Mexican Lawmakers Accept Tax Reforms

Mexico’s lower house of Congress has reduced tax breaks for the private sector in the first of a series of reforms aimed at bolstering government revenues and reducing the country’s dependence on volatile oil-export income.

The action over the weekend came as legislators faced a deadline to approve tax reforms and include them in the government’s 2002 budget before Jan. 1.

Mexico is Latin America’s second-largest economy but has one of the region’s lowest tax-collection rates, at about 10.5% of gross domestic product.

The tax-law reforms must be approved by the Senate.

The Chamber of Deputies late Saturday voted to eliminate a government subsidy paid to employees of private-sector companies, a move legislators said will save the government about $2.7 billion a year.

Companies now will have to pay the so-called salary credit themselves, and those not doing so will be fined the equivalent of 3% of wages and benefits they pay out.

Legislators also eliminated a tax break for companies that allowed them to deduct from taxes 5% of their profits if they were reinvested in the company. From now on, only “productive investments” will be deductible.

In a bid to avoid rampant tax evasion, deputies reduced the maximum income tax rate for individuals to 35%, down from a current ceiling of 40%.

The maximum rate for companies was maintained at 35%, but the reforms approved on Saturday call for both rates to be reduced by one percentage point a year.

President Vicente Fox, in a tax reform package sent to Congress last April, proposed immediately setting both the individual and corporate maximum income tax rates at 32%.

The lower house also approved a tax on certain stock transactions involving companies that have less than 35% of their shares traded on the local bourse and have been public less than five years.

Deputies said the tax was aimed at closing a loophole in which major shareholders would list large stakes in companies on the local market for the sole purpose of transferring ownership without being taxed. There is no capital gains tax in Mexico on stock transactions.

The eleventh-hour votes on the tax reforms comes after legislators rejected key aspects of the fiscal reform package sent to Congress by Fox.

The major money-generating proposal of the Fox reforms was to extend a 15% value-added tax to food, medicines, books and other items on which consumers currently pay zero VAT.

Legislators in the divided Congress, where no single party has a working majority, balked at the VAT proposal, saying it would be a harsh blow to Mexico’s 40 million poor.

The original Fox proposal sought to generate extra income of about $12 billion in the first year following the bill’s passage.

Lawmakers said the reforms passed over the weekend, including proposals for a 20% tax on luxury goods and increased taxes on alcohol and tobacco, would bring in about $8.7 billion in extra cash for the government.