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 News Around the Republic of Mexico | June 2007 
Mexico's Calderon to Hit Business in Tax Reform Plan
 Jason Lange & Greg Brosnan - Reuters
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| | Mexican President Felipe Calderon's fiscal reform plan presented to Congress includes a flat tax on businesses, and calls for a tax of 2 percent on monthly cash bank deposits of more than 20,000 pesos. |
Mexico City - Mexican President Felipe Calderon wants to close off corporate tax loopholes in a long-awaited plan sent to Congress on Wednesday meant to plug fiscal gaps as economically vital oil reserves falter.
Struggling with one of the lowest tax takes in Latin America, the plan calls for a 19 percent flat rate on companies and tries to bring small cash-in-hand businesses into the tax system.
"This reform would allow us to generate by 2012 ... almost 30 percent more tax revenues than we do at the moment," Calderon said in a speech.
The plan would increase the tax intake by 2.8 percent of gross domestic product by 2012, almost enough to offset rising costs and expected lost oil sales, the government said.
Mexico's peso currency dropped 0.65 percent and stocks retreated 1.6 percent, partly because some investors had hoped for more from the reform proposal, handed to lawmakers by Finance Minister Agustin Carstens.
PATCHING HOLES
Revenues from crude production have long funded about a third of Mexico's budget, but a key oil field is drying up and state energy monopoly Pemex is being starved of funds for exploration in deeper waters of the Gulf of Mexico.
Economists have long warned Mexico is headed for financial disaster if it is unable to find new sources of income.
"This about patching holes in the ship and patching holes in the ship is a positive measure," said Gray Newman, Latin America economist for Morgan Stanley. He added the reform could help Mexico run a significant budget surplus by 2012.
Winning congressional approval for the tax package is a top priority for Calderon, who won last year's presidential elections by less than a percentage point, overcoming opposition claims of vote fraud.
He said he hoped Congress would approve the bill by September, which would open the way for the president to tackle politically difficult reforms in the energy sector.
At the heart of the tax package is a new gradually-introduced flat rate of 19 percent on companies to close tax loopholes.
Under the reform, companies would pay either the flat tax or their income tax, whichever is higher.
Carstens said it would not mean a heavier burden for many companies, but would hit "the ones who are using elusive practices or are not paying enough because of exemptions."
The Mexican government says its tax take is around 10 percent of gross domestic product, barely half the level of other major Latin American economies like Chile and Brazil.
Calderon also wants a 2 percent tax on monthly bank cash deposits of over 20,000 pesos ($1,850). That is aimed at small businesses such as hairdressers and auto body shops that often fall outside the tax system.
The government, which also wants to slap a 20-percent tax on gaming, shied away from applying value-added taxes, or VAT, to food and medicine, seen as affecting millions of poor.
Many economists welcomed the new package although some said it did not go far enough in widening the base of taxpayers.
"From what I have seen so far these are very superficial reforms," said Cesar Castro, chief analyst at Mexican investment consultants Capem. "To diversify income sources they would have had to change VAT, which is being left as is."
The ruling conservative National Action Party is the biggest group in Congress, but Calderon will need help from opposition lawmakers to pass the tax bill.
His predecessor Vicente Fox failed to get any meaningful economic reform through a hostile Congress during six years in office. Fox's attempt at tax reform was brought down by stiff opposition to charging VAT on food and medicines.
If Congress successfully increases revenues, many investors expect credit ratings agencies will upgrade Mexico's debt rating, which would lower the country's borrowing costs. ($1=10.808 Mexico pesos)
(Additional reporting by Frank Jack Daniel and Noel Randewich) |
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