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Mexican President Urges Congress To Pass Tax Reform

by Mike Godfrey,, Washington

01 August 2007

Mexican President Felipe Calderon has called on Congress to pass a long awaited tax reform plan "as soon as possible" so that it can be included in the 2008 government budget, which is due to be presented in September 2007.

"I have to present a budget for 2008, and if there's no final decision on the fiscal reform, this budget will be extraordinarily pressured by existing and growing spending commitments such as public pensions and debts derived from project finance," Calderon told a news conference.

The new reforms, which will affect businesses, are aimed at reducing the Mexican government's dependence on oil revenues and increasing the country's tax take as a percentage of GDP which, at about 10%, is one of the lowest rates in the region.

According to the document sent to lawmakers in June, the reforms propose a 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 needs to address poverty and social inequality, and to widen the tax base.

Under the business tax plans, a flat rate of 19% will be phased in, but companies will have the option of paying the flat tax or their income tax.

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.

The reforms package has however, shied away from introducing value-added tax on food and medical supplies for fear that such measures would be seen as hitting the poor the hardest. A similar proposal helped to bring down former president Vicente Fox.

There is also a heavy emphasis on fighting tax evasion in the reforms, which propose to close loopholes, create a more equitable system, reward punctual contributors, and simplify the calculation and payment of taxes for small businesses.

Mexican businesses have claimed that the proposals will result in a rapid increase in their tax burdens and have urged the President to water down his proposals.

Speaking at an auto factory in the north of the country last month, Calderon said that the government is "working intensively" to improve the tax reform package and was keen to avoid "an impact on investment and employment."

If approved by Congress, the government claims that its tax revenues will increase by 30% by 2012. However, although the ruling National Action Party has a majority, it will still need the support of opposition parties to get all the proposed measures through the assembly.

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