A look at the Philippines-Mexico double taxation agreement

The Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) No. 58, 2018 on the Agreement for the Avoidance of Double Taxation on income tax between the Philippines and Mexico, which has entered into force last April 18, 2018. The Agreement was signed in November 17, 2015 between President Benigno Aquino and President Enrique Pena Neto of Mexico and was just ratified by the Philippine Senate last February 19, 2018. The Agreement shall have effect on income that arises in the Philippines beginning January 1, 2019.

The agreement is properly called a “double taxation agreement” or DTA but is more popularly known as a “tax treaty”. Before we go into the salient provisions of the Philippines-Mexico DTA, it would be worthwhile to know what is a DTA, and what is its purpose.

Let us assume that Mr. X, a Philippine citizen, provides consultancy services to a company in Mexico. Without going into the details of the Philippines-Mexico DTA, we can safely say that any income received by Mr. X for service rendered, may potentially be subject to Philippine taxes (Mr. X being a Philippine citizen) and Mexican taxes (as the income is derived, or has its source from Mexico). As the same income is subject to tax under two separate jurisdictions, “double taxation” arises. Thus, a DTA is an agreement signed by two countries to avoid, or if not, minimize double taxation.

The benefits that a DTA brings, especially to international trade, cannot be overemphasized. From our illustration above, the effects of double taxation, if left unchecked, will be to hamper the efficient flow of cross-border transactions. Specifically, Mr. X will feel safer in transacting business in the Philippines to avoid contending with potential tax issues from two separate tax jurisdictions. Countries (aka “contracting states”), in this case, the Philippines and Mexico, will then find it to their best interest to enter into and conclude as much DTAs as they can to address the issues of double taxation.

With that, we look into the salient provisions of the Philippines-Mexico DTA:

Dividends shall be taxed at the following rates:

5 percent if the beneficial owner is a company that directly holds at least 70 percent of the capital of the entity paying the dividends;

10 percent if the beneficial owner directly holds at least 10% of the capital of the entity paying the dividends;

15 percent in all other cases.

Save for a few exceptions, interest shall be taxed at 12.5 percent if the beneficial owner is a resident of the other contracting state.

Royalties shall be taxed at 15 percent if the beneficial owner is a resident of the other contracting state.

In the sale of shares or other participation rights, a transaction shall be exempt from capital gains tax if the sale takes place between affiliated companies to the extent that the consideration received by the transferor consists of shares of stock of the transferee, or of another company that owns at least 80 percent of the voting rights and value of the transferee, provided certain conditions are met.

The gains from the sale of shares, interests, or other rights in the capital of a company shall be taxable, if the seller has held, together with related persons, at least 20 percent of the capital of the company at any time during the 12-month period preceding the sale.