U.S. and Mexico Release Revised Mutual Agreement Protocol

The US and Mexico have reached agreement (the “Agreement”) regarding the eligibility of fiscally transparent entities for benefits under the Convention Between the United States of America and the Government of the United Mexican States for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxation, according to the Internal Revenue Service (IRS). The Agreement “specifies the cases where fiscally transparent entities are entitled to treaty benefits and clarifies the procedure for claiming treaty benefits from Mexico,” the IRS reports.

The revised Paragraph 2(b) of the Agreement says “it is understood that: b) a partnership, estate, or trust is a resident of a Contracting State only to the extent that the income it derives is subject to tax in that State as the income of a resident, either in the hands of the partnership, estate or trust, or in the hands of its partners or beneficiaries;”

An example of a fiscally transparent entity cited in the agreement is an LLC where the member is a resident of the United States, the company is organized in the United States, and the LLC is treated for U.S. federal tax purposes as a partnership. The U.S. resident member of the LLC “would be afforded benefits of the Treaty on income that the resident derives from Mexico through the LLC to the extent of the resident’s share of that income,” according to the Agreement.

Appropriate procedures for the LLC to qualify for the treaty benefit would be to obtain a certificate of residence on Form 6166 “in the same manner as a partnership.” A Form 6166 confirms the filing of Form 1065, U.S. Return of Partnership Income by the LLC and lists the members of the LLC. The procedure would be similar for a resident of the United States that is a “shareholder of a U.S. subchapter S Corporation, an LLC that is disregarded as an entity separate from its owner, or a U.S. grantor Trust,” the Agreement states.

As the number of international tax disputes has increased, the Organization for Economic Cooperation and Development (OECD) has focused on improving the effectiveness of Article 25, the Mutual Agreement Procedure (“MAP”) of the OECD Model Tax Convention. A revised Model Tax Convention was published by the OECD this summer on their web site, OECD.org, but a special Working Group continues to examine the Mutual Agreement Procedure (“MAP”) according to the OECD. The mandate of the Working Group has been extended until December 2006.

At their initial meeting, the Working Group concluded that improving transparency was a critical step in making the MAP procedure more workable, according to a report on the OECD web site. In order to facilitate this process, the OECD has developed a site, “Country Profiles on Mutual Agreement Procedures,” which can be found on OECD.org., at Cross Border Tax Treaty Dispute Resolution, of all OECD member countries. The site contains “information about the Competent Authorities’ contact details, domestic guidelines for MAP and other useful information both for tax authorities and taxpayer”. Information is provided for all 25 OECD members as well as some non OECD economies, including China.

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