Advanced Transfer Pricing Arrangements 14/11/2017 Advanced Transfer Pricing Arrangements Título June 2014 ACFPT/AGGC

Index APAs, BAPAs and MAPs Page Definition…………..………………………………………………………............... 2 Normative Framework………………………………………………………........ 4 to 9 Types of APA……………………………………………………………………… ……. 10 to 11 Duration……………….………………………………………………………………….. 12 Requisites of the applications………..………………………………………. 13 Stages………………..…………………………………………………………………….. 14 Advantages…………..………………………………………………………………….. 15 Diadvantages……………..…………………………………………………………….. 16 to 17 Statistics………………………………………………………………………………….. 18 to 20 1

Advance Pricing Arrangement (APA) 14/11/2017 Definition: An APA is a resolution of the Fiscal Authority to the formal consultation of a Mexican taxpayer in terms of article 34-A of the Fiscal Code of the Federation in force, relative to the methodology used in determining the prices or amounts of considerations in transactions carried out with related parties, according to the terms of article 179 of the Income Tax Act. 2

Normative Framework Fiscal Code of the Federation (hereinafter “CFF”). Income Tax Act (hereinafter “LISR”) Regulations of the Income Tax Act International Treaties to Avoid Double Taxation (hereinafter “Treaties”) OECD Transfer Pricing Guides for Multinational Enterprises and Tax Administrations (hereinafter “OECD T.P. Guides”). Income and Net Worth Tax Model Agreement. (hereinfter “Model Agreement”) 3

Normative Framework Article 34-A of the CFF Power of the tax authority to solve transfer pricing inquiries relative to the methodology used in determining the prices or amounts of considerations in transactions held with related parties. The taxpayer is conditioned to submit all the necessary information and documentation. The resolutions may originate from an agreement between competent authorities with whom there is a Treaty for avoiding double taxation. The validity and term of duration of the resolutions may be conditioned to compliance with requisites that prove that the transactions that are the purpose of the resolution are carried out prices or amounts of considerations that would have been used by independent parties in comparable transactions. 4

Normative Framework Article 179 of the LISR Obligations and Requisites: Taxpayers are obliged to determine their cumulative revenues and authorized deductions at market value. Otherwise, the Tax Authority may determine the cumulative revenues and authorized deductions as independent third parties would do in comparable transactions. Transactions or businesses are comparable when there are no differences between them which may significantly affect the price or amount of the consideration or the profit margin referred to in the methods established in article 180 of the LISR. 5

Article 179 of the LISR (continuation…) Normative Framework Article 179 of the LISR (continuation…) Comparability elements to be considered : The characteristics of the transactions. The functions or activities, assets and risks. The contractual terms. The economic circumstances. The business strategies. 6

Article 179 of the LISR (continuation…) Normative Framework Article 179 of the LISR (continuation…) Related Parties Concept: “It is considered that two or more persons are related parties, when one participates in a direct or indirect manner in the administration, control or capital of the other, or when a person or group of persons participates directly or indirectly in the administration, control or capital of said persons. In the case of partnerships, its members are considered as related parties, as well as the persons which according to this paragraph consider themselves related parties to said member.” For the interpretation of the rules referred to in this article, the OECD’s T.P. Guides will also be applicable if they are consistent with the local Law and Fiscal Treaties. 7

Normative Framework Article 180 of the LISR: Methodologies: Comparable Uncontrolled Price Method Resale Price Method Cost Plus Method Profit Split Method Residual Profit Split Method Transactional Operational Profit Margin Method. 8

Normative Framework Article 182 of the LISR: Maquila companies must determine their fiscal profit according to the following options: Safe Harbor: Fiscal Profit = 6.5% over costs ad expenses or Fiscal Profit = 6.9% over assets APA 9

a) Normal and maquila APA Types of APA 1. Unilateral a) Normal and maquila APA b) Thin Capitalization APA 2. Bilateral a) Bilateral APA b) Mutual Agreement Procedure 10

Types of APA Unilateral (hereinafter “Unilateral APA”): These are transfer pricing inquiries by a Mexican taxpayer to the Mexican fiscal authority. Bilateral or Multilateral (hereinafter “BAPA”): These are transfer pricing inquiries that involve two or more taxpayers and two or more fiscal authorities in Mexico as well as abroad. Mutual Agreement Procedure (hereinafter “MAP”): Originate from audits or Unilateral APAs. 11

Duration Unilateral APA: the period in which it is requested, the immediately preceding period and up to three fiscal periods following that in which it is requested.idateel ejercicio en que se solicite, el ejercicio inmediato anterior y hasta por los tres ejercicios fiscales siguientes a aquél en que se solicite. BAPA and MAP: may be greater than the above when resulting from a friendly procedure, according to the terms of an international treaty of which Mexico may be a part. 12

Requisites for the applications The APA applications are prepared in writing and should include as a minimum the information described in the Fiscal Miscellaneous Resolution in force in 2014, in rules I.3.3.1.10 and II.2.8.4, as the case may be. The document should mainly include: The structural organization of the group. Details of the proposed transfer pricing methodology, including the comparability analysis, selection of comparables, adjustments, among other aspects. Years to be covered by the APA. With respect to all related parties involved: Functional analysis of the companies adn the transactions covered by the APA. Names, addresses, RFC and/or Fiscal Identification Number. Description of the main functions, assets and risk. Financial information. Contracts. 13

Stages Following presentation of the taxpayer’s application at the SAT offices and according to the “Strategies for solving Transfer Pricing Advance Pricing Arrangements (APAS)” the procedure is as follows: Evaluation and analysis of the case. Exchange of initial letters between the competent authorities. (*) Request for information. Copy of the transfer pricing study. Preparation of scenarios. Internal review of scenarios. Exchange of “position paper” between the competent authorities. (*) Negotiations between authorities. (*) Exchange of concluding letter between competent authorities. (*) Issuance of the resolution. Follow-up of compliance with points of resolution . (*) Additional stages to be followed in case of bilateral inquiries (BAPA and MAP). 14

Advantages APA BAPA or MAP Certainty for the taxpayer and fiscal authority. a Facilitates information exchange between the taxpayers and the fiscal authority. Limits the risk of reviews and litigations. Avoid double taxation. Mitigate the risk of erosion of the tax base. r * :Partial a:Total 15

Disadvantages APA BAPA or MAP Partial certainty in unilaeral APAs A Risk as to which arm’s length values are biased. Changes in economic factors may affect the resolutions. a Duration of the processes is too long. Not reaching an agreement between the competent authorities. * :Partial a:Total r: Not applicable 16

Disadvantages Exceptions to the certainty advantage: Changes in the industry to which the taxpayer belongs, following issuance of a resolution. Changes in the OECD’s recommendations on Base Erosion and Profit Shifting (BEPS). Change in the recommendations of the OECD’s T.P. Guides. 17

Mexico’s Statistics Source: SAT Institutional Systems 18

Mexico’s Statistics Source: SAT Institutional Systems 19

Mexico’s Statistics Source: SAT Institutional Systems 20