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Deduction for Intercompany Pro-rated Expenses

18 Jan 2012

The Mexican Income Tax Law provides that expenses incurred abroad on a pro-rated basis with parties that are not income tax payers in Mexico are non-deductible. This means that corporate expenses and services charged by a multinational corporation to its Mexican affiliate determined on a pro-rata basis are non-deductible for the Mexican company. Taxand Mexico considers what this means for multinational companies with affiliates or subsidiaries in Mexico.

Several treaties for the avoidance of double taxation entered into by Mexico establish that interest, royalties, and other disbursements paid by a resident of Mexico to a resident of the other contracting State shall, for the purposes of determining the taxable profits of the Mexican resident, be deductible under the same conditions as if they had been paid to a resident of Mexico (this provision does not apply when transfer pricing rules are not complied with), as a non-discrimination provision.

In December 2011, a Mexican court issued a ruling that constitutes a precedent (not jurisprudence though) in favour of a taxpayer whereby expenses incurred abroad on a pro-rated basis are deductible in Mexico according to the treaties for the avoidance of double taxation, and as per the OECD rules for Transfer Pricing, based on the fact that expenses charged to Mexican residents on a pro rata basis are deductible.

Taxand's Take

This precedent will provide more certainty to taxpayers and multinational corporations with regard to the deductibility of such intercompany charges. Mexican subsidiaries of multinational corporations should look at identifying the opportunities to take or reinforce such deductions so as to make sure their tax position is not compromised.

Your Taxand contact for further queries is:
Manuel Tamez Zendejas
T. +52 55 5201 7403

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Taxand's Take Author