Doing Business

Doing Business in Mexico 2015

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130 Tax and Legal Services - PwC Mexico Revenues from long-term contracts for the construction of buildings or the long-term manufacture of personal property (e.g., large machinery) must be recognized for tax purposes when the periodic estimates of work completed are approved by the customer for payment. In the case of personal-property long-term contracts, revenues should be determined on the basis of the quarterly construction work advance or the manufacture of the equipment, if such estimates are not presented at least every three months. If advance payments, guarantee deposits, etc., are received, the entire amount of the advance or deposit must be recognized as income. Costs incurred under such contracts are deductible in the years in which they are incurred, and in some cases estimated future costs can be charged against such revenues. Business profits There are several differences between business and tax profits (e.g., depreciation rates, inflation effects). These differences should be reconciled on an annual basis, when the annual tax return is filed. Inflation gain or loss Taxpayers are required to calculate an adjustment due to inflation (i.e., additional taxable income) on an annual basis by applying the percentage increases in the National Consumer Price Index to essentially all liabilities net of monetary assets, including bank balances, investments (except in shares) and some notes and accounts payable. On the other hand, taxpayers may have an inflation loss (i.e., additional deduction) if their monetary assets, including bank balances, investments (except shares) and some notes and accounts receivable, exceed their monetary liabilities. It should be mentioned that liabilities that may arise from non-deductible items and the debts that exceed the debt-to-equity ratio (according to the thin capitalization rules) would not be considered in the calculation of the adjustment for inflation. Intercompany transactions For tax purposes, intercompany charges should meet arm's length requirements, (i.e., terms and conditions should be comparable to transactions between unrelated parties). Prices paid for goods bought from foreign or local affiliates or any other source are subject to review by the tax authorities and, if not considered to represent true local or foreign market prices, may be adjusted under broad transfer-pricing provisions. Domestic and foreign transactions must be supported by the application of a recognized transfer pricing method following a preferred method rule. Such methods are: (1) the comparable uncontrolled price method (CUP), (2) the resale price method, (3) the cost-plus method, (4) the profit split method, (5) the residual profit split method, and (6) the transactional net margin method. Taxpayers are first required to apply the CUP method, when determining prices in transactions carried out with related parties. If the taxpayer can demonstrate that the CUP method is inappropriate, the other transfer pricing methods can be applied. Moreover, the resale price and cost plus methods are the next preferred methods after the CUP method. A range of prices or margins could be established by the application of any of the above-mentioned methods. If the price or margin is within the range, the transaction would be considered as carried out at fair market value.

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