| COMPETENT
AUTHORITY MUTUAL AGREEMENT |
| The Competent Authorities of the United
States and Mexico hereby enter into the following mutual agreement (“the
Agreement”), which supersedes and clarifies the Competent Authority
Mutual Agreement entered into on Aug. 26, 2005, Announcement 2005-72, I.R.B.
2005-41. The Agreement specifies the cases where fiscally transparent entities
are entitled to treaty benefits and clarifies the procedure for claiming benefits
from Mexico. The Agreement is entered into under paragraph 3 of Article 26
(Mutual Agreement Procedure) of 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 Taxes
on Income, along with a Protocol, signed on September 18, 1992, and as amended
by the Additional Protocol signed on September 8, 1994, and the Second Additional
Protocol signed on November 26, 2002 (the “Treaty”).
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| 1) Eligibility of fiscally transparent
entities for treaty benefits |
| Paragraph 2(b) of the Protocol provides: |
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For purposes of paragraph 1 of Article
4 it is understood that:
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* * * * * |
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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;
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| The Competent Authorities agree that in
applying paragraph 2(b) of the Protocol, it is understood that income from
sources within one of the Contracting States received by an entity that is
organized in either of the Contracting States, or a third state with which
Mexico has in force a comprehensive exchange of information agreement, and
that is treated as fiscally transparent under the laws of either Contracting
State will be treated as income derived by a resident of the other Contracting
State to the extent that such income is subject to tax as the income of a
resident of the other Contracting State.
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| For Mexican tax purposes, a fiscally transparent
entity organized in the United States, such as a U.S. limited liability company
(LLC) that has elected to be treated as a partnership for federal tax purposes,
will be treated as a U.S. resident for purposes of paragraph 2(b) of the Protocol,
and entitled to claim treaty benefits, to the extent that the income it derives
is subject to tax as the income of a U.S. resident in the hands of its members,
owners, partners or beneficiaries. Similar rules will apply to a U.S. subchapter
S Corporation, an LLC that is disregarded as an entity separate from its owner,
or a U.S. grantor trust.
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| For example, if a U.S. LLC that is treated
as a partnership for U.S. federal tax purposes receives a royalty payment
from Mexico, and the U.S. LLC has two members with equal interests in the
LLC, one Mexican and one U.S., the LLC may claim treaty benefits as a U.S.
resident with respect to 50% of the royalty payment because 50% of the payment
is subject to tax in the United States in the hands of a U.S. resident member.
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| Consistent with this agreement, if a U.S.
LLC that is treated as a partnership for U.S. federal tax purposes owns 99
percent of the stock of a Mexican corporation, and the U.S. LLC has five members
with equal interests in the LLC, under paragraph 4 of Article 13 (Capital
Gains), the gains derived by the LLC from the alienation of such shares may
be taxed in Mexico because the LLC had, at any time during the 12-month period
preceding such alienation, a participation, directly or indirectly, of at
least 25 percent in the capital of the company.
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| Mexico agrees to apply this Agreement
with respect to amounts paid to an entity created and subject to the laws
of a third state or jurisdiction only where such third state or jurisdiction
has in force a comprehensive exchange of information agreement as provided
in Mexican tax provisions and such information is effectively exchanged. The
following is the current list of countries that Mexico has a comprehensive
exchange of information in force. Such a list is published under Mexican administrative
regulations and may be amended from time to time.
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Belgium
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Canada
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Korea
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Israel
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Spain
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France
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Italy
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Norway
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Netherlands
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Singapore
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Sweden
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Finland
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Chile
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Ecuador
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Romania
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Czech Republic
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| Accordingly, if an LLC organized in one
of the states listed above receives an interest payment from Mexico, and the
LLC has two member owners with equal interests in the LLC, one third jurisdiction
resident and one U.S. resident, the LLC may claim treaty benefits as a U.S.
resident with respect to 50% of the interest payment because 50% of the payment
is subject to tax in the United States in the hands of a U.S. resident member.
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| 2) U.S. Residency Certification
for LLCs and other fiscally transparent entities |
| A LLC or other entity organized within
or without the United States that is treated as a partnership for U.S. tax
purposes may certify U.S. residence for treaty purposes by obtaining 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 includes a list of members of the LLC that are residents of the United
States for U.S. federal tax purposes. The Form 6166 will inform the withholding
agent to contact the LLC directly to provide information regarding the allocation
of a particular payment to a specific member.
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| A LLC or other entity organized within
or without the United States that is disregarded as an entity separate from
its owner for U.S. federal tax purposes may certify U.S. residence for treaty
purposes by obtaining a Form 6166 that provides that the LLC is a branch,
division, or business unit of its single member owner, and that such single
member owner is a resident of the United States.
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| A U.S. corporation that has made an election
to be treated as an S Corporation for U.S. federal tax purposes may certify
U.S. residence for treaty purposes by obtaining a Form 6166 certificate of
residence in a manner similar to that of a partnership. A Form 6166 confirms
the filing of an information return, Form 1120S, U.S. Income Tax Return for
an S Corporation, as required for a domestic S Corporation, and includes a
list of shareholders that are residents of the United States for purposes
of U.S. taxation.
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| 3) Effective dates |
| Upon signature by both competent authorities,
this Agreement is effective with respect to Mexican source payments made to
Mexican or U.S. entities to the extent the Mexican statute of limitations
is open for such payments. This Agreement is effective with respect to Mexican
source payments made to entities organized in third countries or jurisdictions
identified in the Agreement as of January 1, 2006.
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| Agreed to by the undersigned Competent
Authorities:
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| Robert H. Green U.S. Competent Authority |
Ana Bertha Thierry Mexican Competent Authority |
| December 22, 2005 |
December 22, 2005 |
