Economic Substance And Arm's Length

Mexican taxpayers are obliged to determine their taxable income and authorized deductions derived from related party transactions considering the prices that would have been used in comparable transactions with or between independent parties. This is, in Mexico the arm's length principle is recognized for tax purposes.

In the previous administration¹, the transfer pricing department within Mexico's Tax Administration ("SAT" for its acronym in Spanish) had an important consolidation going from a mere documentation compliance matter to an strategic risk assessment tool for Multinational Companies ("MNEs").

The latter may be observed not only with the inclusion of new transfer pricing related provisions and obligations such as the local file, master file and country by country report, among others, but with the requirements regarding the economic substance and materiality that have been observed within tax audit procedures in the last years.