Mexican Assembly Dilutes Budget Proposals

by Mike Godfrey, Tax-News.com, Washington

21 October 2009

Mexico’s lower house has voted for a diluted version of President Felipe Calderón’s proposals for broadening the tax base for the 2010 budget.

Calderón’s plan for an additional 2% on VAT on all goods, including food and medicine, was scaled down to a 1% increase to 16% excluding food and medicine. Commentators have advised Reuters and Bloomberg that this is not enough to justify maintenance of the Fitch and Standard & Poor's ratings. After weeks of fluctuations based on speculation on whether the budget measures would pass the lower house, the Mexico peso fell sharply on fears that the proposed tax increases would be insufficient to reduce the country's dependence on declining oil revenue and avoid a downgrade of the country's debt.

The following tax increases were also approved in the 2010 Budget bill:

• The income tax rate for high-earning individuals as well as corporations is to be increased to 30% temporarily, falling to 29% in 2013 and returning to 28% in 2014.
• The tax on all bank cash deposits of at least MXN15,000 (USD1,150) is to be increased to 3%. Previously the tax was set at 2% on deposits exceeding MXN25,000.
• Excise tax of 3% is to be levied on telephone and Internet services. Calderón had envisaged a 4% tax.
• Beer tax of 1.5% has been set – half the rate proposed by Calderón.

Changes to tax rules affecting state-owned oil company Petróleos Mexicanos were also approved as an incentive for new investment in oil development.

The Institutional Revolutionary Party, or PRI, the largest party in the lower house, was the main instigator of the scaling down of Calderón's proposals, including the rejection of the 2% VAT increase. Francisco Rojas, leader of the PRI in the lower house, was quoted by Bloomberg as saying that the modifications to Calderón’s proposal could widen the deficit to about 0.8% of GDP compared with of 0.5% in the original proposal.

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