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Mexico's Long-Awaited Tax Reform Plan Presented

by Mike Godfrey,, Washington

25 June 2007

On Wednesday June 20th, 2007, President Felipe Calderon of Mexico, through his Minister of Finance, presented a fiscal reform package to the Mexican Congress.

According to the document sent to lawmakers, 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 need to address poverty and social inequality, and reduce its dependence on oil revenues.

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, whichever is the highest.

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.

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 hitting the poor the hardest. A similar proposal helped to bring down former president Vicente Fox.

The reforms also seek to ensure a more effective and transparent way of exercising public resources. This, according to the government, will be achieved through "a budget focused on results" to be exercised under the supervision of an independent body of experts, and that operates with a single unified accounting structure for all three levels of government.

In addition, greater fiscal freedom will be granted to state and local authorities in an attempt to boost revenue streams.

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.

The government seeks to have the tax bill approved by September, when it must submit the 2008 federal budget. 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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