In the Mexican tax context, the concept of materiality In operations between related parties it has transcended simple documentary formality to become the pillar of the defense of deductibility. Unlike previous times, in which the emphasis fell on the formal sufficiency of the documentation, the tax authority has deepened the scrutiny on the economic substance of the operations, the reasonableness of the expenditures and the effective generation of economic value, especially in intra-group services and royalty payments for intangibles.
In recent years, the Tax Administration Service (SAT) has intensified its review processes, relying on advanced technological tools, including artificial intelligence for the crossing of banking information, CFDI and accounting records, which makes it easier to detect simulated operations or documentary inconsistencies. The official criterion insists that the burden of proof falls on the taxpayer, who must have suitable and sufficient documentation to prove the reality of the operations.
Intragroup Services: From Document Formality to Value Generation
Traditionally, multinational companies have justified charges for intragroup services—administrative, technical, or management—through a cost-sharing scheme (known as management fees). However, the tax authority demands a much more robust narrative.
The challenge for companies lies in demonstrating that the service received was not duplicated by personnel who were already part of the Mexican company and who, if they had not received it from their related party, would have had to hire an independent third party to perform it. The key question on the SAT is: Did this service generate identifiable and quantifiable economic value for the entity that paid for it?
It is not enough to have a framework contract and a spreadsheet with the distribution of expenses. It will be crucial to have evidence that supports the need for the service, such as emails that demonstrate the request and receipt of the service, meeting minutes, reports of specific results attributable to the service, and testimonials from the personnel involved.
In essence, the burden of proof has shifted towards proactively demonstrating that the service was indispensable and that the price paid corresponds to what would have been agreed with an external provider under similar conditions.
Follow information about business and current events in Forbes Mexico
Royalties and Intangibles: Strategic Investment or Risk of Fiscal Erosion?
Pay royalties for the use of trademarks, patents or know-how between related parties is another area of high sensitivity between authority and taxpayer. Historically, this issue has been a focus of attention due to its potential to facilitate the erosion of the tax base through profit shifting.
The trend is clear: the authority will not only question the percentage of the royalty, but the very existence of the benefit that the intangible brings to the local operation. The simple fact that a brand is recognized globally does not automatically justify a royalty payment by the Mexican subsidiary. It is imperative to demonstrate how this intangible directly influences revenue generation or operational efficiency (explain how the intangible affects the pricing power, churnunit cost or quality) of the local entity.
Las Directrices BEPS (Base Erosion and Profit Shifting) promoted by the OECD and the G20 have transformed the valuation of intangibles and transfer pricing in Mexico, demanding coherence between the generation of value and effective taxation. Regarding intangibles, Action 8-10 of BEPS and Mexican legislation (article 179 LISR) require:
- Detailed functional analysis focused on DEMPE functions,
- Identification of unique and valuable contributions (intangibles, competitive advantages, know-how),
- Allocation of profits according to the creation of economic value and not to simulated contractual structures.
This involves having a detailed analysis that supports how the brand attracts more customers, how a patent reduces production costs or how the know-how transferred improves a key process. The absence of this direct connection between the intangible and the economic benefit can lead to the non-deductibility of the expense.
From Present to Future: Strategies that Count
In conclusion, materiality currently requires Mexican companies with intragroup operations to go beyond legal and accounting formality. The key will be to build and maintain a robust defense record that tells the complete story of the business.
This means documenting not only the “what” (the service or the intangible), but the “why” (the business need), the “how” (the effective provision of the service or the use of the intangible) and the “how much” (the economic benefit generated). Companies that manage to articulate this narrative in a coherent manner and with solid documentary support will be better positioned to successfully face the tax reviews of the future.
About the authors:
*Eduardo Enrique García Hidalgo is a member of the Fiscal Development Commission 4 of the College of Public Accountants of Mexico, and Miguel Velázquez Aramis is Deputy Director of Tax Audit at García Hidalgo, Vázquez González.
The opinions expressed are solely the responsibility of their authors and are completely independent of the position and editorial line of Forbes Mexico.
Do you like photos and news? Follow us on our Instagram
