Executive answer
A FAR analysis identifies the functions each party performs, the assets it uses and the risks it assumes and controls in a related-party transaction. Its purpose is not to describe organization charts or repeat clauses. It should explain how value is created, who has decision-making capability, who performs, who contributes resources and which party can bear the economic consequences.
Articles 179 and 180 of the Mexican Income Tax Law include functions, assets and risks among the factors used to assess comparability and apply methods. The OECD Guidelines, to the extent consistent with Mexican law and treaties, provide a technical framework for accurately delineating transactions and analyzing risk control and financial capacity. That interpretive reference does not replace the law or turn a contractual label into a fact.
A defensible FAR connects five elements: activity, decision, asset, risk and evidence. “Mexico sells” is not enough. The analysis should identify who sets price, approves customers, plans inventory, funds credit, decides discounts, manages warranties and bears obsolescence. Only then can the Mexican entity’s return be evaluated against its contribution.
Functions: describe processes and decisions
A function is an economically relevant activity, not every administrative task. Manufacturing functions may include planning, procurement, scheduling, production, quality, maintenance, engineering, inventory and warranty. Distribution may include commercial strategy, customer selection, pricing, marketing, credit, warehousing and after-sales. Services may involve design, staffing, supervision, proprietary methods and acceptance.
For every function, distinguish who designs, approves, performs, monitors and can change it. Routine execution may sit in Mexico while strategic decisions occur abroad; the reverse can also be true despite the agreement. Record frequency, personnel, systems, budget and escalation.
Avoid universal lists. Two distributors selling the same product can have different profiles if one controls price and inventory while the other processes orders. FAR should be specific to the dealing, period and entity.
Assets: ownership, use and contribution
Include tangible assets—plant, equipment, inventory and premises—and intangibles—software, brands, know-how, data, relationships and processes. Identify legal owner, funder, user, maintainer and decision-maker for exploitation. Accounting ownership alone does not explain economic contribution.
Analyze assets by relevance, not only book value. A customer database with no balance-sheet amount may be essential; expensive machinery may be routine when its use is fully prescribed. Record useful life, exclusivity, mobility, capacity, obsolescence and restrictions.
Where several entities contribute to an intangible, document development, enhancement, maintenance, protection and exploitation functions, together with funding and risk control. Do not assign the entire return automatically to the legal owner.
Risks: from agreement to effective control
Common risks include market, inventory, capacity, credit, product, warranty, currency, finance, regulation, intellectual property and people. The agreement allocates risks, but conduct reveals control.
Control means capability to decide whether to take the risk and how to respond, as well as performing or overseeing mitigation. Paying a loss does not prove control. A company may book obsolete inventory while another decided volume, supplier, product and discount. Identify the exact decision, people, information, approval limits and consequences.
Financial capacity matters as well. A party allocated a risk should be able to bear it. Analyze capital, liquidity, access to funds and reasonable magnitude. An assumed group backstop does not cure a lack of resources and decision-making.
Seven-stage process
1. Define the transaction
Use the PT-016 inventory to delimit parties, period, agreements, flows and components. Separate dealings requiring different analyses rather than aggregating for convenience.
2. Review documents
Read agreements, policies, organization charts, job descriptions, budgets, manuals, management reports, minutes and system records. Form hypotheses, not final conclusions.
3. Interview decision-makers
Include operations and owners in both entities, not only tax. Ask about a recent decision: what happened, which alternatives existed, who approved, what information was used and who bore the result.
4. Test with evidence
Request approvals, tickets, reports, system access, orders, limits, forecasts and metrics. An interview is testimonial evidence; corroborate material functions.
5. Build the matrix
Assign functions, assets and risks, but also decision-maker, performer, funder, system and record. Identify contradictions between contract and conduct.
6. Validate with participants
Share the draft with operators. Ask for specific corrections and evidence instead of a general sign-off nobody understands.
7. Connect to the method
Use FAR to select the tested party, indicator, comparable companies and adjustments. If FAR changes no economic decision, it is probably too generic.
Applied FAR matrix
| Element | Question | Evidence | Economic implication |
|---|---|---|---|
| Pricing | Who sets prices and approves discounts? | Authority matrix, messages, system | Market risk and selling function |
| Inventory | Who decides volume and liquidation? | Forecast, orders, aging | Inventory risk and working capital |
| Credit | Who accepts customers and limits? | Policy, scoring, exceptions | Credit risk |
| Production | Who schedules capacity and quality? | Plan, KPIs, reports | Manufacturing and capacity function |
| IP | Who decides development and protection? | Roadmap, budget, registrations | Intangible return |
| Service | Who defines scope and accepts delivery? | SOW, tickets, approval | Benefit and remuneration |
| Finance | Who decides amount and terms? | Committee, forecast, agreement | Financial risk and interest rate |
Add entity, person, location, frequency, asset, financial capacity and evidence strength. The resource should show shared decision-making and should not force one entity where functions are genuinely integrated.
If the current FAR could describe any company in the industry, validate decisions and evidence through an operating workshop.
Interviews that avoid rehearsed answers
Begin with a process and an actual case, not “who assumes the risk?” Ask how the last exceptional discount was approved, what happened to slow inventory or who decided to hire capacity. Request the screen, report or approval. Then compare answers across functions and countries.
Use counterfactual questions: could Mexico reject the order, what happens above budget, who can change the supplier, and who pays and decides when a customer makes a claim? Answers reveal authority limits.
Record name, role, date and scope. Do not attribute one person’s capability to an entity without confirming mandate, information access and continuity. If the decision-maker changed during the year, document the periods.
When contract and conduct differ
First determine whether the difference is occasional, an approved exception or a permanent change. Then evaluate whether conduct, agreement, price or characterization should change. Do not rewrite history retroactively.
A discrepancy may show that a “limited-risk” distributor controls pricing and marketing; that a contract manufacturer decides capacity; or that a parent charges for services performed locally. FAR alone does not determine the effect. Connect the finding to method, remuneration, accounting and adjustments.
Maintain a gap register with severity, owner and deadline. Material differences should reach leadership before year-end.
Decision scenarios
Local loss. Identify the risk causing the loss, the decision-maker and financial capacity. Do not move profit automatically.
New product. Record development, approval, launch, marketing, inventory and warranty from the outset. Prior-year FAR may no longer apply.
Centralization. When a function moves, document people, systems, authority, assets and compensation. Amending the agreement before operations move does not prove a transfer.
Automation. A global system may execute decisions, but someone designs rules, approves exceptions and controls data. Locate those functions.
Common errors
- Copying FAR from the Master File or prior year.
- Interviewing only tax and legal.
- Treating job titles as proof of decisions.
- Confusing bearing cost with controlling risk.
- Ignoring assets without book value.
- Assigning every intangible return to the legal owner.
- Describing functions without frequency, people or evidence.
- Hiding contradictions so the agreement appears consistent.
- Preparing FAR after method selection.
- Failing to update after restructuring or a material loss.
Governance and refresh
Refresh FAR after changes to product, market, agreement, key people, systems, financing, restructuring or unusual losses. Annual continuity can be confirmed through a questionnaire and targeted interviews; a full restart is unnecessary when stability is evidenced.
Tax coordinates, operations validates, legal compares agreements, finance provides results, human resources confirms personnel, and leadership approves material characterization. Preserve the version, interview list, evidence and resolved differences.
The FAR Workshop output is a matrix, transaction-specific narrative, decision map, contract-conduct gap register and consequences for method and policy. An executive should understand it and a reviewer should be able to test it.
Related topics
Quality control for the analysis
Before approval, confirm that every material risk has an identified decision, an authorized person, available information, evidence and financial capacity. Verify that described functions appear in cost, personnel or systems and that relevant assets are linked to use. An unsupported statement should be labelled a hypothesis or gap, not a fact.
Compare the narrative with financial statements and segmented results. A supposedly routine profile showing persistent losses, material investment or unexplained volatility needs investigation. The characterization may still be correct, but the file should identify the risk that produced the outcome and explain why the result is consistent with conduct.
Test internal consistency as well. If Mexico sets prices, approves customers and decides inventory, the method and tested-party choice should acknowledge those contributions. If a foreign committee controls a risk, retain its minutes, information and follow-up rather than citing its existence.
Finally, document what changed from the prior year and what remained stable. This bridge avoids unnecessary repeat interviews and prevents drafting differences from appearing to be economic changes.
Related topics
- PT-005: report content.
- PT-016: transaction inventory.
- PT-018 and PT-019: comparability and method.
- PT-072: restructurings.
- PT-079: limited-risk operating models.
Validate the FAR with observable facts
Turn every stated function into questions about decisions, people, systems and evidence. For inventory, identify who forecasts, purchases, sets levels, approves obsolescence and bears deviations. For credit, determine who sets limits, monitors and collects. For market activity, identify who designs campaigns, controls budget and decides discounts. Interviews should produce examples rather than labels.
Compare answers with agreements, organization charts, job descriptions, approvals, reports, ERP data and results. Where contract and conduct differ, document since when, materiality and action. Analyze assets and risks together with capacity and control; recording a loss does not prove the entity chose to assume the risk.
Validate the draft with operating and tax owners, retaining disagreements and resolution. Refresh it after restructuring, key personnel, product or system changes. A defensible FAR is a verifiable reconstruction of how the business operates, not a paragraph inherited from last year’s study.
Sources and verification date
- Mexican Income Tax Law, current text, Articles 76, 179 and 180.
- OECD Mexico Transfer Pricing Country Profile.
- OECD Transfer Pricing Guidelines, a technical reference subject to its interpretive role in Mexico.
Sources checked on August 2, 2026. FAR depends on facts and period; OECD guidance does not replace Mexican law.
Request a FAR Workshop to turn agreements, interviews and operating data into a decision, asset, risk and evidence matrix that supports method selection.