By Miguel Gutierrez, Michael O'Boyle and Dave Graham
MEXICO CITY Oct 31 Mexico's Congress on
Thursday passed a package of measures aimed at bolstering the
country's weak tax revenues, but only after watering down a plan
that is expected to have a moderate impact at best.
The bill, which includes higher taxes on the rich as well as
levies on junk food and stock market gains, is a central plank
of an economic program spanning energy to telecoms that aims to
ramp up growth in Latin America's No. 2 economy.
Facing a Thursday deadline, the ruling Institutional
Revolutionary Party (PRI) pushed the package through with the
help of leftist lawmakers, making final tweaks in the Senate to
pare back a planned income tax increase.
The lower house then gave final approval to the bill that
President Enrique Pena Nieto is now expected to sign into law.
Mexico has the lowest tax revenue in the 34-nation
Organisation for Economic Co-operation and Development (OECD),
restricting its ability to spend on health, infrastructure and
social programs needed to boost living standards and growth.
Before the bill was presented last month, senior PRI
officials said it would seek to raise the tax take by 4 percent
of gross domestic product. Yet even before the Senate changed
the bill, the government was admitting it was likely to bring in
added revenues of barely 2.7 percent of GDP by 2018.
"The (reform) was reduced to a simple tax code focused on
more, bigger taxes for those who have always paid," said Alfredo
Coutino, Latin America director for Moody's Analytics.
The government stepped back from bolder reform after the
economy suffered a shock contraction in the second quarter, and
sidestepped the unpopular option of levying sales tax on food
and medicine, which could have substantially improved revenues.
Lawmakers in the conservative National Action Party (PAN)
condemned the bill as a menace to Mexico's stumbling economy and
this week walked out of the Senate in protest when their
attempts to change the plan were ignored by the PRI.
The political spats over the tax plan have heightened
tensions between the parties just as the government seeks to
push major reforms of the oil industry and the telecoms market.
The PRI lacks a majority in Congress and is banking on PAN
help to pass the energy reform, which aims to lure investment to
the state-controlled sector and reverse sliding oil output.
The leftist Party of the Democratic Revolution (PRD), which
gave the PRI enough votes to pass the fiscal reform, opposes
breaking the grip of state oil monopoly Pemex on the
This month the PRI, supported by the PRD, modified the
fiscal reform to lift top income tax rates, placing more of the
burden onto the wealthiest in Mexico, who include telecoms mogul
Carlos Slim. Slim began 2013 as the world's richest man.
The top income tax rate stands at 30 percent. The reform
sets out a sliding scale of higher rates capped at 35 percent
for those earning more than 3 million pesos ($233,000) a year.
On Thursday PRD and PRI lawmakers rolled back a plan to
apply a 31 percent income tax rate on people earning between
500,000 pesos and 750,000 pesos. They will now stay at 30
percent and a 32 percent rate kicks in above 750,000 pesos.
Lawmakers also increased the percentage of workers' benefits
that companies can deduct from their total tax bill. Separately,
the Senate voted to raise a levy on high-calorie foods including
chocolate from 5 percent to 8 percent.
The bill had already been scaled back this month when the
lower house threw out plans to apply sales tax to rents,
mortgages, property transactions and school fees.
Tweaks to the tax bill in the lower house in mid-October
also created a shortfall in the budget plan for next year.
Lawmakers then raised the government's oil revenue estimate
and made other changes to close the gap.
Those new estimates were confirmed by Congress late on
Thursday along with a 2014 budget deficit forecast of 1.5
percent of GDP as lawmakers passed the budget revenue plan for
next year. The full budget must be passed by mid-November.
PRI lawmakers concede in private that the tax reform leaves
Mexico with plenty of work to do if it wants to generate more
public funds to help tackle chronic social problems. Nearly half
of Mexico lives in poverty.
Mexico's total tax take, a big chunk of which comes from
Pemex, was less than 19 percent of GDP in 2010, compared with
nearly 26 percent for Turkey, around 31 percent in Greece and 36
percent in Germany, OECD data shows.
After the tax bill, the focus will turn to Pena Nieto's
efforts to reform the oil industry, which aims to bring in
private capital from oil majors with profit-sharing contracts.
The PAN argues Pena Nieto's model does not go far enough to
attract investment, and lawmakers in the party have pledged to
pressure the PRI into providing greater incentives to oil
companies, such as production-sharing contracts.
That could put the president under attack from leftists who
accuse the government of wanting to sell out Mexico's oil wealth
to foreigners, and could spark large protests.
The government hopes the energy reform will spur major
investment and boost economic growth. Analysts say that could
help the country's international credit rating.
Mexico is just one rung short of A territory on the scales
of two ratings agencies, Fitch and Moody's. Among the major
Latin American economies, only Chile is rated in the A category.
Standard & Poor's has Mexico two notches below A.