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What do transfer prices refer to?
In an environment where international trade is constantly changing, it is crucial for governments to protect their tax revenues, therefore, transfer pricing oversight is on the rise as regulations evolve rapidly, lTransfer pricing refers to agreements between related companies in transactions that may involve the transfer of various assets, such as; technology, brands, services, financing and leasing.
These prices are fundamental in the financial and tax field, especially in the context of international trade and transactions between related parties, they are the conditions and amounts of the consideration agreed between companies with a close relationship, such as parent companies, subsidiaries or entities with common shareholding these transactions can include a wide range of business activities, from the transfer of tangible and intangible assets to the provision of services, financing, leasing and other agreements.
The main objective of transfer pricing is to guarantee that these transactions are carried out at fair and reasonable prices, avoiding price manipulation for tax purposes and ensuring an adequate allocation of income between different jurisdictions, this practice seeks to prevent the erosion of bases. tax regulations of governments, promoting equity and transparency at the international level, since the regulations associated with transfer pricing have been constantly evolving to adapt to the growing complexity of global business operations and guarantee effective oversight in this changing environment. .
Transfer pricing study, how is it carried out?
The transfer pricing study is a complex process that involves a detailed evaluation of transactions between related companies to ensure that they are carried out at fair and reasonable prices, avoiding manipulation for tax purposes.
How it is performed?
- Identification of related transactions: The first step is to identify transactions between related companies, such as parents, subsidiaries or entities with common shareholders.
- Comparability analysis: The transaction between related companies is compared with similar transactions carried out between independent companies under comparable market conditions, which involves considering factors such as the type of good or service, the terms and conditions of the transaction, the risk assumed and the functions performed by each part.
- Transfer pricing method selection: There are several internationally accepted methods for determining transfer prices, such as the comparable market price method, the net profit margin method and the resale price method, the method chosen will depend on the availability of comparable data and the nature of the transaction.
- Data collection: Relevant data is collected about the transactions and companies involved, including financial statements, contracts, pricing policies and any other information that may affect transfer pricing.
- Analysis and adjustments: A detailed analysis is performed on the data collected to determine if transfer prices are in line with comparable market prices, if significant differences are identified, adjustments can be made to align transfer prices with market prices.
- Documentation and compliance: It is crucial to document the entire transfer pricing study process, including the methodology used, the data collected, the analyzes performed and any adjustments made. This documentation is important to meet tax compliance requirements and to defend transfer pricing against the tax authorities in the event of an audit.
The transfer pricing study involves a thorough analysis of transactions between related companies to ensure that prices are fair and reasonable, complying with tax regulations and promoting equity and transparency in international trade.
What may be the risks of the transfer pricing study?
The study of transfer pricing can involve several risks, both for companies and for authorities. prosecutors.
Some of these risks are:
- Tax fines and sanctions: If a company does not comply with transfer pricing regulations or does not properly document its policies and procedures, it may face significant fines and tax penalties from tax authorities.
- Retroactive tax adjustments: Tax authorities may make retroactive adjustments to transfer prices if they believe they do not adequately reflect market prices; these adjustments may result in additional taxes, penalties and accrued interest.
- Company reputation: Public scrutiny of a company's transfer pricing can damage its reputation, especially if the company is perceived to be avoiding taxes or failing to comply with ethical and legal standards.
- Compliance costs: Compliance with transfer pricing regulations can be costly and require significant resources, including hiring external experts and implementing appropriate documentation and monitoring systems.
- Conflicts with tax authorities of different jurisdictions: Multinational companies may face challenges when trying to comply with the transfer pricing regulations of multiple jurisdictions, which may result in conflicts with tax authorities of different countries.
- Litigation and legal disputes: Tax adjustments and transfer pricing disputes can lead to protracted and costly litigation between companies and tax authorities, which can negatively affect the company's profitability and financial stability.
What are the regulations or regulations for transfer pricing in Mexico?
The regulations concerning transfer pricing comprise a set of provisions and guidelines established by the tax authorities of various countries to supervise and regulate transactions between related entities, their primary objective is to avoid the decrease in the tax base and the transfer of profits, guaranteeing that operations between related companies are carried out at market prices.
In the specific case of Mexico, transfer pricing regulations are governed mainly by the Income Tax Law (LISR) and its Regulations, along with additional provisions issued by the Ministry of Finance and Public Credit (SHCP) and the Tax Administration Service (SAT). These regulations are designed to prevent tax evasion and ensure that transactions between related parties are carried out at market prices.
The Mexican regulatory framework on transfer pricing requires that companies adequately document and justify the prices and conditions of transactions with related parties, and also establishes the obligation to present an informative statement on operations with related parties, detailing the nature, amount and characteristics of said operations.
Mexico has adopted the Principles of OECD Transfer Pricing as a reference for its internal regulation, although it has also introduced certain modifications and specific provisions to adapt to the national reality, in evaluating the suitability of transfer pricing, the country uses comparability methods such as the method of uncontrolled comparable prices, the net transactional margin method and the profit split method.
The SAT is the authority in charge of supervising compliance with transfer pricing regulations in Mexico and can carry out reviews and adjustments if irregularities or non-compliance are detected. In addition, Mexico has established information exchange agreements with other countries to strengthen international cooperation on transfer pricing and combat tax evasion at a global level.
Article 76-A of the income tax law
Article 76-A of the Income Tax Law (LISR) in Mexico specifically addresses the regulation of transfer pricing, said article establishes the responsibilities related to the documentation and presentation of information on transactions carried out between related parties, whether residents or non-residents in Mexico.
In summary, article 76-A of the LISR requires taxpayers to provide documentation that supports the determination of the transfer prices of the operations carried out with related parties, this documentation must include details about the operations, the methods used to establish the prices of transfer, the adjustments made and any other relevant data that demonstrates the adequacy of the transaction prices.
In addition, the article establishes the obligation to present an annual information return on operations with related parties. This return must contain detailed information on the operations carried out, including the amount of the transactions, the nature of the goods or services exchanged and the commercial conditions. applicable.
Failure to comply with the obligations established in article 76-A of the LISR may result in sanctions by the Mexican tax authorities, which may include fines and adjustments in the taxes payable.
Therefore, it is crucial that taxpayers comply with the provisions of this article and maintain adequate documentation of their transactions with related parties.
Who can carry out a transfer pricing study?
A transfer pricing study can be carried out by various professionals or entities with experience in tax and accounting matters.
Some of the actors who can carry out this type of study are:
- Consultants specialized in transfer pricing: They are professionals with experience in the application of transfer pricing methodologies and in compliance with related tax regulations, such consultants can work in consulting firms or as independent consultants.
- Certified Public Accountants (CPC): Certified public accountants with tax and accounting experience may perform transfer pricing studies as part of their professional services.
- Tax lawyers: Tax law attorneys may also be trained to conduct transfer pricing studies and provide legal advice related to these transactions.
- Internal tax and finance departments: Some large companies have internal departments dedicated to tax and financial matters, which may carry out transfer pricing studies as part of their functions.
- Audits or consultancies external: In the case of external audits, independent audit firms may carry out transfer pricing reviews as part of their assurance work.
Regardless of who conducts the transfer pricing study, it is important that the person or entity has a solid knowledge of the relevant tax regulations, as well as experience in the application of transfer pricing methodologies and in the analysis of financial and commercial transactions between related parties.
5 Advantages of applying a transfer pricing study
Apply a study of transfer prices can provide several advantages for companies.
- Compliance with tax regulations:
One of the most important benefits is to ensure compliance with tax regulations related to transactions between related parties, since a transfer pricing study helps to demonstrate that transactions are carried out at market prices, thus avoiding possible sanctions by the fiscal authorities.
- Reduction of the risk of tax adjustments:
By establishing appropriate transfer prices and rigorously documenting transactions between related parties, the risk of facing retroactive tax adjustments by tax authorities is significantly reduced.
- Optimization of financial structures:
A transfer pricing study can help identify opportunities to optimize the company's financial structures, ensuring efficient allocation of costs, revenues and benefits between different business units and jurisdictions.
- Improved operational efficiency:
By carefully reviewing and analyzing related party transactions, areas of improvement in operational efficiency can be identified, such as consolidating suppliers, optimizing supply chains or restructuring international operations.
- Enterprise risk management:
A transfer pricing study can also help companies more effectively manage risks related to reputation, legality and competitiveness, since by having clear transfer pricing policies and procedures, companies can mitigate the risk of facing litigation, regulatory investigations or conflicts with other related parties.
That is, applying a transfer pricing study provides a series of advantages, from tax compliance to improving operational efficiency and business risk management and is a fundamental tool for companies that operate in an international environment and carry out transactions with related parties.
