VZCZCXRO1142
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4151/01 2152234
ZNR UUUUU ZZH
P 032234Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8295
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
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 004151 
 
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 DAN TOMLINSON 
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: FURTHER REACTION TO MEXICAN FISCAL REFORM PLAN 
 
REF: A. MEXICO 3246 
 
     ¶B. MEXICO 3859 
     ¶C. MONTERREY 725 
 
------- 
Summary 
------- 
 
¶1. (SBU) Six weeks after the introduction of the Calderon 
Administration's proposal for fiscal reform (ref A), 
companies and business organizations continue their 
objections to the most controversial aspects of the plan, a 
flat minimum tax on revenues (CETU) and a tax on cash 
deposits (ICI).  Some Congressional analysts have called the 
plan unconstitutional.  Mexico's labor-intensive maquiladora 
sector warns its tax burden will increase 600%.  Business 
organizations are calling for reduced rates, more 
deductibility of expenses, and improved government spending 
oversight.  U.S. firms could be particularly hard-hit if the 
CETU is not creditable against U.S. taxes. U.S. pension plans 
have raised this and other concerns with the Embassy. 
Japanese firms apparently do not face this double taxation 
threat. Mexican Finance Ministry officials have raised the 
double taxation concern with U.S. Treasury.  Meanwhile, 
Calderon and Government economists defend the plan as 
essential to pay down government pension and infrastructure 
debt and to construct future infrastructure projects. End 
Summary. 
 
---------------------------------- 
Controversial Minimum Business Tax 
---------------------------------- 
 
¶2. (U) The centerpiece of President Calderon's June 20 fiscal 
reform proposal is an alternative minimum tax, CETU (Single 
Business Contribution) (ref A).  Administration analysts 
expect the additional tax revenue generated by the CETU to be 
1.8% of GDP.  Though the Mexican Congress may change the 
proposed CETU rate, now set at 16 percent in 2008 and 19 
percent starting in 2009.  Many in the private sector have 
vocally opposed this tax and demanded that it be reduced to 
12% or that it allow labor deductions.  The private sector's 
main complaint has been that CETU does not allow companies to 
deduct the cost of labor, payroll, social security 
contributions, pensions, and other allowances, from income. 
Although the government has reassured the private sector that 
a salary credit included in the reform would compensate 
companies for the losses, business, employers, financial, 
outsourcing, maquiladoras and many other associations argue 
that CETU will hurt job creation, investment plans, and 
competitiveness. 
 
------------------------------------- 
Risk of being an unconstitutional tax 
------------------------------------- 
 
¶3. (U) Recently, the Chamber of Deputy's Parliamentary Law 
and Investigations Research Center called both the CETU and 
the tax on the informal economy (ICI), also included in the 
Calderon reform plan, unconstitutional because they violate 
the Constitution's principles of equity and proportionality. 
According to the Center, the CETU violated the 
proportionality principle because it includes revenues 
without allowing deductions.  The Center warned about a wave 
of injunctions or "amparos" against the CETU if it is 
approved.  The Research Center also determined that the tax 
on the informal economy violated the principle of equity by 
levying only deposits in cash while exempting deposits made 
by electronic means.  In order to formally declare the CETU 
unconstitutional, legislators would have to challenge it and 
file a case before the Mexican Supreme Court of Justice. 
However, the Chairman of the Finance Committee of the Chamber 
of Deputies, Jorge Estefan (PRI), believes that the CETU is 
 
MEXICO 00004151  002 OF 004 
 
 
the cornerstone of the reform, and announcing "there will be 
no reform, without the CETU". 
 
-------------------------------- 
Ministry of Finance Defends CETU 
-------------------------------- 
 
¶4. (U) Juan Manuel Perez Porrua, Head of the Revenue Policies 
Unit of the Ministry of Finance (Hacienda) met with members 
of the Parliamentary Research Center.  He explained that the 
tax reform's overall goal was to generate additional tax 
revenue totaling 3% of GDP.  Without the CETU, the GOM would 
not be able to reach that goal and address the country's 
infrastructure and social needs.  The National College of 
Economists also recommended that legislators not reduce the 
CETU to 12% as proposed by many in the private sector since 
such a drop would reduce overall collections under the reform 
from 3% of GDP to only 1.2 to 1.4% of GDP. 
 
---------------------------------- 
Industry Complaints About the CETU 
---------------------------------- 
 
¶5. (SBU) The National Maquila Industry Council (CNIME), 
raised its concern over member firms being subject to double 
taxation as a result of the CETU. CNIME has reports that the 
CETU will increase member firms tax burden by as much as 600% 
because the sector is so labor intensive. Outsourcing 
services are in a similar situation.  The Mexican Human 
Capital Association (AMECH) has said that outsourcing 
companies may see their tax payments increase 500%, affecting 
job creation or promoting the creation of poor-quality or 
temporary jobs with no benefits.  Large employers and trade 
associations, such as CCE (Business Coordinating Council), 
Coparmex (Mexican Employers' Confederation), Concamin 
(Mexican Confederation of Industrial Chambers), Concanaco 
(National Confederation of Commerce Chambers), ANTAD 
(Department Stores National Association) agree that Mexico 
needs a tax reform, but they are demanding changes to CETU 
and a commitment from the government that the additional 
resources would be used to alleviate poverty and not for the 
government's current expenses. (Comment: Former Finance 
Minister Pedro Aspe (protect) who now heads one of Mexico's 
leading consultant companies, told Econoffs that almost all 
the increased tax revenue would go to fund additional 
salaries for teachers agreed to by President Fox with the 
national teacher's union in October/November 2006, an 
agreement quietly ratified by the Calderon Administration in 
May 2007.  As part of the effort to resolve the teacher's 
strike in Oaxaca, Fox agreed to raise teachers' salaries in 
order to eliminate the three-tier system that had teachers in 
southern and other parts of Northern Mexico earning less than 
their counterparts in more prosperous parts of the country. 
END COMMENT) 
 
¶6. (U) Citibank, Procter & Gamble, Daimler Chrysler, and 33 
other multinationals under the Executive Council of Global 
Corporations (CEEG) requested that Congress amend the tax 
reform.  In a letter to the GOM, the organization asked it to 
expand the taxpayers' base, control government spending, and 
give large companies the certainty that resources will be 
spent on social programs, such as health, education, housing, 
and infrastructure.  The organization had already announced 
its member firms' planned USD 3 billion in investment could 
be postponed until there is more certainty about the reform. 
Although large banks largely agree that the tax reform is 
fundamental to generate the needed resources to help the 
country grow, they also consider that the tax on cash 
deposits more than 20,000 pesos that attempts to capture the 
informal sector and the CETU affect their interests since 
they will be forced to invest in order to comply with the new 
law. 
 
 
MEXICO 00004151  003 OF 004 
 
 
------------------------------------------- 
Will U.S. Firms be Hurt by Double Taxation? 
------------------------------------------- 
 
¶7. (SBU) Refs B and C report strong concerns by U.S. firms 
that the CETU is not creditable against U.S. income tax, 
leading to double taxation under the U.S.-Mexico tax treaty. 
Ministry of Finance officials have raised this issue with the 
U.S. Department of Treasury. Post sent Treasury a July 11 
letter to the Embassy from Prudential's Chief Operating 
Officer for Real Estate Investors in Latin America, Maite 
Igareda (protect).  In the letter, Igareda says that under 
U.S. Federal Regulation 1.901-2, the CETU does not meet the 
requirements to qualify as a foreign income tax that is 
creditable by U.S. tax residents against their U.S. income 
tax.  Japanese Embassy Economic Counselor Yoshiko Kajima told 
Econoff her country's firms are not concerned about double 
taxation, because the Mexico-Japan "tax arrangement" would 
cover the CETU.  (COMMENT:  Post will be querying other 
countries' representatives to see if they fear double 
taxation. END COMMENT) 
 
------------- 
Japanese View 
------------- 
 
¶8. (SBU) Kajima said the Japanese Society of Companies in 
Mexico was "very seriously concerned," however because the 
CETU would be a "big shock" to Japanese maquiladoras, raising 
taxes on them 600% to 900% because several have large numbers 
of employees.  The Japanese Ambassador is planning to raise 
this concern with the Ministries of Finance and Economy. 
Kajima said Japanese maquiladoras have been cooperating with 
US, Mexican, Korean maquiladoras to raise their concerns with 
the Mexican Congress, and found some Mexican Senators shared 
their concerns and planned to amend the fiscal reform to 
lessen the impact on maquiladoras. (COMMENT:  Current taxes 
on maquiladoras are extremely low, possibly around 3 percent. 
 END COMMENT) 
 
---------------------------- 
U.S. Pension Funds Concerned 
----------------------------. 
 
¶9. (SBU)  In the July 11 letter, Igareda the proposed tax 
reform would have a "very negative impact" on "United States 
pensions plans and non-tax investors."  In addition to the 
problem of double taxation, she says the CETU does not grant 
to non-Mexican private and public pension plans the same 
tax-exempt status that Mexican Income Tax Law grants with 
respect to income from rental payments, capital gains and 
interest payments.  The CETU would therefore tax pensions 
plans that are currently tax-exempt in Mexico.  Finally, she 
says the CETU does not consider fiscal year 2007 as a 
creditable year for its purposes, which would generate a 
large amount of CETU payable in 2008 for payments made before 
¶2008. Igareda notes that Prudential Real Estate Investors 
currently sponsors six estate funds in Mexico with 
commitments in excess of USD 1.2 billion.  Post has been 
working with Igareda, who is preparing a paper for the USG on 
the views of the wider pension plan sector on the proposed 
tax reform. 
 
--------------------------------------------- 
Calderon Urges Congress to Approve the Reform 
-------------------------------------------- 
 
¶10. (U) President Calderon asked Congressmen to approve the 
tax reform to address the imminent financial pressures from 
increased pension liabilities and "Pidiregas" (off-government 
balance sheet infrastructure borrowing) maturities next year. 
 The President also warned that without a tax reform, the 
government would not be able to develop the infrastructure 
 
MEXICO 00004151  004 OF 004 
 
 
projects that the country needs.  Congress would have to 
approve the tax reform during a special session before 
September 8, when the Executive has to send forward its FY 
2008 budget package. 
 
 
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http://www.state.sgov.gov/p/wha/mexicocity and the North American 
 Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA