In Uncategorized on 02/01/2019 at 15:09

Judge Mark V Holmes sure gets ‘em…the off-beat conundra that delight the blogger. So here’s Emilio Torres Luque, cross-border trucker and wife Gabriela, and their C Corp (which Emilio claims is his alter ego), Emilio Express, Inc., et al., Docket No. 14949-10, filed 2/1/19.

Emilio has permits to ply his trucks between Tijuana and a certain distance into the USA. He and Gabriela have US green cards, but are also Mexican nationals and claim to have permanent homes available to them both in Mexico and the US.

Emilio and his C Corp have somewhat idiosyncratic tax filings in both countries, but IRS is nailing Emilio and C Corp for around half-a-million in total deficiencies on their US income taxes for the four (count ’em, four) years at issue.

Emilio and C Corp claim they’re really Mexican all the way, and thus can be taxed only by Mexico. Their basis for their claim is 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, Mex.-U.S., Sept. 18, 1992, S. Treaty Doc. No. 103-7 (amended by Protocols, Sept. 8, 1994; Nov. 26, 2002).

Emilio and C Corp petition the SNOD, but since they claim treaty benefits, Judge Holmes holds everything up while the competent authorities hash it out. “(This term might sound odd to those outside the international-tax cloister, but is simply an office within the Treasury Department that is enabled by the Treaty to communicate informally with its counterpart in the Mexican government to try to resolve disputes about taxes owed by the same taxpayer of these two sovereigns.).” Order, at p. 4.

Emilio and C Corp first filed with Mexico showing tax due, but then amended to show they had a Mexican $28K refund coming.

“An agent of the IRS’s competent authority wanted to know what the effect of these amended returns would be, and she wrote her Mexican counterpart to ask. He replied that ‘I can tell you that in terms of article 32, paragraph 4 of our Federal Fiscal Code, an amended income tax retum has the effect to replace the normal income tax return, prevailing over the normal income tax return.’ Other correspondence confirmed that this meant the original payment of more than Mex$28,000 was now an asset to [Emilio], available as an offset or refund.” Order, at p. 4.

So the US competent authority concluded Emilio wasn’t taxed on anything in Mexico.

Emilio claims he’s a Mexican resident, and when Mexico accepted his amended returns he doesn’t owe the US anything.


“Let us turn first to the language of the Treaty. What is its purpose — is it to determine residence in ambiguous situations like this, or is it something else? The submittal letter from the Secretary of State to the President that accompanied the Treaty says that the Treaty’s purpose is to ‘cooperate to resolve issues of potential double taxation and to exchange information relevant to implementing the Convention and the domestic laws imposing the taxes covered by the Convention.’ Article 26 sets up the mutual agreement procedure that the parties in these cases used. See Treaty, supra note 1, art. 26. That Article states that the procedure is to be used when there is ‘taxation not in accordance with the provisions of this Convention.’ Id. at art. 26, para. 1.

“There is nothing in the Treaty that creates exemptions from taxation for income based on residence as the Treaty defines it. What the Treaty does is embody an agreement between the two countries that each shall relieve residents of the other from double taxation on the same income through a system of tax credits. This is set out in Article 24, where both countries agree that “a Contracting State shall allow to a resident of that State . . . as a credit against the income tax of that State: a) the income tax paid to the other Contracting State by or on behalf of such resident or citizen . . .” Id. at art. 24, para 1, subpara. a.” Order, at p. 9. (Citation omitted).

And here’s as clear an explanation of the rationale of double taxation treaties as anything I’ve yet read.

“[Emilio’s] argument is based on an [sic] that, if they qualify as residents of Mexico under the Treaty, all of their income can be taxed only by Mexico and not by the United States, even though they are green-card holders. The Court can sympathize with them a bit — it certainly might seem that relief from double taxation could be more easily done by a treaty allocating to either Mexico or the United States the right to tax particular taxpayers on particular sorts of income. But that is not how the Treaty is set up — it is set up instead to allow both countries to subject to their tax law the entire income of the same taxpayer as long as a system of credits is in place to prevent double taxation.

“And, if the purpose of a tax treaty exercised any pull over the interpretation of its language, one must consider the advantages of such a credit system over an exemption system. Under an exemption system, two residents of the same country with the same amount of income could be subject to different effective rates of taxation — a resident with low-taxed foreign income would be subject to less total tax than would a resident with purely domestic income. (And that would be the situation with [Emilio] and their San Diego neighbors.) With a system of credits in place based on tax paid, there is no such advantage.” Order, at pp. 9-10.

All the treaty does is give Emilio credit for any tax he paid Mexico. As he paid none, all his US income is taxable by US law.

So the treaty only provides that two single tax returns don’t equal double taxation.

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