Mexico’s new flat tax, the IETU, will go into effect on January 1, 2008. The new tax has caused anxiety among U.S. investors over the tax implications. Investors and tax professionals have worried that the new tax might not qualify as an income tax under Article 24 of the U.S.-Mexico tax treaty. This, in turn, would mean that U.S. investors would not be able to receive a credit against their U.S. income taxes for the IETU paid in Mexico—a classic case of double taxation.

But the IRS has stepped in with a welcome, if provisional, clarification. On December 10, the IRS issued Notice 2008-3, in which it said that it, too, had not determined whether the IETU qualified as an income tax under Article 24(1) of the Treaty, and that the agency was going to study the new tax in order to make a determination.

Most important, the agency said that if it later determined that the Tax Treaty did not apply to give U.S. taxpayers a credit against the IETU paid in Mexico, that claimed credits for payments or accruals of IETU made before the determination and anytime during the tax year that the determination is made would not be challenged by the agency.

Left unanswered by the recent announcement was the longer term question: If the IRS finds that the IETU does not qualify for foreign tax credit under the Tax Treaty, will it act to let U.S. investors avoid double taxation in future tax years? One can only say at this point that the issue has captured the agency’s attention.

Related Resources:

Special White Paper Report: Is the New Mexican Flat Rate Tax Creditable in  the US and Elsewhere?

Practical Latin American Tax Strategies 

Brazil Tax, Law & Business Briefing 

Mexico Tax, Law & Business Briefing   

Tax Audit Procedures in Mexico

Tax Strategies for Structuring Latin American Business Entities

Using Treaties and Holding Companies for Latin American Tax Planning

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