Executive answer
In electronics and semiconductors, profitability depends on decisions made before a part enters production: forecasts, architecture, component selection, purchase commitments, reserved capacity and end-of-life timing. When markets change, inventory can become scarce or obsolete quickly. Transfer pricing must identify who controlled those decisions and had the ability to mitigate their consequences.
A Mexican entity may manufacture, assemble, test, distribute, repair or develop software. Each activity carries different risks. Calling it a “limited-risk manufacturer” does not answer who bears non-cancellable components, expedites, yield, warranties, intellectual property or idle capacity.
Useful analysis follows the product, program and event. It connects forecasts, purchase orders, agreements, bills of material, inventory, engineering change notices, accounts and decisions. This avoids treating the entity that records a write-off as automatically having assumed the risk.
Map the electronics chain
Identify the designer, IP owner, foundry, component supplier, contract manufacturer, Mexican plant, distributor, customer and cloud or software provider where relevant. Record who defines the product, purchases, price, quality, demand and support.
Map transactions: manufacturing, buy-sell, consignment, engineering, testing, licenses, firmware, SaaS, warranty, logistics and financing. Separate goods and services even if one invoice combines them.
Organize the cycle into introduction, ramp-up, maturity, decline and end of life. An aggregate annual margin may offset a loss-making launch against a mature product and hide the causal decision.
Forecasts and purchase commitments
Retain forecasts by date, version, product, customer and source. Distinguish nonbinding forecasts, firm orders, non-cancellable non-returnable commitments, blanket orders, consignment and capacity reservation.
Ask who approved purchases beyond orders, selected a sole supplier and could cancel, redirect or resell. The legal buyer may not control volume risk if another entity imposed the forecast.
Compare forecast to actual and measure bias. A known recurring deviation may change what an independent party would accept. Document buffers, safety stock and mitigation decisions.
Do not wait for a write-off. Set alerts for weeks of inventory, ageing, demand, lifecycle status and non-cancellable commitments.
Obsolescence
Define categories: excess, slow-moving, technically obsolete, commercially obsolete, discontinued component, engineering-change stock and finished product without a customer. Each has a different cause and recovery path.
Link the accounting provision to SKU, bill of material, forecast, customer, decision and disposition. A corporate reserve percentage does not explain who economically bears the loss.
Examine who controlled design, change, purchase and sale. If the principal ordered a global redesign, a routine plant might negotiate compensation for trapped stock. If Mexico purchased against its own unsupported forecast, the result may differ.
Record alternatives: rework, substitution, transfer to another plant, return, secondary sale, cannibalization or scrap. Control over risk includes the ability to decide and carry out mitigation.
Shortage and component allocation
During a shortage, the group decides which customer, product or plant receives scarce components. That decision can shift margin across jurisdictions. Document criteria, authority, information and compensation.
If Mexico pays a premium to secure parts, determine who approved and benefits. Separate price increase, broker fee, freight and quality. Evaluate nonconforming or counterfeit-part risk within the applicable controls.
When the group diverts Mexican inventory to another market, record price, logistics cost and impact on local orders. A principal’s strategic instruction should not disappear into a purchase variance.
Capacity, equipment and utilization
Measure practical capacity by line, tester, clean room, surface-mount line, assembly cell or other relevant process. Distinguish fungible and dedicated equipment, bottlenecks and specialized labor.
Identify who approved capex, forecast volume and controls relocation. Principal-owned equipment may influence remuneration, comparability and tax-maquila statutory bases where applicable. Reconcile ownership, invoice, customs entry, location and use.
Idle capacity may be ordinary, launch-related, shortage-driven, customer loss or a global decision. Analyze cause and mitigation before adjusting an indicator.
Yield, scrap and quality
Set metrics by product and stage: first-pass yield, defects per million, scrap, rework, downtime and returns. Compare them with the approved baseline and learning curve.
Classify causes as design, material, machine, process, software, instruction or supplier. Determine who could prevent and who decided the response.
A yield decline from an imposed design differs from a local process failure. Retain engineering records, root-cause analysis, lots and recoveries.
Zugzwang’s Electronics TP Review connects lifecycle, forecasts, inventory, capacity, quality and agreements to attribute outcomes to the decisions that produced them.
Engineering changes and end of life
Every engineering change notice should identify requester, approver, date, products, affected inventory, cost, recovery and transition. Uncontrolled changes create obsolete stock and contradictory narratives.
At end of life, document the last-time buy, service demand, warranty, safety inventory and support term. Ask who determines the final volume and finances long-term stock.
If a product is replaced by group technology, analyze the transfer of customers, functions and profit potential. Do not describe the loss as mere market risk if a controlled decision occurred.
Technology, software and intangibles
Separate hardware design, firmware, embedded software, testing, algorithms, data and support. Identify who develops, directs, funds and exploits each element.
A plant may create valuable process improvements without legally owning the product. Document suggestions, patents, code and reuse. Set remuneration based on facts.
Characterize charges for licenses, SaaS, design tools, cloud and support. The label “technology fee” does not establish service, royalty, reimbursement or bundle. Review rights and applicable withholding.
Manufacturing, distribution and repair
Do not combine manufacturing, distribution and after-sales results when their risks differ. Distribution controls commercial inventory, credit and market; manufacturing controls process and quality; repair may involve parts, diagnostics and warranty.
Segment revenue, COGS, people, depreciation, inventory and shared cost. Use consumption-related drivers such as hours, units, space, orders or assets. Reconcile to the financial statements.
For consignment, determine when ownership transfers and who bears shrinkage, obsolescence and working capital. Physical location alone is not decisive.
Method and comparables
Select the method by transaction. A CUP may work for comparable components if specifications, volume, term, warranty and market can be adjusted. Cost plus may apply to routine manufacturing or engineering. TNMM requires a proper tested party, PLI and reliable segmentation.
Examine comparables for technology cycle, IP, R&D, inventory, asset intensity, warranty and utilization. A durable-goods wholesaler may not reflect a semiconductor distributor exposed to rapid obsolescence.
Working-capital adjustments require reliable inventory and terms. A capacity adjustment should isolate cause and normal utilization. Document why it improves comparability.
Pricing and pass-through
Define which costs receive a markup and which are pass-through. High-value components are not automatically pass-through; review sourcing, warranty, financing, logistics and risk functions.
If Mexico negotiates suppliers and controls inventory, excluding all component cost may understate its contribution. If it merely processes consigned goods without authority, the base may differ.
Maintain a policy by cost category and implement it in the accounts. Review new materials and services before year-end.
Losses and shocks
Build a budget-to-actual bridge across volume, mix, price, material, FX, premium buys, freight, yield, obsolescence, utilization and warranty. Link each variance to an event and control.
A shortage loss is not assigned by default to the buyer or manufacturer. Review agreements, allocation decisions, mitigation ability and third-party outcomes. Preserve contemporaneous evidence.
If a routine entity repeatedly bears losses, revisit the model, cost base, true-ups and profile. A comparable range cannot replace a factual explanation.
Monthly operation
Monitor forecast accuracy, aged inventory, provisions, NCNR commitments, capacity, yield, scrap, premium freight, segmented margin and projected true-up. Set thresholds and owners.
Bring supply chain, product, plant, finance, tax and legal together. The committee should decide purchases, transfers, reserves, recoveries and adjustments. Keep a decision log.
Automate feeds where possible but retain raw data, rules and approvals. Fast analytics do not fix a bad definition.
Currency, working capital and financing
Components may be purchased in one currency, processed in another and sold in a third. Document who sets currency, terms, hedging and price. Separate material-price movement, FX effect and financing cost; combining them can assign a treasury risk to a manufacturer that does not control it.
Strategic inventory and NCNR commitments consume capital. Identify who funds, which entity chooses the level and whether the intercompany formula rewards working capital. Long payment terms do not replace loan analysis when balances cease behaving as commercial accounts.
For hedging or netting, retain policy, approvals and beneficiaries. Recording the FX loss in Mexico does not establish that its team selected the exposure. Reconcile agreements, invoices, receivables and hedges.
Product governance and evidence
Assign an owner for each product family and a tax owner for the policy. Product validates lifecycle and engineering changes; supply chain validates forecasts and purchases; the plant validates capacity and yield; finance validates accounts; legal validates rights; tax determines treatment.
Hold a review on product introduction, generation change, material commitment and end-of-life declaration. The minutes should describe alternatives and authority. Contemporaneous decisions are stronger than a narrative reconstructed after a write-off.
Maintain a common dictionary for SKU, customer, program, entity and account. Without consistent identifiers, segmentation becomes a manual allocation that cannot be reproduced reliably.
Internal-audit questions
Which inventory lacks a current forecast? Who approved each material NCNR commitment? Which engineering change trapped stock? Was premium freight recovered? Does consigned ownership agree with agreements? Do pass-through costs follow policy? Is there a difference among provision, write-off and scrap? Does the true-up agree with the invoice and payment?
Sample answers to documents. Record finding, amount, year, cause and remediation. Quarterly testing reduces the chance that the obsolescence account becomes the first warning.
Customs and documentary bridge
Temporary imports, virtual transfers, returns and scrap require separate customs evidence. Reconcile the inventory ageing report to customs control so a part written off financially is not left open operationally. Tooling and consigned material also need ownership records.
A transfer-pricing true-up does not automatically determine customs value or VAT. Before invoicing, identify imports, periods, component prices, assists, royalties and Incoterms. Keep a documented bridge explaining where the tax bases align and where they differ.
Legal title, physical possession and economic control may reside with different entities. State each expressly rather than using the single word “owner” across systems.
Sector defense file
Include the chain map, FAR, agreements, forecasts, purchase orders, bills of material, lifecycle, ECNs, inventory, capex, ownership, quality, segmentation, method, comparables and events. Preserve versions.
Reconcile provisions and write-offs to disposal. Track customer, supplier, insurer and related-party recoveries. Avoid double counting.
Document judgments such as normal capacity, obsolescence classification, pass-through and benefit period. A number without a written criterion is difficult to defend.
Illustrative example
A Mexican entity buys NCNR components following a global forecast. The principal accelerates the next generation and cancels the product, leaving unusable stock. The analysis reviews who controlled the forecast and change, whether Mexico could redirect inventory, what clauses existed and what independent parties would have negotiated.
If Mexico exceeded the approved forecast through a local decision, some risk may belong to it. The obsolescence entry begins the analysis; it does not conclude it.
Conclusion
Time is an economic variable in electronics. Forecasting, sourcing, lifecycle and capacity determine whether inventory creates value, protects sales or becomes a loss. The policy should attribute outcomes to whoever controlled those decisions and executed mitigation.
A company that connects product and supply-chain data to accounting and agreements can explain its margin, correct deviations early and support its position without relying on sector generalities.
Request an Electronics TP Review to map lifecycle, inventory, capacity, technology and year-end actions with product-level evidence.
Verified official sources
- Mexican Chamber of Deputies, current Income Tax Law, Articles 76, 179 and 180.
- OECD, Transfer Pricing Guidelines 2022, Chapters I-III and VI.
- OECD, Transfer Pricing Country Profile: Mexico.
Verification closed on August 2, 2026. Confirm product facts, agreements, ownership and applicable regulation for each operation.