal administration.
• Corporations resident abroad that have permanent establishment in the country, only for the activities carried out in said establishments.

Article 76-A of the MITL states that only taxpayers who fall into any of the following cases must submit country by country returns.

• Are multinational controlled corporate entities, understood as those that meet the following requirements: 
• Are resident in Mexico 
• Have subsidiary companies defined in terms of the financial information rules, or permanent establishments, that are resident or located abroad, as the case may be. 
• Are not subsidiaries of another company resident abroad.
• Are required to prepare, present, and disclose consolidated financial statements in terms of the financial information rules.
• Report in their consolidated financial statements results of entities with residence in one or more countries or jurisdictions.
• Have reported consolidated incomes in the immediately previous fiscal year, for accounting purposes, equivalent or greater than 12 billion MXN.
• Are corporate entities resident in national territory or resident abroad with permanent establishment in the country, that have been designated by the controlling corporation of the multinational group resident abroad as responsible to provide the country by country informative return that is referred to in the present section. The corporate entity designated must present, at the latest 31 December of the following year, a notice to the tax authorities on the terms established for that purpose by the SAT through general rules.

The informative returns must be submitted by 31 December each year, or in response to the miscellaneous rule anticipated by 2.9.18 for the fiscal year 2018, by the end of June. Sanctions for the default or for incomplete or erroneous filing carry a fine ranging from $140,540 to $200,090, in accordance to that established in articles 81-XL and 82 XXXVII of the FTC, in addition to the inability to contract with the public sector in acquisitions, leases, services, or public works, in the terms established by the FTC in its article 32-D, as well as the suspension of the importer´s registry, according to the general rules of foreign trade in its numeral 1.3.3-IX. Eventually, the risk of non-deductibility of transactions with related parties should be taken into consideration, in terms established by fraction V of article 27 of the MITL

 

 

 

Author: Jesús Aldrin Rojas M. Partner, QCG Transfer Pricing Practice

[2] http://www.oecd.org/tax/beps/guidance-on-country-by-country-reporting-beps-action-13.htm

[3] http://www.oecd.org/ctp/beps/beps-accion-13-guia-sobre-el-uso-apropiado-de-la-informacion-contenida-en-los-informes-pais-por-pais.pdf

[4] http://www.oecd.org/tax/folleto-marco-inclusivo-de-beps.pdf

[5] Updateable figures