- Primary adjustments: Defined as those made in order to comply with the obligations established in the Income Tax Law, relative to determining income and deductions in controlled transactions. Primary adjustments are made to adjust the actual pricing of intercompany transactions to align with prices that would have been determined by independent parties in comparable circumstances. Generally speaking, a primary adjustment can be applied either voluntarily by the taxpayer or imposed by the SAT.
- Corresponding adjustments: As a consequence of a primary adjustment, in order to avoid a double taxation issue, the related party of the entity that recorded the primary adjustment could/should record a corresponding adjustment.
- Virtual adjustments: Virtual adjustments occur when a taxpayer chooses to recognize an adjustment for income tax purposes only, by either modifying its taxable income or just paying an additional or lesser amount of income tax. Virtual adjustments have no further implications on other taxes; however, these adjustments may affect profit sharing methodologies if taxable income is modified.
- Transactional adjustments: Transactional adjustments occur when both parties agree to modify the formal terms of a controlled transaction in order to comply with the arm’s length principle (i.e., primary and corresponding adjustments as described above). Transactional adjustments have implications for both non-income taxes and profit sharing.
Source: Ceteris' Transfer Pricing Times, Volume IX, Issue 10