VZCZCXRO7476
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4280/01 2221734
ZNR UUUUU ZZH
P 101734Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8378
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITY
RHMFIUU/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEHC/DEPT OF LABOR WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHMFIUU/CDR USSOUTHCOM MIAMI FL PRIORITY
RHMFIUU/CDR USNORTHCOM  PRIORITY
RHEHNSC/NSC WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 03 MEXICO 004280 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
SECSTATE FOR A/S SHANNON 
SECSTATE FOR WHA/MEX, WHA/ESP, EB/IBF/OMA 
SECSTATE FOR EB/ESC MCMANUS AND IZZO 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
USDOC FOR ITS/TD/ENERGY DIVISION 
TREASURY FOR IA (ALICE FAIBISHENKO) 
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOD 
SECSTATE PASS TO USTR (EISSENSTAT/MELLE) 
SECSTATE PASS TO FEDERAL RESERVE (CARLOS ARTETA) 
NSC FOR DAN FISK 
 
 
E.O. 12958: N/A 
TAGS: ECON BEXP SENV EAID PGOV EFIN EINV MX
SUBJECT:  FISCAL REFORM:  CURRENT STATUS 
 
REF:  A. MEXICO 3246 
 
¶1. (U) Summary:  Mexico's opposition parties continue to deliberate 
on whether to allow a Special Session so that Congress could rule on 
Calderon's fiscal reform proposal before the FY 2008 budget must be 
submitted on September 8.  Despite criticism of the CETU minimum 
alternative tax by business, a leading Mexico NGO, the Mexican 
Competitiveness Institute (IMCO), sees the CETU as a needed 
modernization of Mexico's current fiscal regime that would increase 
investment and job creation.  Because expanding Mexico's tax base is 
not currently politically possible, the Calderon Administration has 
little leeway to meet industry demands to lower the CETU rate or 
increase deductions.  Even critics of the CETU acknowledge that the 
worst outcome would be for the Congress to block Calderon's attempt 
at fiscal reform.  End Summary. 
 
 
PRI and PRD Views 
----------------- 
 
¶2. (U) While Finance Secretary Augustin Carstens and President 
Calderon continue to lobby for their tax reform proposal, the PRI 
and PRD opposition parties are debating whether to call a special 
Congressional session in August to approve the reform before the FY 
2008 budget package is due to be sent to Congress on September 8. 
The PRI will discuss its proposed changes to the fiscal reform 
during its party plenary on August 19-21 in Veracruz.  Proposed 
changes being considered by the PRI include reducing the Single Rate 
Business Tax (CETU) by 3%, eliminating the tax on spray paint, 
earmarking resources from the "informality tax" on cash deposits 
over 20,000 Mexican pesos a month, and preventing taxes being 
collected on remittances.  Some PAN legislators have proposed 
reducing the CETU by 2%.  The Finance Ministry warned that each 
percentage point drop in the CETU would reduce government revenue by 
USD 1 billion. 
 
 
Praise for the Fiscal Reform 
---------------------------- 
 
¶3. (U) Whether the fiscal reform will generate enough revenue, and 
how that revenue will be used is a key part of the ongoing debate. 
Those analysts publicly supporting fiscal reform note the importance 
of increasing government revenue.  Moody's senior economist for 
Latin America, Alfredo Coutino predicted that financial markets 
would rally with the approval of the tax reform due to the 
importance of generating the additional revenue equivalent to 2% of 
GDP. 
 
¶4. (U) Roberto Newell, Director General of the Mexican 
Competitiveness Institute (IMCO, a leading non-governmental 
organization) used an Op-Ed piece in a leading newspaper to defend 
Calderon's proposal.  Newell noted that given PRI and PRD opposition 
to expanding the Value-Added tax (VAT), the CETU was the best 
available option.  While Newell admitted the CETU tax was not 
perfect, he said it was a necessary means to get around the many 
exemptions that keep collections of the current income tax (ISR) 
well below what is needed for a healthy economy.  He explained that 
the CETU puts a much-needed floor on collections, ensuring that 
businesses pay a minimum level of tax.  He claimed that the CETU 
will actually increase incentives for investment and job creation in 
the formal economy.  Because the CETU is a much simplified tax, and 
the CETU's rate is well below the marginal rate for the current 
"ISR" income tax, it would be a step toward a more modern, effective 
tax regime that would promote investment and growth.  Newell 
expressed the hope that that over time, the old fiscal regime would 
be replaced by the simpler, more modern system started with the 
CETU. 
 
 
Maquiladoras Criticize the Reform Proposal 
 
MEXICO 00004280  002 OF 003 
 
 
------------------------------------------ 
 
¶5. (U) The National Council for the Maquiladora Export Industry 
(CNIME), took the opposite view in their August 7 discussion with 
Econoff. The CNMIE said the CETU would stifle investment and job 
creation, particularly in labor intensive sectors such as their own. 
 CNIME President Jose de Jesus Calleros said that the maquila 
industry is particularly affected by the CETU because of the 
inability to claim deductions for labor costs which constitute 70 
percent of the industry's expenditures.  He said that if the CETU is 
passed as currently presented, Mexico would become less competitive 
as investors and businesses move to countries with a more favorable 
tax structure. 
 
 
Mexico Needs Help to Expand its Tax Base 
---------------------------------------- 
 
¶6. (U) Citibank, Proctor and Gamble, Daimler Chrysler and 33 other 
corporations under the Executive Council on Global Corporations 
(CEEG) have written to authorities requesting changes in the tax 
reform to expand the base of taxpayers, and improve control and 
transparency of government spending.  The CEEG said investors needed 
certainty that government resources will be spent on social programs 
such as health, education, housing and infrastructure. 
 
¶7. (U) The CEEG gets at the heart of Mexico's fiscal reform debate. 
The PRI and PRD will not accept expansion of the VAT, and the 
government is finding it extremely difficult to expand the tax base 
beyond those firms and people currently paying taxes.  Recent 
visitors from U.S. Treasury's Office of Technical Assistance told 
Emboffs of the very great need of Mexico's tax authorities (SAT) for 
technical assistance to learn how to go after businesses and people 
who do not pay taxes.  OTA also noted the strong commitment and 
desire of the SAT managers who want to improve tax collection 
processes.  OTA said that SAT clearly recognizes that they need to 
go after tax evaders. 
 
 
More Tax Revenue is Needed 
-------------------------- 
 
¶8. (U) The CEEG has joined many politicians and other observers in 
making demands that the increased government revenue from the fiscal 
reform fund badly needed infrastructure, education, health and 
housing.  It is unclear whether that will happen, however. Francisco 
Suarez Davila, PRI former Undersecretary of Finances and former 
chairman of Congress' Committee publicly warned that most of the 
expected resources from the tax reform will be channeled to the 
teachers union SNTE due to an agreement made by then-President Fox 
and the SNTE in October 2006 (Ref A).  Suarez claimed little will 
remain to address social needs, explaining that the Finance Ministry 
expects to collect 130 billion Mexican pesos form the CETU, but 50 
billion will go to pay teachers salaries, and 3 percent net of GDP 
will go to pay pensions and Pidieragas (off-the books government 
debt) maturities. 
 
 
Comment 
------- 
 
¶9. (U) Although Calderon's fiscal reform proposal is not the broad 
reform most had expected, and does not significantly expand Mexico's 
narrow tax base, it is a step forward; and many observers expect 
Calderon to propose a broader fiscal reform later during his term if 
the current reform passes the Congress.  The government is in a 
difficult position. Investors are claiming that the CETU rate must 
be reduced, and increased deductions allowed from the CETU or 
employment will suffer.  The government desperately needs to 
increase tax revenue, however.  The maquiladora industry, which is 
de-crying increased taxes of upwards of 600%, currently pays a tax 
 
MEXICO 00004280  003 OF 003 
 
 
rate of 1% on total income (see septel).  The current tax regime 
keeps taxes extremely low through a complicated system of deductions 
and exemptions.  There is currently no political will in the Mexican 
Congress, and perhaps within the Calderon Administration, to take on 
the special interests to dismantle these special privileges. 
Finance Secretary Carstens said both publicly and privately that 
success in achieving economic reform depends on the Administration 
knowing when to pick its battles.  As long as oil production 
continues to decline, Mexico must increase the taxes that its firms 
and individuals pay.  Since PRI and PRD opposition prevents 
expanding the VAT, the government will have limited options for 
finding other revenue sources if it agrees to reduce the amount to 
be collected through the CETU. 
 
¶10. (SBU) Comment:  Even those who complain about the tax reform, 
such as the American Chamber of Commerce, note that the worst case 
would be for the reform to fail.  Not only would financial markets 
be disappointed at Mexico's failure to make even a moderate fix to 
its broken fiscal regime, but it would weaken President Calderon's 
credibility to achieve consensus to advance his reform agenda.  End 
Comment 
 
 
GARZA