VZCZCXRO2373
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3246/01 1722030
ZNR UUUUU ZZH
P 212030Z JUN 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 7585
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 003246 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR A/S SHANNON 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
STATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR RICHARD MILES, DAN FISK 
STATE PASS TO USTR (EISSENSTAT/MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: MEXICO'S CALDERON UNVEILS TAX REFORM PROPOSAL 
 
REF: MEXICO 2518 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1. (SBU) On June 20, President Felipe Calderon submitted to 
the Congress Permanent Standing Commission a fiscal reform 
proposal that focuses on boosting government revenues and 
combating tax evasion.  The initiative aims to increase 
federal tax collection by 1.9 percent of GDP and state 
collection by 0.9 percent -- bringing the non-oil tax intake 
from 10 percent of GDP to about 13 percent by 2012.  The 
proposal includes a new alternative minimum tax designed to 
close loopholes companies use to reduce their tax payments, a 
2 percent levy on monthly cash bank deposits of more than 
20,000 pesos (USD 1,835), and measures to fight tax evasion. 
The proposal does not levy food and medicine or cut back on 
generous special tax regimes.  The process of building 
consensus for this proposal will be more difficult than it 
was for pension reform.  President Felipe Calderon needs 
support from opposition parties in Congress, notably the PRI, 
to secure the reform's passage.  Private sector organizations 
have already expressed concern that the new alternative 
minimum tax could impede job creation.  Calderon has a strong 
chance of passing fiscal reform, though the proposal sent to 
Congress is likely to be modified.  Although Calderon's tax 
reform proposal is an important step forward for Mexico, it 
is not as comprehensive or bold as many would have liked 
given that Mexico has the second worst tax collection rate in 
Latin America after Guatemala.  End Summary. 
 
------------------------- 
The Government's Proposal 
------------------------- 
 
¶2. (U) The Calderon government's fiscal reform proposal 
centers on a new alternative minimum tax (called the CETU) 
designed to prevent companies from using deductions and 
loopholes to significantly reduce their tax payments.  This 
tax replaces the 1.25 percent tax on assets, and would 
require companies to pay the higher of the CETU and the 
current corporate tax of 28 percent.  The CETU rate will be 
16 percent in 2008 and 19 percent starting in 2009, but the 
new system reduces the number of deductions.  Importantly, 
companies would not be allowed to deduct the cost of labor 
from income, meaning that more labor-intensive operations may 
see their tax bill increase.  Business groups have already 
been vocal in opposition to this particular change, arguing 
that it will hurt job creation.  A government press release 
says the tax will not harm employment since it is being 
complemented by an employment credit.  Since the tax allows 
for deducting investments, it should help foster competition 
and development.  The CETU aims to generate additional income 
equivalent to 1.8 percent of GDP. 
 
¶3. (SBU) The reform seeks to impose taxes on the informal 
economy in an indirect manner.  It introduces a 2 percent tax 
that would be assessed on cash bank deposits that exceed 
20,000 pesos (USD 1,835) in one month.  Individuals and 
companies would be able to credit the outlays for this tax 
against income taxes.  Banks will be responsible for 
collecting the tax, taking into consideration the various 
accounts opened by an individual.  The levy will not be 
imposed on diplomatic or consular agents or NGOs.  While this 
measure will not significantly increase government revenues, 
it will help reduce tax evasion.  Some analysts have 
expressed concern that the initiative will discourage workers 
in the informal economy from using banking services. 
 
¶4. (U) The reform obliges taxpayers to report any loan, 
donation, or an increase in capital of more than 600,000 
pesos (USD 55,000).  To simplify the payment of the income 
tax for individuals and professional activities, the salary 
 
MEXICO 00003246  002 OF 003 
 
 
credit will be eliminated and replaced by an employment 
subsidy, which will benefit those with lower income (less 
than 7,000 pesos/USD 640 per month).  The size of the subsidy 
depends on the individual's salary. 
 
¶5. (U) The proposal introduces a 20 percent tax on lotteries 
and gambling-related income, and a 50 percent tax on aerosol 
paints.  In an effort to improve tax collection at the local 
level, it gives state and local governments the authority to 
levy products that are subject to the federal Special Tax on 
Production and Services (IEPS).  This includes such products 
as gasoline, tobacco, and alcohol.  The application of these 
taxes is subject to the approval of local legislatures. 
 
¶6. (U) The reform also gives the Tax Administration Service 
(SAT) more teeth to fight tax evasion.  The proposal would 
allow SAT to examine the operations of people who deposit 
more than 1 million pesos (USD 91,700) in their accounts in a 
year but have not accounted for the corresponding tax 
payments.  It establishes that individuals and companies must 
present documentation that SAT requests during an audit. 
Currently, many wait until they are taken to court to produce 
this paperwork.  It also proposes making senior managers of 
companies responsible if they omit information during an 
audit. 
 
¶7. (U) The government's proposal leaves the basic income tax 
rate at 28 percent for companies and individuals, and does 
not attempt to levy food and medicine.  Tax exemptions and 
special treatments for the agricultural sector remain 
unchanged. 
 
--------------------------------------------- 
Proposal Likely To See Markups Before Passage 
--------------------------------------------- 
 
¶8. (SBU) The process of building consensus for this proposal 
is likely to prove more difficult than it was with pension 
reform.  Calderon needs support from opposition parties in 
Congress, notably the PRI, to secure the reform's passage. 
Private sector organizations have already expressed concern 
that the CETU could impede job creation, and some pundits 
have pushed for a better way to accomplish the same fiscal 
objectives.  Calderon has a strong chance of passing fiscal 
reform, though the proposal sent to Congress is likely to be 
modified.  The government would like the reform to be 
approved during an extraordinary session of Congress this 
summer so the new measures can be incorporated into the 
President's 2008 federal budget proposal, which is due to the 
Chamber of Deputies on September 8. 
 
------- 
Comment 
------- 
 
¶9. (SBU) Calderon's tax reform proposal is an important step 
forward for Mexico, but it is not as comprehensive or bold as 
many would have liked.  It was designed to be both 
economically sound and politically feasible, but the latter 
seems to have prevented the government from addressing a 
number of key issues.  The proposal fails to simplify the tax 
system in a meaningful way or get rid of many generous 
special tax regimes, measures the government had previously 
identified as key components of a fiscal reform.  The 
measures to improve tax administration are helpful, but could 
have gone further.  Moreover, the reform does not address the 
transparency and efficiency of spending at the local level. 
As expected, the reform does not attempt to tax food and 
medicine or solve the state energy company's fiscal woes. 
Further tax reform will be needed to provide the government 
the steady flow of revenue it needs to address poverty and 
other growing social needs, and to avoid a potential fiscal 
crisis down the road due to declining oil production.  End 
Comment. 
 
MEXICO 00003246  003 OF 003 
 
 
 
 
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