Mexican Tax Reforms Face Race Against The Clock

by Leroy Baker, Tax-News.com, New York

06 September 2007

Mexican President Felipe Calderon is running out of time to have a key tax reform package passed this year, as negotiations in parliament get bogged down in a separate debate over electoral reforms.

The reforms are seen as crucial for shoring up the Mexican government's finances while giving the business sector certainty on tax laws. They propose a 19% flat tax on business income, a 2% tax on monthly cash bank deposits of more than 20,000 pesos (US$1,850), and a 20% levy on gaming, as the administration attempts to raise the revenues it need to address poverty and social inequality, and reduce its dependence on oil revenues.

The tax package must be approved by September 8 to go forward into the next budget, or Calderon will not be able to use the revenues raised from the reforms to fulfil his economic programme. However, the path to approval appears to have been blocked by an ongoing debate over the replacement of senior officials at the Federal Electoral Institute.

The left has accused President Calderon's centre right National Action Party of rigging last year's closely-contested elections, which Calderon won by a majority of less than 0.5%.

While the final drafts for Calderon's tax proposal are ready, the Finance Committee in the lower house of Parliament is not expected to approve them until electoral reform issue is resolved.

Calderon hopes the reforms will tempt small cash-in-hand businesses into the tax system, to help achieve the government's target of increasing tax collection as a percentage of the Mexican economy, which currently stands at 10% - one of the lowest in the Americas - by about 3%. Approximately 40% of Mexico's revenues are collected in taxes paid by the state oil monopoly, Petroleos Mexicanos.

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