VZCZCXRO3879
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4191/01 2191912
ZNR UUUUU ZZH
P 071912Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8329
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 004191 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD 
NSC FOR RICHARD MILES 
STATE PASS TO USTR (MELLE) 
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV MX
SUBJECT: AMERICAN CHAMBER OF COMMERCE CONCERNS ABOUT 
MEXICAN FISCAL REFORM PLAN 
 
REF: A. 8/3/07 E-MAIL LKIRKCONNELL TO AJEWELL AND 
        AFAIBISHENKO 
     ¶B. MEXICO 3246 
     ¶C. MEXICO 2518 
     ¶D. MONTERREY 725 
     ¶E. MEXICO 4151 
     ¶F. MEXICO 3859 
     ¶G. MEXICO 351 
     ¶H. 06 MEXICO 7015 
     ¶I. MEXICO 4150 
 
¶1.  (U) Summary:  In ref A, Post sent Treasury's Office of 
International Affairs the Spanish-language presentation from 
the American Chamber of Commerce about its concerns regarding 
the fiscal reform proposal that President Calderon submitted 
to Mexico's Congress (ref B). Below is an English-language 
summary of the AmCham presentation. Post initially reported 
on AmCham's concerns in ref F.  AmCham's concerns include 
possible double taxation since the "CETU" (Single Rate 
Business Tax, an alternative minimum tax) does not appear to 
meet the requirements of the U.S.-Mexico tax treaty, the 
effect of the CETU on U.S. firms with large numbers of 
employees, and the effects of the CETU on U.S. maquiladora 
firms (firms assembling products for export.)  End Summary 
 
Double Taxation 
---------------- 
 
¶2.  (U) The AmCham presentation begins with a cover letter 
explaining AmCham's overall concerns, including double 
taxation. The letter quotes the AmCham Mexico President as 
claiming AmCham is working very closely with US Treasury and 
Mexican Finance Ministry officials to resolve the problem of 
possible double taxation under the CETU.  Later in the 
presentation, AmCham says the Finance Ministry is discussing 
the possible non-creditability of the CETU against U.S. taxes 
with the U.S. Treasury Department, and that so far there has 
not been a determination although it seems very difficult for 
the CETU to be creditable given its nature.  The AmCham says 
non-creditability of the CETU goes against agreements with 
the United States to avoid double taxation, and will not only 
raise the cost of doing business for U.S. firms but will 
reduce their competitiveness in attracting investment and 
generating jobs.  (Comment: A recent report from accounting 
firm Ernst and Young/Mexico says Mexico has 34 tax treaties 
that would not cover the CETU because the CETU is not 
considered an income tax. End Comment.) 
 
Conditional Support for Improving Mexico's Public Finances 
--------------------------------------------- ------------- 
 
¶3.  (U) AmCham begins is presentation by welcoming any 
initiative to improve Mexico's public finances, as long as 
the measures protect and promote investment, employment 
generation and raise the level of competitiveness.  The 
AmCham says the positive aspects of the fiscal reform are: 
its evaluation of the budget based on measures and objectives 
to make sure spending is more transparent and efficient; 
improved capacities and obligations of the states for tax 
collection and harmonizing accountability at all three levels 
of government (federal, state and municipal); multi-year 
budgeting for investment and infrastructure projects; and the 
effort to tax the informal economy. 
 
Possible Constitutional Problems 
--------------------------------- 
 
¶4.  (U) The AmCham says the CETU may face a constitutional 
problem because temporary imports by maquiladoras, labor 
costs and charitable donations are not deductible.  The 
AmCham recommends reducing the CETU to rate to 12 percent. 
(Comment:  The proposed CETU rate starts at 16 percent, and 
rises to 19 percent in future years. The very purpose of the 
CETU is to get around the many legal tax exemptions currently 
provided to firms and individuals in Mexico.  End Comment.) 
The AmCham also claims that the proposed reform 
 
MEXICO 00004191  002 OF 003 
 
 
inappropriately holds lawyers, public accountants or advisors 
accountable for the fines of taxpayers, which would violate 
Mexico's constitutional guarantee that individuals can 
"freely practice" their professions. 
 
Need for a Transition Period, Deductions Under the CETU 
--------------------------------------------- ---------- 
 
¶5.  (U) The AmCham calls for a transition period before the 
CETU takes effect, saying the transition period should be 
clearly defined and recognize depreciation and losses from 
previous years.  The AmCham complains that there is no 
transition mechanism that would allow deductions for pending 
investment, and no clarification for the treatment of 
payments for investments made in previous years.  The AmCham 
predicts a paralysis of investment in the second half of 2007 
due to uncertainty about tax implications for 2008. 
 
¶6.  (U) The AmCham calls for social security payments and 
salaries to be deductible from the CETU, especially for firms 
whose principal asset is human capital.  The AmCham also 
calls for research and development and charitable 
contributions to be deductible.  The AmCham says many of its 
members would be adversely affected if donations are not 
deductible. 
 
Impact on Maquiladoras 
---------------------- 
 
¶7.  (U) The AmCham claims that the CETU will raise taxes on 
maquiladoras by 700 percent, and that 80 percent of this 
increase is due to insufficient provisions for crediting 
social security payments, profit sharing payments, Christmas 
bonuses and overtime against the CETU.  The AmCham complains 
that the proposal holds owners of the maquiladoras 
responsible for tax charges for workers who are themselves 
exempt from tax because of their low salaries (Comment:  Post 
will be meeting with the Mexican Maquiladora Association and 
will report further on their views.  End Comment) 
 
Informality Tax 
--------------- 
 
¶8.  (U) The AmCham welcomes the proposal for a 2 percent tax 
on bank deposits over 20,000 Mexican pesos a month in order 
to capture revenue from the informal economy, and as a means 
to identify those who do not declare their income to tax 
authorities.  AmCham suggests, however, that this 
"informality tax" only apply to physical persons and 
businesses not currently registered with the Finance 
Ministry. For those who do pay taxes, the AmCham says the 
"informality tax" should be creditable not only against 
income tax, but also against the Value Added Tax and the 
CETU.  (Comment:  Ref I reports that 25 to 43 percent of 
Mexico's working age population is employed in the informal 
economy.  End Comment) 
 
Conditional Support for Efforts to Fight Tax Evasion 
--------------------------------------------- -------- 
 
¶9.  (U) The AmCham supports the Calderon Administration's 
efforts to combat tax evasion in the proposed fiscal reform, 
but expresses concern about the idea of restricting the right 
of taxpayers to offer evidence that they have complied with 
their tax obligations.  AmCham claims this would limit access 
to justice and be a step backward from the fiscal code of 
1967 which has subsequently been expanded by court decisions. 
 (Comment:  According to a Chamber of Deputies Finance 
Committee staffer who worked on fiscal reform, one of its 
purposes is to shift the balance from current laws that 
strongly favor taxpayers to a more balanced system such as in 
the United States.  See ref H.  End Comment) The AmCham also 
criticizes the proposal to raise the criminal statute of 
limitations for tax violations to eight years, claiming the 
applicable term should be five years. 
 
 
MEXICO 00004191  003 OF 003 
 
 
 
Further Fiscal Reform is Needed 
------------------------------ 
 
¶10.  (U) The AmCham concludes its presentation by expressing 
the hope that once the fiscal reform is approved, work will 
begin on a second reform to deal with VAT taxes on 
consumption, so that Mexico's public finances can be truly 
viable.  (Comment:  As reported in ref C, both opposition 
parties the PRI and the PAN oppose expansion of the 
value-added tax. End Comment) 
 
 
 
 
 
Visit Mexico City's Classified Web Site at 
http://www.state.sgov.gov/p/wha/mexicocity and the North American 
 Partnership Blog at http://www.intelink.gov/communities/state/nap / 
GARZA