VZCZCXRO6051
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4236/01 2211448
ZNR UUUUU ZZH
P 091448Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8353
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 04 MEXICO 004236 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, AND EB/IFD/OMA 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD 
TREASURY FOR IA (ALICE FAIBISHENKO) 
TREASURY FOR TAX POLICY OFFICE 
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: MEXICO: U.S. INVESTORS ASK FOR INTERVENTION ON TAX 
POLICY REFORM 
 
REF: A. MEXICO 3246 
 
     ¶B. MEXICO 2518 
     ¶C. MEXICO 3859 
 
¶1.  Sensitive but unclassified, entire text. 
 
¶2.  (SBU) This is an action message, see paragraph 2. 
 
¶3.  (SBU) Summary and Action Request.  Representatives of 
U.S. real estate firms in Mexico contacted the Embassy August 
6 to express their concern over the Calderon administrations 
tax reform proposal (refs. A-C) and ask the Embassy's help in 
lobbying the Mexican government to rescind those portions of 
the tax proposal they believe would cause most harm to U.S. 
investors.  The request, received in the letter reproduced in 
paras 4 - 14, centers on three aspects of the proposal: (1) 
that taxes paid under the Single Rate Income Tax for business 
or CETU proposal will not be deductible in a foreign (U.S.) 
firm's country of origin; (2) while pension plans in Mexico 
are exempt from income taxes, they would not be exempt from 
the CETU; and (3) the proposal includes no "transitional 
regime" meaning that companies would not receive any tax 
deduction for capital expenditures made before the entry into 
force of the tax.  Given these points, and the information 
included in refs A-C above, Embassy requests Washington 
agency guidance on whether post should engage with GOM 
officials/legislators on this issue, and the potential harm 
it would cause to U.S. firms.  End Summary and Action 
Request. 
 
¶4.  (SBU) Begin letter text: 
 
August 6, 2007 
Mr. Antonio Oscar Garza 
United States Ambassador to Mexico 
United States Department of the Treasury 
Dear Ladies and Gentlemen: 
 
The United States real estate companies set forth below are 
managers of and/or investors in real estate funds that hold 
and operate real estate properties in Mexico, including 
industrial, residential, retail and office properties. United 
States nationals, including private and public pension and 
retirement plans, foundations, endowments and private 
companies, participate in such real estate funds as investors 
and hold the majority of the equity in the funds.   As you 
are aware, the Mexican Congress is currently discussing a tax 
bill. While we welcome a tax reform, as it will help Mexico 
grow at a faster pace and abate poverty, we have some 
observations to the tax bill that would like to share with 
you and that are described in the document attached to this 
letter. As you will note, our comments to the tax bill seek 
to maintain the tax conditions under which the aforementioned 
United States funds and investors made their investments, and 
we respectfully ask for your help in this regard.   The 
participation of United States investors in the Mexican real 
estate market has been increasing in the recent past and this 
trend expected to continue going forward. According to data 
from the Mexican Association of Real Estate and 
Infrastructure Funds, a non-profit association formed by the 
United States real estate companies set forth below, the real 
estate funds that are currently active in Mexico have 
investments in Mexico of approximately US$6 billion. Such 
Association expects that the real estate investments in 
Mexico by real estate funds in the next 5 years will reach 
approximately US$21 billion. However, such projections may 
not materialize if the tax reform does not include the 
observations contained in the attached document. 
 
Should you have any comments or questions in connection with 
the foregoing, please feel free to contact any of the persons 
listed in the document enclosed to this letter as Exhibit A. 
Sincerely, 
 
Carlyle 
 
MEXICO 00004236  002 OF 004 
 
 
La Salle Investment Management 
Hines 
O'Connor Capital Partners 
Prudential Real Estate Investors 
Walton Street Capital 
End Letter Text. 
 
Begin Exhibit A Text. 
 
THE IMPACT OF THE "CETU" ON 
REAL ESTATE INVESTMENTS BY FOREIGNERS 
-------------------------------------- 
 
Nonresident Pension and Retirement Fund Exemption 
--------------------------------------------- ---- 
 
¶5. (SBU) The current Income Tax Law of Mexico establishes an 
exemption regime applicable to nonresident pension and 
retirement funds (the "Pension Plans") in the case of certain 
type of income similar to that afforded in their countries of 
residence in order to attract their investment. These regimes 
are applicable in several countries, thus establishing a 
competitive factor for purposes of attracting this type of 
investments.  The recent tax amendment submitted to the 
Congress of Mexico, which includes the Business Tax at a 
Single Rate (Contribuci"n Empresarial a Tasa inica or CETU) 
(the "Flat Tax"), establishes that residents of foreign 
countries with a permanent establishment in Mexico that sell 
goods, render services and grant the temporary use of goods, 
will be subject to the Flat Tax. This proposal further 
provides that foreign beneficiaries of any trust in Mexico 
engaged in activities subject to this tax would constitute a 
permanent establishment in Mexico. 
 
¶6. (SBU) In accordance with this presumptive situation, any 
foreign investor, including a Pension Plan, carrying out 
activities subject to the Flat Tax through a permanent 
establishment (including in the form of a legal entity, an 
"Asociaci"n en Participaci"n" or a Mexican trust), will be 
subject to this new tax. 
 
¶7. (SBU) Based on the method of calculating the Flat Tax, 
Pension Plans will now become subject to a substantial 
additional tax on certain real estate activities in which 
they were previously fully exempt. This substantial 
additional tax will apply not only to future investments made 
by Pension Plans, but also to any existing investments held 
by them as well. The application of the Flat Tax to existing 
investments, in which Pension Plans invested based on an 
assumed exempt regime, creates a concern about future legal 
and fiscal certainty for investors. We believe also that the 
investments by these Pension Plans in real estate in Mexico 
will become substantially less attractive as a result of the 
Flat Tax application to them. 
 
We consider that the granting of a Flat Tax exemption to 
Pension Plans, including United States funds, is advisable 
because: 
 
a) It promotes tax competitiveness in Mexico for purposes of 
capturing investments from Pension Plans that are currently 
the most important investors at a worldwide level. 
 
b) Provides legal certainty in Mexico. 
 
c) The impact on tax collection would be low since the 
Pension Plans are not captive taxpayers; therefore, in the 
event that this exemption is not granted, Mexico may lose 
these investments as well as potential future investments. 
 
¶6. (U) Please note that the income tax exemption granted 
under the Income Tax Law of Mexico is not applicable to 
entities that are not pension plans, even though they may be 
tax exempt in their countries of residence. 
 
 
MEXICO 00004236  003 OF 004 
 
 
CETU Credit Abroad 
------------------- 
 
¶8. (SBU) It is not clearly established whether a foreign 
taxpayer subject (either directly or indirectly) to the Flat 
Tax will be entitled to claim a credit in its country of 
residence, as in the case of Mexican income tax. Moreover, 
the tax treaties that were entered into by Mexico with other 
countries refer exclusively to the income tax and in some 
specific cases to taxes on wealth. Hence, the Flat Tax will 
be excluded from application under such treaties. 
 
¶9. (SBU) To avoid that the same income be taxed by both the 
Flat Tax as well as the income or other relevant tax in the 
relevant investor's country of origin, it would be necessary 
that, with the international mechanisms for the avoidance of 
double taxation, the possibility for the nonresidents to 
credit the Flat Tax paid in Mexico be established, thus 
granting legal certainty to avoid a double taxation 
situation. 
 
¶10. (SBU) We believe that the Flat Tax should qualify as a 
tax that may be applied as credit against U.S. tax for U.S. 
taxpayers because, although the Flat Tax is not computed on 
net income as the existing Mexican income tax is, the general 
basis of the Flat Tax is income based (that is, the Flat Tax 
will be generally calculated in the same manner the Mexican 
income tax is, with the exception that certain deductions are 
disallowed under the Flat Tax law). 
We believe the foregoing situation would be very important in 
the case of investments made by U.S. investors due to the 
magnitude thereof. If this foreign tax credit were not 
granted to the U.S. investors, a double taxation would be 
triggered. Also, it is expected that a significant number of 
U.S. taxpayers will pay Mexican tax under the Flat Tax rather 
than under the regular Mexican income tax, with the expected 
result that many U.S. taxpayers who currently receive foreign 
tax credits will no longer do so.  Failure to obtain the 
creditability of the Flat Tax in other countries, such as the 
United States, will likely result in reduced investments in 
Mexico that will generate less employment in Mexico, thus 
increasing the pressure for migration of Mexican workers to 
the United States. 
 
¶11. (SBU) The creditability of the Flat Tax will become more 
relevant in the event that the transitional regime referred 
to below is not included in the tax reform. Also, it is known 
that the Mexican government plans to substitute the income 
tax with the Flat Tax in a few years and, if so happens, the 
creditability of the Flat Tax in the United States will be 
critical. 
 
¶12. (SBU) We also believe that, although the creditability of 
the Flat Tax in the United States, and the granting by Mexico 
of a tax exemption to Pension Plans similar to the one 
existing for income tax, may imply less income tax collection 
in the short term in both countries, the investment from the 
United States investors in Mexico will continue to increase 
and, in the medium and long term, will generate more wealth 
and thus more tax collection in both countries. 
 
Transitional provisions for investments 
--------------------------------------- 
 
¶13. (SBU) As in the case of the rest of the economy, the real 
estate sector will be affected by the lack of a transitional 
regime in the application of the Flat Tax. Nevertheless, the 
impact on the real estate sector would be especially strong 
because it is a sector that requires substantial capital 
investments. 
 
¶14. (SBU) Most specifically, the lack of transitional 
provisions will result in real estate companies not receiving 
any benefit for capital expenditures made prior to the 
effective date of the Flat Tax. Upon sale of a pre-Flat Tax 
 
MEXICO 00004236  004 OF 004 
 
 
real estate asset, the seller would be taxed based on the 
total proceeds received and will not receive any reduction in 
gain for any un-depreciated asset cost.   As an example, in a 
given conservative fiscal period for a real estate fund whose 
investment period was between 2005 and 2007 and that would 
sell its assets in 2010, if there were no transitional 
regime, the Flat Tax would be 4 times greater than the 
applicable income tax.   The lack of transitional provisions 
for the acknowledgement of the disbursements set forth herein 
would prevent imposing the tax on each taxpayer in accordance 
with their actual capacity to bear the tax burden. 
Consequently, it would be necessary to include a transitional 
regime that would allow the acknowledgement of expenses 
incurred on the investments made prior to the date in which 
the new Flat Tax law becomes effective. 
 
Mexico City 
August 6, 2007 
 
End text. 
 
Comment 
------- 
 
¶15.  U.S. firms remain concerned over various aspects of the 
CETU, chief of which is the idea that the CETU is not 
creditable against U.S taxes.  Nevertheless, despite these 
worries, as Washington agencies determine whether USG 
engagement on this issue is appropriate, we should keep in 
mind the following points. First, the CETU is a minimum tax. 
For many firms, though admittedly not all, it would likely be 
possible to adjust deductions to ensure that normal income 
taxes are greater than the minimum dictated by the CETU, and 
deductible from U.S. taxes.  Second, because the proposal is 
very much under debate by the Mexican Congress, interjecting 
a lone U.S. opinion into the fray, even one that warns of 
disinvestment, may be counterproductive.  If warranted, a 
multilateral approach by interested countries may be more 
effective. 
 
GARZA 
 
 
 
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