Breaking taboo, Mexico government aims to tax food, medicine

Reuters News
Posted: Jul 26, 2013 8:53 PM
Breaking taboo, Mexico government aims to tax food, medicine

By Dave Graham and Miguel Gutierrez

MEXICO CITY (Reuters) - Mexico plans to boost its tax coffers by an extra $50 billion a year with an overhaul that aims to extend sales tax coverage, close tax loopholes and could impose charges on capital gains.

Saddled with one of the weakest tax takes in Latin America, President Enrique Pena Nieto will present Congress with a plan by September to substantially improve revenues, including divisive measures to apply value added tax (VAT) to some foods and medicines, according to several people familiar with the plans.

The plans aim to improve Mexico's tax haul by about 4 percentage points of gross domestic product (GDP), according to two senior officials in Pena Nieto's Institutional Revolutionary Party, or PRI.

That would yield nearly an additional $50 billion per year for Mexico.

Food and medicine are now subject to a zero rate of VAT, and the plan currently foresees charging the levy on processed foodstuffs in particular, with a range of staples like milk, eggs, beans and tortillas to be excluded from the tax, the party sources and two other lawmakers said.

Many basic foodstuffs could, however, be moved from a zero rate of VAT to a formal exemption, saving the government billions of pesos a year by closing a loophole that allows producers to reclaim VAT on production costs, said Tomas Torres, a member of the lower house finance committee who is a lawmaker with the Green Party, a PRI ally.

"The reform will seek to suppress special tax regimens, to tax stock market operations and move from zero rates (of VAT) to exemptions," Torres said.

Mexico has long debated whether food and medicines should be subject to VAT. The finance ministry estimates the government loses out on revenues equal to 1.14 percentage points of GDP a year due to the zero rate.

Although Mexico has a balanced budget and optimism about the government's reform agenda is drawing a surge in foreign investment, ratings agencies say the skimpy tax base and oil dependence have been hurdles to a sought-after upgrade, especially as oil output has dropped by a quarter since 2004.

Between 1990 and 2009 Mexico's tax take, excluding state oil monopoly Pemex, fell from 12.7 percent of GDP to 10.7 percent, a 2011 study by Latin American Bank CAF showed. That gave Mexico the worst tax take of the 18 countries CAF studied in Latin America.

In all of the countries surveyed, tax revenues as a proportion of GDP rose during the two decades, apart from in Venezuela and Mexico, the CAF investigation showed.

Tax evasion among small contributors, or those earning less than 2 million pesos a year, was about 96 percent in 2010, costing more than 0.5 percentage points of GDP, according to Mexican tax office data.

Experts estimate Mexico must boost its tax intake by 6 to 8 percentage points of GDP, or about $100 billion a year, to reduce its reliance on oil revenues and fund increased government spending.

While in opposition during 12 years through 2012, the PRI opposed levying VAT on food and medicine when it was proposed by the then ruling conservative National Action Party, or PAN.

After coming to power, Pena Nieto forged a cross-party pact with the PAN and the leftist Party of the Democratic Revolution (PRD) in a bid to push through a wide raft of reforms aimed at boosting annual economic growth to 6 percent.

The PRD has said it would not back VAT taxes on food and medicine.

The PRI does not have a majority in Congress, although it is likely to receive support from PAN lawmakers to win the simple majority needed to pass tax changes. However, in March the PRI changed its party manifesto to enable a change in VAT policies.

Mario Sanchez, a PAN lawmaker and head of the economics committee in the lower house of Congress, said negotiations would show whether his party could reach a deal with the PRI once the bill was submitted, but he struck a positive note.

"I don't think there's a big difference," Sanchez said, referring to the two parties' respective approaches to how to tackle the shortfall in Mexico's tax receipts. "The consultations and proposals are very similar."

The government is also seriously considering proposing raising the top income tax rate to make wealthier individuals and companies pay more, officials said. That could impose a new top bracket as high as 37 percent they said.

The bill will also include incentives to try and draw in more of Mexico's vast informal economy into the tax fold. The Labor Ministry estimates that the government misses out on tax revenue equal to 4 percentage points of GDP due to the size of the informal economy.

(Reporting by Dave Graham and Miguel Gutierrez; Editing by Simon Gardner and Doina Chiacu)