Finance Secretariat Announces Steps to Reverse Mexico's Extremely Low Tax-Collection Rates

SourceMex Economic News & Analysis on Mexico, November 3, 1999 | Go to article overview

Finance Secretariat Announces Steps to Reverse Mexico's Extremely Low Tax-Collection Rates


The Secretaria de Hacienda y Credito Publico (SHCP) has launched a series of fiscal reforms to expand the country's tax base, including programs that affect maquiladora plants and street vendors. President Ernesto Zedillo's proposed reforms are intended to reverse Mexico's extremely low tax- collection rate. Tax revenues have been falling steadily during the past decade. In 1998, income from taxes, excluding those paid by the state-run oil company PEMEX, amounted to only about 10.7% of GDP, a full percentage point below the 11.7% rate recorded in 1989.

So far this year, tax evasion and loopholes have cost the government at least 50 billion pesos (US$5.24 billion) in revenue, the equivalent of 1.25% of Mexico's GDP, the government's tax collection agency (Servicio de Administracion Tributaria, SAT) reported in early October.

The SHCP estimates that tax revenues will decline by another 40 billion pesos (US$4.19 billion), roughly 0.1% of Mexico's GDP, in 2000 because of scheduled reductions in income taxes (impuesto sobre la renta, ISR) and the elimination of some import tariffs under the North American Free Trade Agreement (NAFTA).

But low tax collections are also tied to the high poverty rate. The SHCP estimates that roughly 70% of Mexican workers do not earn enough to pay taxes. A recent survey by the government's statistics agency (Instituto Nacional de Estadisticas, Geografia e Informatica, INEGI) showed that 44% of Mexico's urban population earn the equivalent of two or less minimum wages per day, roughly 64 pesos (US$6.71).

Government seeks to reduce reliance on oil-export revenues The Zedillo administration's efforts to boost tax payments are part of a strategy to reduce reliance on oil exports to increase government revenues. Income from oil exports accounts for one-third of the government's total revenues. In years when oil prices fall sharply, as in 1998, the government is forced to reduce its budget (see SourceMex, 1998-07-15, 1998-03-25, 1998-01-21).

Efforts to boost tax revenue will require major changes to the tax code. However, the president and Congress are not likely to enact any major changes in 2000 because it is an election year. Meanwhile, the administration is seeking new avenues for tax revenues, such as the undertaxed maquiladora sector and the informal economy.

Changes for the maquiladora sector, announced in late October, will require maquiladora plants to pay a higher rate on either their fixed assets or their operational costs.

Maquiladoras will either have to pay 6.9% on their fixed assets or 6.5% on their operational costs. Since 1995, maquiladoras have paid only 5% on either their fixed assets or their operational costs.

The new plan is a compromise from the original proposal announced in mid-August to begin charging income taxes to maquiladora plants (see SourceMex, 1999-09-01). The government planned to change the designation of maquiladoras to "permanent Mexican companies," rather than temporary enterprises dependent on a parent company in another country, which would have required maquiladoras to pay the same taxes as any other Mexican company.

The maquiladora industry protested the original plan, since this would have forced subsidiaries of US companies to pay income taxes to both Mexico's SAT and the US Internal Revenue Service (IRS). This concern prompted officials from the SHCP and the US Treasury Department to develop a temporary compromise, which was the tax plan announced in October. The plan, which will be in effect from 2000 through 2002, will be replaced by a more comprehensive system to tax maquiladoras.

US and Mexican officials are expected to meet during the next several months to draft the longer-term plan.

Tax increase for maquiladoras to raise 1.5 billion pesos Deputy finance secretary Tomas Ruiz Gonzalez said the agreement with the US Treasury boosting the tax rates on fixed assets and/or operational costs will add as much as 1. …

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