According to article 32, Section XVIII of the Mexican Income Tax Law, costs determined on a pro-rata basis and paid to non-residents are not deductible.
In this case it is argued that the provision violates the non-discrimination provision included in Mexico’s income tax treaties.
Supreme Court Judgement
The Supreme Court concludes that the Mexican Income Tax Law must take into account the OECD transfer pricing guidelines, and that these guidelines under certain circumstances acknowledges pro rata cost allocations. On that basis pro rata costs are deductible in Mexico, where certain requirements are met.
According to the Mexican Supreme Court, these requirements are:
a) The corresponding transaction has been concluded in accordance with the transfer pricing rules (paragraphs 151 to 154 of this judgment).
b) All documentation supporting the transaction is available so that its authenticity can be verified, as well as the amounts to which it amounted and that it is a strictly indispensable expense (structural deduction) that was made based on objective tax and accounting criteria and for real business reasons.
c) There is a reasonable relationship between the expense incurred and the benefit received or expected to be received by the taxpayer participating in the expense. In other words, the contract and supporting documentation must be analysed to determine whether there is an adequate and reasonable relationship between the expense incurred and the benefit obtained, so that the benefit cannot unreasonably exceed that amount.
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MEX SC 2014 pro-rata cost