The Internal Revenue Service and the Treasury Department are evaluating the single-rate business tax recently adopted by Mexico to determine whether it can be credited under the terms of a treaty aimed at avoiding double taxation.

One of the treaty's articles provides that the U.S. allow a credit for income tax paid to Mexico by or on behalf of a U.S. resident. Taxes described in the treaty are treated as eligible for the credit, including those imposed by Mexico's Income Tax Law and any substantially similar taxes imposed in addition to, or in place of, the taxes listed.

The IRS and the Treasury Department believe that the provisions, design and operation of Mexico's new tax, known as the impuesto empresarial a tasa unica, including its interaction with Mexico's regular income tax, require further study in order to determine whether the IETU is a creditable income tax.

Pending the conclusion of this study, the IRS said it would not challenge a taxpayer's position that the IETU is eligible for a credit under the treaty. The IRS notice is effective for the IETU paid or accrued on or after Jan. 1, 2008, the date when the IETU goes into effect.

Any change in the foreign tax credit treatment of the IETU as a result of the study will apply only to the IETU paid or accrued in taxable years beginning after the date that further guidance is issued.

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