Praxis in Transfer Pricing ¿Interest or dividends?

Abstract

In the recent updates to the OECD Transfer Pricing Guidance on Financial Transactions the importance of distinguishing between the payment of interest and the payment of dividends in loan transactions between related parties is reiterated. The distinction is critical with regards to the erosion of the tax base since interest is deductible for purposes of income tax payments while dividends are not. To date, there is no methodology with quantitative indicators that can unambiguously determine the difference between the two. Given this lack of clarity, this article presents the case of a tax audit performed on a Mexican subsidiary that carries out loan operations with its parent company abroad. The case presents a situation that tax authorities frequently face in real transfer pricing audits, in which it can be unambiguously ruled that interest payments can be declared as dividend payments, thus protecting the integrity of the national tax base.