[Senate Executive Report 104-6]
[From the U.S. Government Publishing Office]



104th Congress                                              Exec. Rept.
                        HOUSE OF REPRESENTATIVES

                                 SENATE

 1st Session                                                      104-6
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  ADDITIONAL PROTOCOL MODIFYING THE INCOME TAX CONVENTION WITH MEXICO

                                _______


   August 10 (legislative day, July 10), 1995.--Ordered to be printed

_______________________________________________________________________


   Mr. Helms, from the Committee on Foreign Relations, submitted the 
                               following

                              R E P O R T

     [To accompany Treaty Doc. 103-31, 103rd Congress, 2d Session]
    The Committee on Foreign Relations, to which was referred 
the 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 Washington on September 
18, 1992 (the additional protocol was signed at Mexico City on 
September 8, 1994), having considered the same, reports 
favorably thereon, without amendment, and recommends that the 
Senate give its advice and consent to ratification thereof.

                               I. Purpose

    The purpose of the proposed additional protocol is to 
broaden the scope of the current treaty's provisions relating 
to the exchange of information between the United States and 
the United Mexican States ("Mexico"). The proposed additional 
protocol's amendments to these rules permits the exchange of 
information with respect to the administration and enforcement 
of taxes imposed by States, municipalities, or other political 
subdivisions or local authorities of the two countries.

                             II. Background

    The proposed additional (second) protocol ("proposed 
additional protocol") to the income tax treaty between the 
United States and Mexico was signed in Mexico City on September 
8, 1994. The proposed additional protocol would amend the 
current U.S.-Mexico income tax treaty, as amended by the first 
protocol, both of which were signed in Washington, D.C. on 
September 18, 1992, and entered into force on December 28, 
1993.
    The proposed additional protocol was transmitted to the 
Senate for advice and consent to its ratification on September 
19, 1994 (see Treaty Doc. 103-31). The proposed additional 
protocol was the subject of a hearing before the Senate 
Committee on Foreign Relations on June 13, 1995.
                              III. Summary

    The proposed additional protocol revises Article 27 
(Exchange of Information) of the current income tax treaty 
between the United States and Mexico. The revisions entail two 
specific changes to the current treaty. First, the proposed 
additional protocol eliminates specific reference in that 
article to the Agreement Between the United States of America 
and the United Mexican States for the Exchange of Information 
with Respect to Taxes that was signed on November 9, 1989 (the 
``Tax Information Exchange Agreement'' or ``TIEA''). Such 
change incorporates into the income tax treaty's exchange of 
information provisions any amendments or revisions to the TIEA 
or to any subsequent agreement for the exchange of information 
which might supersede the TIEA. A proposed protocol to the TIEA 
(the ``TIEA protocol''), which is not subject to Senate advice 
and consent, was signed by the two countries on September 8, 
1994.
    Second, the proposed additional protocol makes the exchange 
of information provisions applicable to any tax covered by any 
exchange of information agreement between the two countries. 
Under the current treaty, exchange of information applies with 
respect to all taxes imposed in either country at the Federal 
level. Taxes presently covered by the TIEA's provisions are the 
Federal income taxes, Federal taxes on employment income, and 
Federal excise taxes imposed by either the United States or 
Mexico. Also covered are the Federal taxes on transfers to 
avoid income tax and the Federal estate and gift taxes imposed 
by the United States, and the Federal taxes on business assets 
and Federal value added taxes imposed by Mexico.
    The TIEA protocol increases the scope of taxes covered by 
the TIEA. Under the TIEA protocol, taxes covered by the TIEA 
include taxes imposed by a State, municipality, or other 
political subdivision or local authority of either the United 
States or Mexico. The TIEA does not, however, cover taxes 
imposed by a possession of either country. Moreover, the 
proposed additional protocol provides that if no TIEA or 
similar agreement were in effect, the income tax treaty's 
exchange of information provisions are extended to cover sub-
Federal-level taxes imposed in either country. The effect of 
the TIEA protocol coupled with the proposed additional protocol 
to the income tax treaty is to extend application of the income 
tax treaty's exchange of information provisions to such sub-
Federal-level taxes.

                          IV. Entry Into Force

    The proposed additional protocol will enter into force when 
the instruments of ratification are exchanged.

                          V. Committee Action

    The Committee on Foreign Relations held a public hearing on 
the proposed additional protocol to the income tax treaty 
between the United States and Mexico, and on other proposed tax 
treaties and protocols, on June 13, 1995. The hearing was 
chaired by Senator Thompson. The Committee considered the 
proposed additional protocol to the income tax treaty between 
the United States and Mexico on July 11, 1995, and ordered the 
proposed additional protocol favorably reported by a voice 
vote, with the recommendation that the Senate give its advice 
and consent to the ratification of the proposed additional 
protocol.
                         VI. Committee Comments

    On balance, the Committee believes that this additional 
protocol is in the interest of the United States and urges that 
the Senate act promptly to give its advice and consent to 
ratification. The Committee has taken note of certain issues 
raised by the proposed additional protocol, and believes that 
the following comments may be useful to U.S. Treasury officials 
in providing guidance on these matters should they arise in the 
course of future treaty negotiations.
    The proposed additional protocol between the United States 
and Mexico extends application of the income tax treaty's 
information-exchange program to cover taxes imposed by sub-
Federal-level taxing authorities, such as States, counties, 
cities, etc., of either country. Thus, for example, the 
proposed additional protocol could require one country to 
obtain and provide information to the other country, if so 
requested, which might assist one or more of the other 
country's State or local taxing authorities in administering 
and enforcing the various taxes (e.g., sales and use taxes, 
property taxes, franchise taxes, income taxes, inheritance 
taxes) imposed by such authority.
    The income tax treaty exchange of information provision, as 
implemented by the TIEA, imposes on the competent authority of 
a country the obligation to use all legal means and its best 
efforts to execute a request for information from the other 
competent authority. Specifically, the two countries are to 
cooperate with one another to carry out the objective of 
facilitating the exchange of information between them on the 
assessment and collection of taxes, with a view to better 
enable them to prevent fiscal evasion and fraud, and to develop 
improved information sources for tax matters. As a general 
rule, if the competent authority of one country requests 
assistance as specified under the TIEA, the competent authority 
of the other country must execute the request, except to the 
extent that such execution would cause the requested competent 
authority to exceed its legal authority or would otherwise be 
prohibited by the laws of that other country. A competent 
authority is not required to comply with a request for 
assistance if the information requested is not obtainable under 
the laws of that country or in the normal course of its 
administration. In such cases where a request cannot be 
complied with in the manner requested, the two competent 
authorities are to consult with one another to establish 
alternative lawful means for rendering assistance.
    In addition, a competent authority of a country is not 
required to comply with a request for assistance to the extent 
that (1) such compliance would in its judgment be contrary to 
the country's national security or public policy; (2) the 
supplying of requested information would disclose any trade, 
business, industrial, commercial, or professional secret or 
trade process; (3) the request does not comply with the 
provisions of the TIEA; or (4) the supplying of the requested 
information would discriminate against a national of the 
country whose competent authority is receiving the request.
    The TIEA defines ``information'' for the purpose of 
information exchange as any fact or statement, in whatever 
form, that may be relevant or material to tax administration 
and enforcement, including (but not limited to) testimony of an 
individual, and documents, records or other personal property 
of a person or of one of the countries. Such information 
includes information to effect the determination, assessment, 
and collection of tax, the recovery and enforcement of tax 
claims, or the investigation or prosecution of tax crimes or 
crimes involving the contravention of tax administration. Under 
the TIEA, the competent authorities are to automatically 
transmit information to each other for this purpose, and are to 
determine the items of information to be exchanged and the 
procedures to be used.
    A competent authority is required to transmit spontaneously 
to the other competent authority information which has come to 
its attention and which is likely to be relevant to, and bear 
significantly on, accomplishment of the purposes of the 
exchange of information provisions. It is further required to 
take such measures and implement such procedures as are 
necessary to ensure that information is forwarded to the other 
competent authority.
    If information in the tax files of a competent authority is 
insufficient to comply with a request, the competent authority 
is to take all necessary measures to provide the requesting 
country with the information requested. The requested competent 
authority is granted the authority (1) to examine any books, 
papers, records, or other tangible property which may be 
relevant or material to the inquiry; (2) to question any person 
having knowledge of or in possession, custody or control of 
information which may be relevant or material to the inquiry; 
(3) to compel any person having knowledge or in possession, 
custody or control of information which may be relevant or 
material to the inquiry to appear at a stated time and place 
and testify under oath and produce books papers, records, or 
other tangible property; and (4) to take such testimony of any 
individual under oath. If information is requested of a 
competent authority, the competent authority is to obtain the 
information requested in the same manner, and provide it in the 
same form, as if the tax of the requesting country were the tax 
of the requested country and were being imposed by it.
    Extension of coverage of exchange-of-information provisions 
to taxes imposed below the Federal level is unprecedented under 
U.S. income tax treaties and tax information exchange 
agreements currently in force. No other proposed treaty 
containing such a provision has ever come before the Committee 
for its consideration. 1 As described above, the exchange 
of information provisions place considerable levels of 
responsibility on the competent authority of each country to 
respond to requests for assistance by the other competent 
authority. The Committee observes that it would be undesirable 
if extension of information-exchange responsibilities in such a 
manner in this or other future treaties placed an unmanageable 
administrative burden on the U.S. competent authority. The 
Committee also anticipates that these consequences will not 
arise, in light of the fact that the Treasury Department's 
Technical Explanation of the TIEA protocol indicates that the 
competent authorities will develop mechanisms to ensure the 
effective and efficient administration of these exchange-of-
information provisions.
    \1\ The Convention on Mutual Administrative Assistance in Tax 
Matters, among the member States of the Council of Europe and the 
Organization for Economic Co-operation and Development (OECD), applies 
to taxes imposed by political subdivisions and local authorities 
(Article 2, subparagraphs 1(b)(i) and 1(b)(iv), Senate Treaty Doc. 101-
6, November 8, 1989). The Convention entered into force on April 1, 
1995. The United States ratified the Convention subject to a 
reservation that the United States will not provide any form of 
assistance with respect to taxes imposed by or on behalf of 
possessions, political subdivisions, or local authorities. The proposed 
U.S.-Canada protocol, also ordered reported on July 11, 1995, extends 
the exchange-of-information provisions below the Federal level in a 
much more limited way than would occur under the U.S.-Mexico protocol. 
The U.S.-Canada protocol allows the United States to provide its sub-
Federal-level entities with information (in specified circumstances) 
that the United States has previously obtained for its own purposes, 
but does not permit the United States to request information on behalf 
of its sub-Federal-level entities.
    The Committee observes that the extension of coverage to 
sub-Federal-level taxes in this treaty may be viewed by other 
treaty partners as precedent setting and may lead to a desire 
for the inclusion of similar provisions in treaties with other 
countries where extensive sub-Federal-level taxes are imposed. 
However, the Committee observes that the Treasury Department 
has stated that relatively few current or potential treaty 
partners have extensive sub-Federal-level taxes. Consequently, 
this issue may not arise in many future treaty negotiations.
    In its hearings on the proposed additional protocol, the 
Committee requested the Treasury Department to provide 
additional information regarding the protocol. Relevant 
portions of Treasury's response to this inquiry, contained in a 
July 5, 1995 letter from Joseph H. Guttentag, International Tax 
Counsel, to Senator Thompson, are reproduced below:

    1. What will the administrative burdens of this Protocol be 
on the United States?
    The Internal Revenue Service will carry out the provisions 
of the Protocol. The IRS has participated in a dialogue with 
the Mexican competent authority and the Border States Caucus 
concerning how information flows to and from the states can be 
managed most efficiently. Upon ratification, the IRS will meet 
with the Border States Caucus and the Mexican competent 
authority to complete and implement the necessary procedures. 
This provision was agreed only after careful consideration of 
the administrative ramifications it would have on federal and 
state tax authorities. The IRS is well-equipped to administer 
this provision and we do not anticipate that performing its 
obligations under the Protocol will unduly tax the IRS' 
resources. Moreover, the provision of information by the 
Mexican tax authorities will reduce administrative burdens on 
tax authorities in the United States.
    2. Will Mexico be able to meet its administrative burdens 
under the Protocol?
    Yes. Mexico's ability to provide information has grown 
continuously since the inception of the information exchange 
program between the United States and Mexico, which dates back 
to the entry into force of the Tax Information Exchange 
Agreement in 1989. The Mexican tax authorities are committed to 
ensuring that the exchange contemplated under the pending 
protocol is accomplished properly and efficiently.
    3. Will such a provision be a precedent for future 
treaties?
    Like all tax treaty provisions, exchange of information 
provisions are tailored to meet the administrative needs of the 
tax administrators and taxpayers in the two countries. There 
are few current or potential treaty partners with extensive 
sub-federal-level taxes. Consequently, this issue is not likely 
to arise in many future treaty negotiations. However, it is 
possible that a similar provision would be included in a future 
treaty where, as in this case, the facts and circumstances 
indicate that it would be in the interests of federal and state 
tax administrators and taxpayers.
    4. Why does the Canadian protocol not contain a similar 
provision?
    The Canadian protocol makes tax information available to 
sub-federal jurisdictions to a more limited extent. Under the 
Canadian protocol, the IRS may provide information received 
from Canada to a state only when the information is relevant to 
taxes that are substantially similar to the federal taxes 
covered by the treaty (e.g., income taxes). The U.S. and 
Canadian negotiators determined that this provision was 
adequate to meet their needs.
                           VII. Budget Impact

    The Committee has been informed by the staff of the Joint 
Committee on Taxation that the proposed additional protocol 
would cause minimal increases in fiscal year receipts between 
1995 and 2000.

          VIII. Explanation of Additional Protocol Provisions

    For a detailed explanation of the proposed additional 
protocol, see the ``Treasury Department Technical Explanation 
of the Additional Protocol Signed at Mexico City, on September 
8, 1994, and Modifying 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 Washington, D.C., on September 18, 1992.''

               IX. Text of the Resolution of Ratification

    Resolved, (two-thirds of the Senators present concurring 
therein), That the Senate advise and consent to the 
ratification of the 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 Washington on 
September 18, 1992. The Additional Protocol was signed at 
Mexico City on September 8, 1994 (Treaty Doc. 103-31).