The first tax treaty between Australia and Mexico was signed on 9 September 2002. The treaty also includes a protocol which was signed at the same time. The following is a summary of the key features of the tax treaty.
Date of effect
For withholding taxes, the convention has effect in relation to payments made on or after 1 January 2004.
For other taxes covered, the convention has effect in respect of income, profits or gains of years of income beginning on or after 1 July 2004.
Business profits
A limited 'force of attraction' rule is included in the Business Profits Article1 in accordance with Mexico's reservation to the OECD Model. This rule provides that:
where a permanent establishment exists in one country, business profits derived by an enterprise of the other country from the sale of goods directly by its head office situated in the other country may be taxed in the first country, provided that those goods are similar to the ones sold through that permanent establishment.
However, this rule does not apply where the sale of those goods was carried out in that manner for bona fide commercial reasons and not merely to obtain a benefit under the treaty.
The Protocol inserts a provision into the Business Profits Article to ensure that profits derived by a non-resident beneficiary through a permanent establishment of a trust can be taxed in the country where the permanent establishment is located.
Another provision in the Protocol2 ensures that Australian residents who do not have a permanent establishment in Mexico are not subject to the Mexican assets tax3. However, this exclusion does not apply to assets covered by the definition of royalties that are used by a Mexican resident.
Dividends
The treaty lowers the maximum rate of dividend withholding tax from 15%4 to nil where the dividends are franked (that is, are paid out of profits which have borne the normal rate of company tax)5 and are flowing to a company which directly holds at least 10% of the voting of the paying company.
However, the Protocol6 provides for the Mexican corporate tax rate of 32% to apply where dividends have not been paid out of the 'net profit account' (that is, the company makes a distribution out of profits that have not been subject to company tax in Mexico).7
Interest
The treaty limits the general rate of source country taxation on interest to 15%8. This rate is lowered to 10% where the interest is derived by or from a bank, from certain bonds or securities, or from credit sales of machinery or equipment. No source country taxation will apply to interest derived from the investment of official foreign exchange reserve assets by the Government of either country, its monetary institutions or a bank performing central banking functions.
Royalties
The treaty reduces the maximum rate of source country taxation on royalties from the domestic rate of 30% to 10%. Also, payments for the use of industrial, commercial or scientific equipment and radiofrequency spectrum licences9 are treated as royalties.
Capital gains
The treaty includes a comprehensive Alienation of Property Article for the taxation of gains from the alienation of property. In accordance with Australia's treaty practice, a 'sweep-up' provision allows the source country to tax capital gains not otherwise dealt with in the treaty. Australia can continue to tax, for instance, capital gains derived by Mexican residents on the disposal of Australian entities.
A 'departing resident' provision is also included to give taxpayers the option to pay capital gains tax on certain assets only in their new country of residence.
'Most favoured nation' clause
The Protocol10 provides that, if Australia agrees to include a Non-Discrimination Article (NDA) in a subsequent tax treaty with another country, then Australia also has a 'most favoured nation' (MFN) obligation to enter into negotiations with Mexico to provide the same treatment given to that other country.
The Protocol11 also includes an 'automatic' MFN clause in relation to the Exchange of Information Article (EOI). As a result, if Australia agrees in a future tax treaty to extend EOI to value-added taxes imposed by either country, such an extension shall automatically apply for the purposes of the Mexican tax treaty. Australia has not yet triggered this MFN clause.
What to read/do next
Further information relating to this and other Australian Tax Treaties can be found on the Treasury Website
Visit the International tax agreements homepage
1 See Article 7.1(b).
2 See Protocol item 11(a).
3 The Mexican assets tax operates as an alternative minimum income tax under which resident and non-resident companies are obliged to pay the tax if, and to the extent that, it exceeds the companies' income tax liability for a given tax year.
4 Note: Australia's domestic law dividend withholding tax rate of 30% is thus reduced by the treaty.
5 Note, this accords with Australia's domestic law which currently does not subject fully franked dividends to withholding tax.
6 See Protocol item 5.
7 Note: In Mexico, dividends are not subject to any tax at the shareholder level, only at the corporate level and Mexico currently imposes no withholding tax on dividends paid to residents or non-residents.
8 Note: However, Australia's domestic law interest withholding tax rate will apply as it is only 10%.
9 See Protocol item 9(c).
10 See Protocol item 11(b).
11 See Protocol item 11(c).
Last Modified: Friday, 21 December 2007