of the Code and the overall limitation on itemized deductions under section 68. According to the Technical Explanation, any amounts that would be treated as charitable contributions under the proposed treaty that are in excess of amounts deductible in a taxable year could be carried forward and deducted in a later year, subject to the same U.S. law limitations, if a carryforward of such amounts would be permitted under U.S. law.

In the case of an individual U.S. resident, Code section 170(b)(1) provides that the deduction for charitable contributions generally is allowed to the extent that the aggregate of such contributions does not exceed 50 percent of the individual's contribution base (i.e., adjusted gross income computed without regard to any carryback of a net operating loss) for the taxable year. Under the proposed treaty, contributions by such an individual to qualified Mexican charities would be deductible to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer's contribution base (taking into account only income derived from sources within Mexico) for the taxable year.

The Technical Explanation makes clear that the overall limitation on itemized deductions of individuals under Code section 68 would be applicable to charitable contributions that would be deductible under the proposed treaty. Under Code section 68, in the case of an individual whose adjusted gross income exceeds the "applicable amount" (generally $100,000 (adjusted for inflation since 1990)), the amount of itemized deductions (including charitable contributions) otherwise allowable for the taxable year are reduced by the lesser of (1) 3 percent of the excess of the adjusted gross income over the applicable amount, or (2) 80 percent of the amount of the itemized deductions otherwise allowable for the taxable year. The proposed protocol (paragraph 17(b)) reflects that the United States and Mexico agree that, except for churches or conventions or association of churches, Article 70-B of the Mexican Income Tax law and section 509(a)(1) and (2) of the Internal Revenue Code, as interpreted by the governing regulations and administrative rulings of Mexico and the United States, respectively, in effect on the date of signing of the proposed treaty, provide essentially equivalent standards for organizations within their coverage.83 Therefore, a finding by the tax authorities of Mexico that an organization qualifies under Article 70-B, or by the U.S. tax authorities that an organization qualifies under section 509(a)(1) or (2) (except for a church or convention or association of churches) would be accepted by the other country for the purpose of extending to that organization the benefits detailed above. If the competent authority of the other country, however, determines that granting such benefits would not be appropriate with respect to a particular organization or type of organization, such benefits could be denied after consultation with the competent authority of the country of residence of the organization.

83 Although the provisions of the proposed treaty that permit deductions for cross-border charitable contributions would not themselves be self-executing, this paragraph of the proposed protocol would bring those provisions into effect immediately upon entry into force of the proposed treaty.

Exemption from excise taxes

Under the proposed treaty, a religious, scientific, literary, educational or other charitable organization which is resident in Mexico and which has received substantially all of its support from persons other than U.S. citizens or residents would be exempt from the U.S. excise taxes imposed with respect to private foundations. Article 23. Other Income

This article is a catch-all provision intended to cover items of income not specifically covered in other articles, and to assign the right to tax income from third countries to either the United States or Mexico. Contrary to the corresponding articles in the OECD and U.S. model treaties, this article of the proposed treaty would not forbid taxation of a treaty country resident's other income by the other treaty country.84 On the contrary, it confirms that the treaty country of source would retain the right to tax the other income of a resident of the other treaty country.

As a general rule, items of income not otherwise dealt with in the proposed treaty which are derived by residents of one of the countries and arise in the other country would be taxable by the other country. An item of income is considered to be "dealt with" in the proposed treaty if an item in the same income category is the subject of provisions of an article of the treaty, whether or not a treaty benefit would be granted to that item. Examples of categories of income that are not dealt with in the proposed treaty, and thus would be subject to the provisions of Article 23, are lottery winnings, punitive damages, and cancellation of indebtedness income.

Article 24. Relief from Double Taxation

In general

One of the two principal purposes for entering into an income tax treaty is to limit double taxation of income earned by a resident of one of the countries that may be taxed by the other country. Unilateral efforts to limit double taxation are imperfect. Because of differences in rules as to when a person may be taxed on business income, a business may be taxed by two countries as if it were engaged in business in both countries. Also, a corporation or individual may be treated as a resident of more than one country and be taxed on a worldwide basis by both.

Internal rules regarding the relief from double taxation

United States

The United States taxes the worldwide income of its citizens and residents. It attempts unilaterally to mitigate double taxation generally by allowing taxpayers to credit the foreign income taxes that they pay against U.S. tax imposed on their foreign source income.

84 The other income articles of the model treaties provide as a general rule that items of income of a resident of one of the countries, wherever arising, that are not otherwise dealt with in the treaties, would be taxable only by the country of residence. This general rule would not apply where the income is attributable to a permanent establishment or fixed base in the other country.

A fundamental premise of the foreign tax credit is that it may not offset the U.S. tax on U.S. source income. Therefore, the foreign tax credit provisions contain a limitation that ensures that the foreign tax credit offsets U.S. tax on foreign source income only. This limitation generally is computed on a worldwide consolidated basis. Hence, all income taxes paid to all foreign countries are combined to offset U.S. taxes on all foreign income, subject to the separate limitation rules discussed below.

The limitation is computed separately for certain classifications of income (e.g., passive income, high withholding tax interest, financial services income, shipping income, dividends from noncontrolled section 902 corporations, DISC dividends, FSC dividends, and taxable income of a FSC attributable to foreign trade income) in order to prevent the crediting of foreign taxes on certain types of traditionally high-taxed foreign source income against the U.S. tax on certain items of traditionally low-taxed foreign source income. Also, a special limitation applies to the credit for foreign taxes imposed on oil and gas extraction income.

Foreign tax credits generally cannot exceed 90 percent of the preforeign tax credit tentative minimum tax (determined without regard to the net operating loss deduction). The 90 percent alternative minimum tax foreign tax credit limitation, enacted in 1986, overrode contrary provisions of then-existing treaties.

An indirect or "deemed-paid" credit is also provided. A U.S. corporation that owns 10 percent or more of the voting stock of a foreign corporation and receives a dividend from the foreign corporation (or an inclusion of the foreign corporation's income) is deemed to have paid a portion of the foreign income taxes paid (or deemed paid) by the foreign corporation on its earnings. The taxes deemed paid by the U.S. corporation are included in its total foreign taxes paid for the year the dividend is received and go into the relevant pool or pools of separate limitation category taxes to be credited. Mexico

Like the United States, Mexico taxes its residents on their worldwide income. Subject to certain limitations, Mexico grants a credit against Mexican income tax for foreign taxes paid by the taxpayer on foreign source income.

An indirect or "deemed-paid" credit also is provided in Mexico. A Mexican corporation that owns at least 10 percent of the capital of a foreign corporation and receives a dividend from the foreign corporation is deemed to have paid a portion of the foreign income taxes paid by the foreign corporation on its accumulated earnings. Earnings of a foreign subsidiary are not taxed by Mexico until distributed to the Mexican parent corporation.

Proposed treaty rules for the relief from double taxation

Credit for taxes paid to the other country

Part of the double tax problem is dealt with in other articles of the proposed treaty that would limit the right of a source country to tax income. Article 24 would provide further relief where both Mexico and the United States would otherwise still tax the same

item of income. This article would not be subject to the saving clause, so that the country of citizenship or residence would waive its overriding taxing jurisdiction to the extent that this article applies.

The proposed treaty generally would provide for relief from double taxation of a U.S. resident or citizen by the United States permitting a credit against its income tax for the income taxes paid to Mexico by or on behalf of that resident or citizen. Similarly, Mexico would grant to a Mexican resident a credit against its income tax for the income tax paid to the United States by such person. The credit mandated by the proposed treaty would be computed in accordance with the provisions of and subject to the limitations of the law of the country granting the credit (as those provisions and limitations may change from time to time without changing the "general principles hereof"). Thus, for example, the credit granted by the United States under the proposed treaty would be subject to the overall foreign tax credit limitation, the alternative minimum tax foreign tax credit limitation, and the limitations imposed on each separate foreign tax credit category. This provision is similar to that found in many U.S. income tax treaties.

The proposed treaty also would allow the U.S. deemed paid credit, subject to the "gross-up" rules of section 78 of the Code, to U.S. corporate shareholders of Mexican companies receiving dividends in any taxable year from those companies if the U.S. company owns 10 percent or more of the voting stock of the Mexican company. Similarly, the proposed treaty would allow the Mexican deemed paid credit to Mexican corporate shareholders of U.S. companies receiving dividends in any taxable year from those companies if the Mexican company owns 10 percent or more of the voting stock of the U.S. company.

The double taxation article provides that the following taxes would be considered income taxes and, thus, would be eligible for the foreign tax credit: the U.S. income taxes (excluding the accumulated earnings tax, the personal holding company tax, and social security taxes), the excise taxes imposed by the United States on insurance premiums paid to foreign insurers and with respect to private foundations, the income tax imposed by the Mexican Income Tax Law, and any identical or substantially similar taxes which are imposed by either country after the date of signature of the proposed treaty in addition to, or in place of, existing taxes.

In addition, the proposed treaty specifies that creditable taxes would include any profits tax imposed on distributions, but only to the extent such tax is imposed on earnings and profits as calculated under the tax accounting rules of the country of residence of the beneficial owner of the distribution. This provision is intended to assure that the United States would grant a credit to a U.S. shareholder of a Mexican corporation which pays Mexico's tax on distributed profits. That tax is imposed by Mexico to ensure that full 35-percent tax has been paid at the corporate level on corporate earnings.85 The tax is imposed on the distributing corporation, at the regular corporate tax rate of 35 percent, on the amount

85 Under Mexico's integrated tax system, no tax is imposed on shareholders with respect to the receipt of dividend distributions from Mexican corporations.

of a distribution that exceeds the corporation's income that previously has been subject to tax. According to the Technical Explanation, the purpose of limiting the credit for this tax by the extent to which it is imposed on earnings and profits in the U.S. sense is to ensure that creditability would be consistent with the prevailing U.S. principle of only allowing credits for those foreign taxes which are imposed on net income.

Under the proposed treaty, where in accordance with a provision of the treaty a Mexican resident would be exempt from Mexican tax on certain income it derives, Mexico would use the exemption method, rather than the credit method, of avoiding double taxation. In such a case, Mexico would be permitted to take into account the person's entire income, including the exempted income, in computing the tax rate to apply to the taxable portion of that person's in

come.

Source rules

In this article, for purposes of implementing the proposed treaty's foreign tax credit, source rules are provided for determining from which of the countries an item of income would be deemed to have arisen. Under these rules, income derived by a resident of one of the countries that may be taxed in the other country in accordance with the proposed treaty (other than solely by reason of citizenship) would be treated as arising in that other country. Except as provided in Article 13 (Capital Gains), however, the preceding rule would not override the source rules of the domestic laws of countries that are applicable for purposes of limiting the foreign tax credit.86

Special rules for U.S. citizens who reside in Mexico

In the case of a U.S. citizen residing in Mexico, the proposed treaty provides that with respect to items of income derived by that person which would be either exempt from U.S. tax or subject to a reduced rate of U.S. tax, Mexico would allow as a credit against its income tax, subject to Mexico's domestic foreign tax credit rules, only the tax paid (if any) that the United States would be permitted to impose under the proposed treaty (other than taxes that it could impose solely on the basis of the person's U.S. citizenship). For purposes of computing U.S. tax, the United States would allow as a credit against its income tax the income tax paid to Mexico after application of the credit described in the preceding sentence. The credit so allowed by the United States, however, could not reduce that portion of the U.S. tax that is creditable against Mexican tax under this special rule. For the exclusive purpose of relieving double taxation in the United States under these rules, the items of exempt or reduced rate income described above would be treated as Mexican source income to the extent necessary to avoid double taxation of such income.

To illustrate this provision, assume that a U.S. citizen who resides in Mexico (and is treated as a Mexican resident under the proposed treaty's tie-breaker rules for determining residency) re

86 Under Article 13, capital gains would be treated as foreign source to the extent necessary to avoid double taxation.