April 22, 2022

EY TAX Flash

Effects of inflation
on transfer pricing

_______________________________________________
More than two years after the pandemic began, we have experienced significant
NEW! EY Tax News: Mexico Edition global economic impacts and, undoubtedly, one of the most concerning effects at
the end of the first quarter of 2022 is inflation. In general, increases in energy,
EY’s Tax News: Mexico Edition is a free, commodities and food prices, as well as various supply chain disruptions, have
personalized email subscription service that resulted in higher than expected levels of inflation, notably in the United States and
allows you to receive EY Mexico Tax Alerts many emerging and developing economies.
and newsletters across all areas of tax.
Access registration here. Inflation forecast for 2022 in advanced economies is 3.6% and 5.9% in emerging
markets and developing economies1. In response to this problem, central banks
Also available is our EY Mexico Tax Alert
have used monetary policies to increase reference interest rates, especially in those
Library here.
economies with more access to credit. Furthermore, without leaving aside the effects
that this pandemic has had on economic growth, according to the World Bank, after
having rebounded by an estimated 5.5% in 2021, the global economic growth forecast
_______________________________________________ for 2022 was reduced to 4.1%2.

In addition to the effects of the pandemic, the war between Russia and Ukraine will
have a direct impact on the European market, which, due to the sanctions imposed,
could have an impact on the entire world.

In the case of Latin America, inflation continues to rise due to various economic and
social factors. Fossil fuel prices have almost doubled compared to 2021, while energy
prices have also increased significantly, as well as the prices of basic consumer goods.
Moreover, considering the shortage in the supply of goods and services, the supply
chains of the most important industries in the region are still highly fragmented.

1
International Monetary Fund - World Economic Outlook - January 2022
2
World Bank - Global Economic Prospects - January 2022
According to estimates by the International Monetary Fund,
economic growth in the region is expected to continue to slow
down in the coming years, in addition to expected inflation
rates of between 10% and 11%3. At the end of 2021, México
alone reached inflation levels not seen in the last two decades
according to the last quarterly report published by Banco de
México, reaching 7.22% in the first two weeks of 20224.
Effect on transfer pricing analyses
Inflation is generating great uncertainty in the worldwide
economy. Driven by severe market disruption, companies have
altered their way of doing business and have immediately sought
to adapt to a new reality in the short term, trying out new
business models that will allow them to survive and evolve in the
medium and long term.
As a result of the markets´ inflation impact, business
negotiations and economic terms have changed, so it is
important to review and analyze the economic, commercial
and contractual effects, among others, that this may have on
intercompany policies and the alignment of functions, assets
and risks.
3
Bloomberg - Latin American Inflation Expectations - November 2021
4
Banco de México– Quarterly Report October-December 2021
For further information about this bulletin, please contact any of
the following professionals:
Mauricio Fuentes
International Tax & Transactions –
Transfer Pricing Partner
mauricio.fuentes@mx.ey.com
The increase in the prices of goods and services poses
the need to evaluate whether companies will be able to
transfer them along the value chain until they reach the
final consumer, or whether they should modify their transfer
prices in the short term, considering the effects that this may
have on their market share and profitability margins.
According to the Transfer Pricing Guidelines issued by the
Organization for Economic Cooperation and Development
(OECD), economic terms of an intercompany transaction
must be reflected in the transfer pricing report. Therefore, it is
important that in 2022 the inflationary effects be incorporated
into the functional and economic analysis that will support the
market value of the group’s operations.
Tax authorities are expected to keep a close watch on
profitability margins and the changes that have occurred in
2022 compared to prior years. Consequently, a preliminary
review of the company’s financial situation prior to year-end
becomes extremely relevant, as well as for transfer pricing
analyses to include economic information that supports the
economic circumstances of the period analyzed and the
potential reasonable adjustments derived from such situation in
order to prove that intercompany transactions are carried out at
arm’s length.
EY
Assurance | Tax | Transactions | Advisory
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