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IMF Urges Mexican Tax Reforms

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

10 August 2011


The International Monetary Fund (IMF), in its conclusions following the completion of its latest Article IV consultation with Mexico, warned that the country’s non-oil tax revenue base needs to be developed to meet the medium-term challenge of reduced oil revenues.

The IMF confirmed that Mexico has recovered rapidly from the fallout of the global crisis. Robust growth has brought output back to pre-crisis levels, which, it said, has been underpinned by Mexico’s “sound public and private sector balance sheets, strong prudential framework, and the effective countercyclical policy response, with the floating exchange rate providing also an important buffer to the fallout from the global crisis and supporting the recovery.”

It supported the authorities’ fiscal consolidation plans, including returning to the balanced budget rule next year and lifting the ceiling on the accumulation of resources in the oil stabilization fund to save oil revenue windfalls. However, it encouraged further efforts by the Mexican government to rebuild fiscal buffers over the medium-term, particularly in view of the projected decline in oil revenues relative to gross domestic product (GDP).

Reliance on oil revenues is said to represent a significant challenge to Mexico’s longer term fiscal outlook, in the absence of a significant increase in volumes. Such revenues currently account for a third of government tax revenues, but there is a risk that they could fall by about 4% of GDP by 2030, as the economy grows.

The IMF pointed out that a combination of expenditure restraint and non-oil revenue mobilization would be required, with consideration given to broadening the coverage of fiscal accounts to include sub-national governments. It was noted that the level of non-oil tax revenue in Mexico is one of the lowest in the region and the lowest amongst OECD countries at around 10% of GDP, with income taxes accounting for 50% of that, and value- added tax (VAT) accounting for 40%.

It was suggested that key elements of Mexico’s tax system and potential areas for reform could therefore include personal income tax (PIT), which has a narrow base because of uncapped deductions, preferential regimes, and exemptions. In fact, PIT rates are planned to be reduced, after they were temporarily increased from 28% to 30% last year, to 29% in 2013 and to 28% in 2014.

However, despite the 30% top rate, PIT collections amounted to only 2.3% of GDP in 2010. The tax needs, it was said, to be simplified, its base broadened, and its progressivity enhanced.

On the other hand, corporate income tax was considered “generally sound and competitive”, but its base could be broadened by bringing in medium and large businesses in agriculture, forestry and transportation from the simplified regime.

The other key element in Mexico’s non-oil taxes is VAT, where collections have been increasing only slowly as widespread zero rates and exemptions continue to reduce its yield. These weaknesses, the IMF added, together with a reduced VAT rate in the border areas, complicate administration and make VAT in Mexico the least revenue-productive in the OECD.

It was concluded that VAT should be broadened by minimizing exemptions, unifying the rate across the country and limiting zero rates to exports.

TAGS: tax | economics | value added tax (VAT) | fiscal policy | gross domestic product (GDP) | International Monetary Fund (IMF) | corporation tax | Mexico | oil and gas | tax rates | individual income tax

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