Simulation of intercompany transactions and Tax Fraud in Mexico

One of the worst scenarios that a taxpayer in Mexico with transfer pricing obligations could face is carrying out intercompany transactions that could be classified as “simulation,” since this could be considered tax fraud, potentially resulting in severe consequences.

What situations can trigger this allegation? 

In general, it’s the disconnect between the substance and the form of the transaction with the intention of undermining the tax base of any of the participants.

Consider an intercompany services transaction. If the service provider lacks the necessary experience, infrastructure or economic capacity, could they effectively provide that service? On the other hand, if the recipient of the service cannot demonstrate the areas of their organization that benefited, can it be considered that the service was actually rendered?

Suppose another case, in which the taxpayer exploits an intangible asset, but there is no evidence that the owner of the intangible has invested in the activities necessary to obtain it and the intangible does not generate an economic benefit for the recipient. Could this be considered a sound business practice?

Lastly, imagine a situation in which related parties participate in financing but the recipient does not have the credit capacity to meet the debt. Could this transaction really be classified as a loan?

All of the above situations and many others have an impact on the taxable base of the participants, resulting in greater income or deductions, but when these deductions are exercised in Mexico, they can trigger the presumption of simulation, either absolute or relative, provided for in the Income Tax Law and in the Federal Tax Code, as they refer to transactions between related parties.

Of course, in order for a transaction to be classified as simulation, it requires the tax authorities to qualify it as such, but facing these late stages means not only a headache but a serious risk for the taxpayer, now having to consider the possibility of this allegation becoming criminal in nature, with penalties that reach up to 9 years in prison in Mexico. Remember, your transfer pricing analysis must demonstrate that the transactions are real, not simulated. 

Don’t allow unnecessary risk to derail your business. Our transfer pricing exerts possess an in-depth understanding of the intricacies of intercompany transactions and the legal landscape in Mexico. We’ll work alongside you to meticulously analyze your operations, identify any potential risks, and implement robust strategies that guarantee adherence to regulations. Reach out today for a confidential consultation. Let us empower you to navigate the complexities of transfer pricing with confidence.