China and Mexico: The Real Winner May Be Hong Kong

Chinese President Xi Jinping visited Mexico in early June and met with the Mexican President Enrique Pe?a Nieto. Following their meetings, the two leaders released a statement saying that both were prepared to ?take their relationship to a new level? and to develop the existing trade relationship into a ?strategic partnership.?

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This suggests that both countries could form mutually beneficial commercial alliances in the form of joint ventures. For China and Hong Kong, that makes some sense because Mexico is a member of the North American Free Trade Agreement ? which also includes the United States and Canada. Therefore, the prospect of Chinese companies seeking partnerships with Mexican businesses to then sell onto the lucrative U.S. market looms large.

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But does it? If there was substance to these declarations of ?strategic partnership? then we would potentially be in the wonderfully ironic position of Chinese companies, through Mexican JVs, qualifying for the U.S.-led Trans-Pacific Partnership Agreement, a trade bloc that includes Mexico and Vietnam, among others, and is largely aimed at replacing China as the primary supplier of choice for certain products (such as textiles) for the U.S. market.

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Yet, sadly, I feel that is not going to happen. These sorts of meetings, in my opinion, are an excuse for political grandstanding and media exposure. As a result, they mean very little.

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Hong Kong the Winner?

While the prospect of Mexican-Chinese JVs to target the U.S. market may seem appealing to both, in actual fact, the Chinese side have little incentive to do so. Mexico has no double taxation agreement (DTA) with China, meaning that Chinese investors are subject to Mexican rates of corporate income tax (CIT) and related taxes with no treaty to offset these.

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Mexico has a higher rate of CIT at 28% than China at 25%. Although that doesn?t sound like a huge difference ? it is more than enough to eat into any available profit gains in such competitive markets. Mexico also levies immediate worldwide income tax claims on all residents ? something that is not likely to sit well with Chinese investors.

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That said about Mainland China, the news may yet be of use to Hong Kong?s business community. Hong Kong signed a comprehensive DTA with Mexico on June 18, 2012, which entered into force on March 7, 2013 and will have effect in Hong Kong for years of assessment beginning on or after April 1, 2014.

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Under the terms of the DTA, the current policy of double-taxing Mexican individuals who are resident in Hong Kong will end, and any tax paid in Mexico will be considered a tax credit against the tax payable to Hong Kong. The DTA also incorporates the Organization for Economic Cooperation and Development requirements for the exchange of tax information.

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Specifically, the DTA lowers rates of withholding taxes in the contracting state in which the income is derived, in respect of dividends, interest and royalties. While dividend income is only taxable in the country of the recipient, interest income can be taxed in both territories.

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But in the territory where the interest income arises, withholding tax will be capped at 4.9% if the beneficial owner is a bank, and at 10% when the recipient is the beneficial owner of the asset from which interest income is derived. If the recipient is the beneficial owner of royalties income, the withholding tax rate will be capped at 10%.?

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Action, not just words

The two leaders released a statement suggesting that Chinese-Mexican bilateral relations would enter into a new phase and were ?being upgraded.? Xinhua published the official statement through China Daily that, in condensed form, promised both sides ?will view their relations from a strategic and long-term perspective? and ?accommodate each other?s concerns.?

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Along with that are statements to ?maintain exchanges between high-level leaders and political parties,? as well as ?agree to increase mutual investment in key areas such as energy, mining, infrastructure and high technology.?

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Source: http://feedproxy.google.com/~r/cfoi/~3/dmYbXvr1qJk/china-and-mexico-real-winner-may-be-hong-kong

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