Friday, 10 April 2015

Overview of requirements to deduct prorated expenses under shared expense arrangements in Mexico

Mexico’s Tax Administration Service (SAT) published regulations on 16 October 2014 that allow Mexican taxpayers to deduct shared expenses incurred on a pro rata basis with nonresidents, provided certain requirements are met, despite a specific prohibition on the deduction of such expenses in the Income Tax Law (ITL)
The October regulations were a consequence of the decision issued by the second Chamber of the Supreme Court of Justice on 19 March 2014, in which the court held that the prohibition under the ITL could not be justified, since Mexico’s transfer pricing rules require taxpayers to adjust their transactions with nonresident related parties to arm’s length terms. The Supreme Court decision does not include a specific date for the termination of the prohibition on the deduction of prorated expenses. This leaves open the possibility that prorated expenses incurred in previous years may be deductible for tax purposes if the requirements of the new regulations are met.
In addition to the general deductibility requirements contained in the ITL and other regulations, specific requirements must be met under the October regulations for shared expenses to be deductible; for example, such costs must be strictly necessary for the company to carry out its activities and there must be a reasonable connection between the expenses incurred and the benefit received, or expected to be received, by the company. Additionally, the taxpayer must demonstrate that the transaction was agreed upon at arm’s length terms and must maintain documentation relating to transfer pricing.
Source & more info: Deloitte