Friday, March 20, 2009

Mexico asks for tax information from the US

We have just been sent a fascinating (subscription-only) article in the publication Tax Notes International, entitled "Mexico Seeks Exchange of Certain Bank Information With United States".

It consists of the text of a letter sent by top officials from the Mexican finance ministry to Tim Geithner, US Treasury secretary, in which Mexico is requesting that the US provide it with key information on income on bank deposits by Mexicans with accounts in the U.S.

First, some excerpts from the letter, which is, if you follow these things, a remarkable development.

"I believe that one of the key elements of information that Mexico and the United States should begin sharing is the one pertaining to interest paid by banks of one country to residents of the other.
. . .
Due to the fact that the United States does not tax interest income paid by banks to non-resident aliens, and both countries do not have a solid and reliable mechanism to verify the actual residence of foreign depositors, we simply are allowing both the tax avoiders and the criminals to move their money untaxed and benefit from it.

As you are aware, Mexico and the United States regularly exchange information, on a case-by-case basis, in accordance to our bilateral Tax Treaty. We also exchange bulk information on interest payments (between corporations), dividends and royalties. However, we do not exchange information on interests paid by banks from one country to residents of the other country.
. . .
I truly believe that we should enhance our cooperation and strengthen our capacities to protect our peoples and wealth."


This marks a real break from the past. As American right-wingers have long acknowledged, the U.S. is a tax haven in that it protects dirty money flowing into it with secrecy. In the past, countries like Mexico kept quiet about this little problem, starving them of tax revenues, because the governments were so beholden to the tax-evading élites that they were powerless to act.

The TJN correspondent who sent us this article remembers sitting next to a top Mexican official at a dinner a while ago, who told him he had once tried to do something about capital flight but had been prevented from doing so. The correspondent said that the fact that the Mexican Government is moving on this issue evidences three major things:
  • The situation within the Mexican Government has changed substantially.
  • The present international situation, in which the movement toward information exchange and the override of bank secrecy in tax matters has become a major issue, is taking on a significant momentum.
  • The South is waking up.
It is also worth noting that under the U.S. Internal Revenue Code, U.S. banks which take deposits from Canadian residents have to provide information (via the US Internal Revenue Service) to the Canadian Government about those deposits and the interest on those deposits. (For tax law geeks: Code section 1.6049-4(b)(5) and 1.6049-(8)). This exchange of information is automatic. But the North American Free Trade Agreement (NAFTA) does not guarantee this for Mexico.

One more thing. The letter to Geithner ends with this:

"It has been a pleasure meeting with you today."

That suggests to us that the official raised this in a chat with Geithner, received a warm response, and was emboldened to compose this letter. We may be wrong - this is just a guess. But if so, the positive implications could be colossal.

(( update: a correspondent added this, in an email on March 20:

(1) "The February 9, 2009 letter from the Mexican Government stresses the use of bank accounts in the United States not only for tax evasion, but also for other illegality such as organized crime, money laundering and drug proceeds. Note the "intertwining" of tax issues with money laundering and other crimes.
(2) I believe that a "new bilateral legal instrument" will be developed. Mexico and the US have an exchange of information agreement signed in November 1989 which entered into force in January 1990, and an income tax treaty signed in September 1992 which entered into force in December 1993, and there have been subsequent protocols. Reviewing the relevant clauses, there is no clear override of bank secrecy clause as in the standard OECD and UN Model income tax treaties, and the model OECD TIEA. Therefore, it may be that a new clause will be developed for this purpose.
(3) Sometime between 2003 and 2005, I had mentioned the US-Canada treatment to [a senior Mexican tax official whom our correspondent named] and I had sent to him a copy of the relevant regulations in the US Internal Revenue Code, but at that time he told me that it was "not possible" to get Mexico to do anything about that, although he was personally interested in the matter."
))

1 Comments:

Anonymous Anonymous said...

This is more than Tax Justice : it is poetic justice. Imagine if France and UK actually handed over to Panama assets stolen by former strongman Manuel Noriega. That is why the entire anti-tax haven ploy is a one-way street for the benefit of European and US banking centers.

4:32 pm  

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