Breaking taboo, Mexico gov't aims to tax food, medicine

Fri Jul 26, 2013 8:36pm EDT

By Dave Graham and Miguel Gutierrez
    MEXICO CITY, July 26 (Reuters) - Mexico plans to boost its
tax coffers by an extra $50 billion a year with an overhaul that
aims to extend sales tax coverage,   close tax loopholes and
could impose charges on capital gains.
    Saddled with one of the weakest tax takes in Latin America,
President Enrique Pena Nieto will present Congress with a plan
by September to substantially improve revenues, including
divisive measures to apply value added tax (VAT) to some foods
and medicines, according to several people familiar with the
plans.
    The plans aim to improve Mexico's tax haul by about 4 
percentage points of gross domestic product (GDP), according to
two senior officials in Pena Nieto's Institutional Revolutionary
Party, or PRI. 
    That would yield nearly an additional $50 billion per year
for Mexico.
    Food and medicine are now subject to a zero rate of VAT, and
the plan currently foresees charging the levy on processed
foodstuffs in particular, with a range of staples like milk,
eggs, beans and tortillas to be excluded from the tax, the party
sources and two other lawmakers said.    
    Many basic foodstuffs could, however, be moved from a zero
rate of VAT to a formal exemption, saving the government
billions of pesos a year by closing a loophole that allows
producers to reclaim VAT on production costs, said Tomas Torres,
a member of the lower house finance committee who is a lawmaker
with the Green Party, a PRI ally.
    "The reform will seek to suppress special tax regimens, to
tax stock market operations and move from zero rates (of VAT) to
exemptions," Torres said.
 
    Mexico has long debated whether food and medicines should be
subject to VAT. The finance ministry estimates the government
loses out on revenues equal to 1.14 percentage points of GDP a
year due to the zero rate.
    Although Mexico has a balanced budget and optimism about the
government's reform agenda is drawing a surge in foreign
investment, ratings agencies say the skimpy tax base and oil
dependence have been hurdles to a sought-after upgrade,
especially as oil output has dropped by a quarter since 2004.
    Between 1990 and 2009 Mexico's tax take, excluding state oil
monopoly Pemex, fell from 12.7 percent of GDP to 10.7 percent, a
2011 study by Latin American Bank CAF showed. That gave Mexico
the worst tax take of the 18 countries CAF studied in Latin
America.
    In all of the countries surveyed, tax revenues as a
proportion of GDP rose during the two decades, apart from in
Venezuela and Mexico, the CAF investigation showed.
    Tax evasion among small contributors, or those earning less
than 2 million pesos a year, was about 96 percent in 2010,
costing more than 0.5 percentage points of GDP, according to
Mexican tax office data.    
    Experts estimate Mexico must boost its tax intake by 6 to 8
percentage points of GDP, or about $100 billion a year, to
reduce its reliance on oil revenues and fund increased
government spending.
    While in opposition during 12 years through 2012, the PRI
opposed levying VAT on food and medicine when it was proposed by
the then ruling conservative National Action Party, or PAN.
    After coming to power, Pena Nieto forged a cross-party pact
with the PAN and the leftist Party of the Democratic Revolution
(PRD) in a bid to push through a wide raft of reforms aimed at
boosting annual economic growth to 6 percent.
    The PRD has said it would not back VAT taxes on food and
medicine.
    The PRI does not have a majority in Congress, although it is
likely to receive support from PAN lawmakers to win the simple
majority needed to pass tax changes. However, in March the PRI
changed its party manifesto to enable a change in VAT policies.
    Mario Sanchez, a PAN lawmaker and head of the economics
committee in the lower house of Congress, said negotiations
would show whether his party could reach a deal with the PRI
once the bill was submitted, but he struck a positive note.
    "I don't think there's a big difference," Sanchez said,
referring to the two parties' respective approaches to how to
tackle the shortfall in Mexico's tax receipts. "The
consultations and proposals are very similar."
    The government is also seriously considering proposing
raising the top income tax rate to make wealthier individuals
and companies pay more, officials said. That could impose a new
top bracket as high as 37 percent they said.
    The bill will also include incentives to try and draw in
more of Mexico's vast informal economy into the tax fold. The
Labor Ministry estimates that the government misses out on tax
revenue equal to 4 percentage points of GDP due to the size of
the informal economy. 

 (Reporting by Dave Graham and Miguel Gutierrez; Editing by
Simon Gardner and Doina Chiacu)
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