Also, paragraph 1.30 of the transfer pricing guidelines of the Organization for Economic Cooperation and Development (OECD) that serve as a source of interpretation of Mexican transfer pricing provisions under article 2151 of the Mexican Income Tax Law, (MITL) states that “Arm’s length prices may vary across different markets even for transactions involving the same property or services; therefore, to achieve comparability requires that the markets in which the independent and associated enterprises operate are comparable, and that differences do not have a material effect on price or that appropriate adjustments can be made.”
The estimates of 2009 of certain macroeconomic indicators show how irregular the economy behaved. Just to illustrate a few examples, in 2009, the US economy is estimated to drop 2.5%2. The 2009 decline of Mexico’s GDP is estimated at 7.1%3. The December 15, 2009 US Federal Reserve Statistical Release, reports that the industrial production of November 2009 in the US, was 5.1% below that of November 2008. On the other hand, it is estimated that in 2009 the US will have a deflation of 0.4% and Mexico an inflation of 5.3%4. Furthermore, the exchange rate of the Mexico peso to the US dollar had a very erratic behavior throughout 2009: it went all the way from 13.76 as of January 1, 2009 to as high as 15.36 in March, and as low as 12.83 in August, to close on December 31 at 13.06. In summary, taking into account the US deflationary and recessed economy, it would appear that if one were to take those benchmarks on a general basis, it may be anticipated that Mexican companies would report lower profits for fiscal year 2009 and, they even could report losses. As to this latter, paragraph 1.52 of the OECD transfer pricing guidelines expressly state that companies may have genuine losses because of “unfavorable economic conditions.” But the results of one single year would be mitigated based on the methodology to manage financial information of comparable transactions, as recommended by OECD transfer pricing guidelines.
In this respect, paragraph 1.49 of such guidelines literally state that: “In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years……Multiple year data will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. The data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or profit so that it should not be used as a comparable. In practice, average information of prior years is used to test a transaction. It will then be important when testing 2009 related party transactions, to define the number of years to be employed to come up with a reasonable profit level indicator of the comparable transactions. In summary, the very unusual economic situation that appears to be upturning, will certainly pose special questions when conducting the 2009 transfer pricing analysis of related party transactions. One should not be surprised if much lower profits and even losses should be the arm’s length answer.
Pending issuance of 10K forms5, usually between 60 and 90 days from the company’s fiscal year end, since most companies close their fiscal year on December 31, it will be until March at the earliest, that taxpayers will have access to the 2009 financial information to commence an accurate transfer pricing analysis using US comparables. Nevertheless, it would be important to anticipate for the 2009 accounting closing, whether in the circumstances of the taxpayer (assets, functions and risks), adjustments should be made to the prices and considerations for related party transactions, both cross-border and domestic.
Contacts: Mauricio Monroy Tax Partner mauricio.monroy@monroycp.com +52(664)972-9072
Guillermo Gómez Tax Partner guillermo.gomez@monroycp.com +52(664)972-9072

Tags: CETES, MAQUILADORA, ASSETS, RISKS, ADJUSTMENTS