Brathwaite, Jonathan: Substantial Benefits from Pending Barbados-Mexico Tax Treaty for Inbound Outbound Investments of Mexican Resident

  • Substantial Benefits from Pending Barbados-Mexico Tax Treaty for Inbound Outbound Investments of Mexican Resident by Jonathan Brathwaite
    • Barbados is faring well as an International Financial Centre. After the G20 meeting in London Barbados was placed on the OECD?s white list of jurisdictions and after meetings with President Obama at the Summit of the Americas in April 2009 Barbados Prime Minister Hon David Thompson has confirmed that Barbados will not be on any blacklist issued by the United States of America.The pending Barbados-Mexico tax treaty, signed April 7, 2008, generally follows the OECD model treaty, but Barbados special incentive entities still have access to key articles under this treaty. The Barbados model is designed to enable the international investor flexibility in accessing key markets. The treaty is ideal for those considering significant investment into or out of Mexico.Once the treaty comes into Force 1 Jan 2010 Barbados will be removed from the Mexican blacklist of tax havens. Mexicans will also be able to establish Barbados based structures without being subject to CFC rules and without extra reporting requirements to the Mexican authorities.
      Resident(Article 4)Barbados law is based on English common law and residence in Barbados is based on Central Management and Control and likely reflects the ratio of the latest cases in this area including De Beers and more lately Holden.Given that in most common law countries like USA, Canada and UK, the law surrounding residence can be seen to be in a state of flux. Barbados? principle of Central Management and Control is as effective as any. No major jurisdiction has yet put residence on a statutory footing.The test criteria outlined in article 4 of the OECD model is well trodden in the case law and ?domicile, residence, place of incorporation, place of effective management, or any criterion of a similar nature.?, are concepts addressed in many of the key the tax law tests and cases addressing residence.Mexico?s use of ?seat of management? and ?effective management? for tie breaker purposes should cause no conflicts with the legal concept of ?central management and control.? All of these principles imply a level of substance. As economic substance increases the line between these concepts begins to fade.The treaty residence article directly refers to ?domicile? which is a key legal concept in the tax law of persons resident in Barbados. A person resident but not domiciled in Barbados is not subject to tax on foreign source income that is not remitted to Barbados. Mexico has reserved the right to use a ?place of incorporation? test for determining the residence of a corporation and failing that to deny dual resident companies certain benefits under the convention. Domicile of a Barbados resident person is not merely an approach used to make that person dual resident. Dual residence would likely require use of an entity incorporated in another jurisdiction. There are a number of Barbados entities that can be structured to be deemed non domiciled.

      Liable to tax
      Following on from the last point on a Barbados resident but non domiciled person, such a person would likely be able to obtain full treaty benefits although subject to the base erosion tests laid out in the treaty in article 28. It should be noted that a Barbados person resident but not domiciled is not necessarily a special incentive entity.

      Permanent Establishment [Article 5, Subparagraph 4(f)]
      The inclusion of paragraph seven(7) allows the usual exclusion of a PE where the person is acting in the other state through a broker, general commission agent or agent of any other status.Sub paragraph 4(f) is subject to the provision that, ?The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of subparagraph (f) of this paragraph.? The inclusion of this provision comes about because Mexico has reserved the right to exclude this provision from its treaties. The reason this reservation has been retained is so that Mexico could consider as PE to exist where a fixed place of business is maintained for any combination of activities in subpara (a) to (e) of paragraph 4. This in itself is not unreasonable nor unduly material to the use of this article.

      Miscellaneous Rules (Article 28)
      This article applies Limitation of Benefits to the treaty. This article is still relatively reasonable when considering the use of Barbados as an International Financial Centre.Generally, the benefits of the Treaty are available to residents of Barbados or Mexico who are individuals or entities. However, in the case of an entity which is a resident of either country, the benefits of the Treaty will only be available where:

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