[Senate Treaty Document 108-3]
[From the U.S. Government Publishing Office]



108th Congress 
 1st Session                     SENATE                     Treaty Doc.
                                                                  108-3
_______________________________________________________________________
 
SECOND ADDITIONAL PROTOCOL MODIFYING CONVENTION WITH MEXICO REGARDING 
           DOUBLE TAXATION AND PREVENTION OF FISCAL EVASION

                               __________

                                MESSAGE

                                  from

                   THE PRESIDENT OF THE UNITED STATES

                              transmitting

  SECOND ADDITIONAL PROTOCOL THAT MODIFIES THE CONVENTION BETWEEN THE 
 GOVERNMENT OF 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 TAXES ON INCOME, SIGNED AT 
                    MEXICO CITY ON NOVEMBER 26, 2002




February 25, 2003.--The Protocol was read the first time, and together 
  with the accompanying papers, referred to the Committee on Foreign 
     Relations and orderd to be printed for the use of the Senate.
                         LETTER OF TRANSMITTAL

                                The White House, February 25, 2003.
To the Senate of the United States:
    I transmit herewith for Senate advice and consent to 
ratification, the Second Additional Protocol that Modifies the 
Convention Between the Government of 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 Taxes on Income, signed at Mexico City 
on November 26, 2002. I also transmit, for the information of 
the Senate, the report of the Department of State concerning 
the proposed Protocol.
    The Convention, as amended by the proposed Protocol, would 
be similar to tax treaties between the United States and other 
developed nations. It would provide maximum rates of tax to be 
applied to various types of income and protection from double 
taxation of income. The Protocol was concluded in recognition 
of the importance of the United States economic relations with 
Mexico.
    I recommend that the Senate give early and favorable 
consideration to this Protocol, and that the Senate give its 
advice and consent to ratification.

                                                    George W. Bush.
                          LETTER OF SUBMITTAL

                                       Department of State,
                                     Washington, February 12, 2003.
The President,
The White House.
    The President: I have the honor to submit to you, with a 
view to its transmission to the Senate for advice and consent 
to ratification, the Second Additional Protocol that Modifies 
the Convention between the Government of 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 Taxes on Income, signed at Mexico City 
on November 26, 2002 (the ``Protocol'').
    The proposed Protocol with Mexico was negotiated to bring 
the existing Income Tax Convention, concluded in 1992 with a 
Protocol and amended by an Additional Protocol in 1994, up to 
date and in closer conformity with current U.S. tax treaty 
policy. The Convention, as amended by the proposed Protocol, 
would provide for maximum rates of tax to be applied to various 
types of income and protection from double taxation of income. 
The withholding tax rates on investment income in the proposed 
Protocol are the same or lower than those in the existing 
Convention.
    Pursuant to Article II of the proposed Protocol, replacing 
Article 10 of the existing Convention, new withholding rates 
are applicable to certain dividends. The proposed Protocol 
provides a withholding tax rate of zero on dividends from 
certain 80-percent owned corporate subsidiaries as well as 
dividends paid to qualified pension funds. Under the existing 
Convention, direct dividends meeting a 10-percent ownership 
threshold are subject to a 5-percent maximum rate of 
withholding tax, and portfolio dividends are subject to a 10-
percent maximum rate of withholding tax. These rates will 
continue to apply under the Convention as amended by the 
proposed Protocol.
    This would be only the third U.S. income tax treaty to 
provide an exemption from withholding taxes for certain direct 
dividends--the others being the recent Income Tax Convention 
with the United Kingdom and the recent Protocol amending our 
Income Tax Convention with Australia, which are now pending 
before the Senate Foreign Relations Committee. Both the United 
States and Mexico share an understanding that the existing 
Income Tax Convention will be promptly amended if the United 
States concludes a treaty with a lower withholding rate on 
dividends with any other country. Therefore, ratification of 
the proposed Protocol is consistent with this understanding, 
given that we would simultaneously be seeking ratification of 
the U.K. and Australia treaties.
    The maximum rates of withholding tax on dividends are 
subject to the standard anti-abuse rules for certain classes of 
investment income found in other U.S. tax treaties and 
agreements. In addition, the withholding rates described above 
do not apply if the beneficial owner of the dividend is a 
resident of one Contracting State who carries on business in 
the other Contracting State and the income is attributable to a 
permanent establishment or fixed base situated in that other 
State. If the income is attributable to a permanent 
establishment, it will be taxed as business profits, and, if 
the income is attributable to a fixed base, it will be taxed as 
a payment for independent personal services.
    The proposed Protocol brings the Convention into conformity 
with current U.S. tax treaty policy as to the treatment of 
dividends paid by U.S. regulated investment companies (RICs) 
and real estate investment trusts (REITs). The Protocol 
reflects a change in approach, adopted in 1997, which is 
intended to prevent the use of structures designed to avoid 
U.S. withholding tax on outbound dividends while providing 
appropriate benefits to portfolio investors in RICs and REITs.
    The existing Convention preserves the U.S. right to tax 
former citizens whose loss of citizenship had, as one of its 
principal purposes, the avoidance of tax. Article I of the 
proposed Protocol expands this right to include former long-
termresidents whose loss of such status had, as one of its 
principal purposes, the avoidance of tax.
    For purposes of applying rules regarding the elimination of 
double taxation, the proposed Protocol provides an updated 
provision regarding the source of income. Pursuant to Article V 
of the proposed Protocol, income that may be taxed by one of 
the parties to the Convention in accordance with the treaty 
will generally be treated as arising in that country. Thus, the 
other country will generally exempt that income from taxation 
or provide a credit for the taxes paid with respect to such 
income.
    The United States and Mexico will notify each other, 
through diplomatic channels, when their respective 
constitutional and statutory requirements for entry into force 
have been satisfied. In accordance with Article VI, the 
proposed Protocol will enter into force on the date of receipt 
of the later of such notifications. The proposed Protocol will 
have effect, with respect to taxes withheld at source on 
dividends, for dividends paid or credited on or after the first 
day of the second month next following the date on which the 
proposed Protocol enters into force. The effective date for all 
other types of taxes is for taxable periods beginning on or 
after the first day of January of the year following the year 
in which the proposed Protocol enters into force.
    The Department of the Treasury and the Department of State 
cooperated in the negotiation of the proposed Protocol. It has 
the full approval of both Departments.
    Respectfully submitted.
                                                   Colin L. Powell.
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