VZCZCXRO7724
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4970/01 2571212
ZNR UUUUU ZZH
P 141212Z SEP 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8859
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
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 MEXICO 004970 
 
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 TAX REFORM BILL NEARING ADOPTION 
 
REF: A. MEXICO 4815 
     ¶B. MEXICO 4552 
     ¶C. MEXICO 4282 
     ¶D. MEXICO 4280 
     ¶E. MEXICO 4236 
     ¶F. MEXICO 4191 
     ¶G. MEXICO 4151 
     ¶H. MEXICO 4015 
     ¶I. MEXICO 3246 
     ¶J. MONTERREY 725 
 
------------------------ 
Summary and Introduction 
------------------------ 
 
¶1. (SBU) President Calderon's economic team and political 
parties, mainly the National Action Party (PAN) and the 
Institutional Revolutionary Party (PRI), have reached a 
consensus on almost all issues included in the tax reform 
bill.  Legislators in the finance committee of the Chamber of 
Deputies discussed and approved on September 12 the seven 
bills included in the fiscal reform.  With some changes, the 
tax reform aims to increase federal tax collection by 2.5 
percent of GDP by 2012 and at least USD 9 billion in 2008. 
The tax reform bill could be adopted as early as September 13 
in the Chamber of Deputies.  The bill had been put off until 
political parties had reached agreement on an electoral 
reform bill being discussed at the same time in the Senate. 
The electoral reform bill was approved on September 12 in the 
Senate (it now faces a vote in the Chamber of Deputies), 
opening the way for approval of tax reform.  Although it is a 
step in the right direction, the tax proposal is not the bold 
reform needed to fully address Mexico's low level of tax 
collection and declining oil production.  End Summary. 
 
------------------------------ 
Congress' Proposal and Changes 
------------------------------ 
 
¶2. (U) The Calderon government's fiscal reform proposal 
remains centered on a new alternative minimum tax designed to 
prevent companies from using deductions and loopholes to 
significantly reduce their tax payments.  The original 
alternative minimum tax, (CETU, Single Rate Business 
Contribution) has been modified, and is now called the Single 
Rate Business Tax (IETU) because legislators believe it is 
more appropriate to call it a tax, rather than a 
contribution.  Ministry of Finance Under Secretary Alejandro 
Werner has told Econoffs that he believes the modified IETU 
tax would be creditable against U.S. taxes.  Mexico's 
legislators have said the Calderon Administration would be 
responsible for getting other countries to accept the 
creditability of the IETU under tax treaties. 
 
¶3. (U) As originally proposed, the CETU rate would have been 
16 percent in 2008 and 19 percent starting in 2009.  However, 
to sooth private sector concerns, legislators agreed to 
reduce the IETU to 16.5 percent in 2008, and gradually 
increase it to 17 percent in 2009, and 17.5 percent in 2010. 
The private sector is still calling for the tax to be reduced 
to 16 percent. 
 
¶4. (U) Addressing industry and maquila concerns about hurting 
job creation, Congress also proposed allowing deductions for 
salaries and other labor costs, such as fees for social 
security.  Investments made during the last quarter of 2007 
will also be deductible for the next three years.  A 
transition period for fixed assets' amortization was also 
approved. 
 
¶5. (U) Calderon's original proposal included a 2-percent levy 
on monthly cash bank deposits of more than 20,000 pesos (USD 
1,835) -- a tax that can be credited against income taxes -- 
 
MEXICO 00004970  002 OF 003 
 
 
and measures to fight tax evasion.  Legislators raised the 
monthly threshold on cash deposits to 25,000 pesos (USD 
2,230).  To allow banks to prepare their systems to be able 
to collect the tax, the measure will not be effective until 
July 1, 2008.  Legislators agreed to keep the government's 
proposal to introduce a 20-percent tax on lotteries and 
gambling-related income, but discarded the 50-percent tax on 
aerosol paints.  The Congress also met public concerns by 
allowing tax deductions for charitable donations -- with some 
restrictions to prevent companies from using this as a 
mechanism for tax evasion -- and deductions for small 
agricultural producers. 
 
------------------------------------ 
Complying With Political Commitments 
------------------------------------ 
 
¶6. (U) The legislature has dropped Calderon's proposal to 
grant states the authority to collect local taxes on tobacco, 
gasoline, and beer, because governors did not want to assume 
the political cost of directly collecting those taxes.  The 
Institutional Revolutionary Party (PRI) and the National 
Action Party (PAN) agreed on a 5.5-percent increase in 
gasoline prices, which would be collected by the federal 
government.  Additional resources obtained from the gas tax 
hike would be completely transferred to the states and 
municipalities provided they sign an agreement with the 
federal government, in which they commit to use the resources 
for infrastructure projects.  Legislators agreed to increase 
gasoline prices gradually and include a subsidy for the ten 
poorest states.  The proposal approved on September 12 
provides for an increase in the price of gasoline by 2 cents 
each month over an 18-month period making for a 36 cent 
increase at the end of this period in order to reduce the 
expected 0.3-percent inflationary impact.  Some PRI and PAN 
lawmakers were reluctant to approve the gas tax increase, but 
providing the additional revenue to local governments was a 
commitment made to get governors to support tax reform.  The 
Democratic Revolution Party (PRD) legislators have already 
announced that they will vote against a gas price increase 
out of stated concern over the impact on the lower class. 
 
¶7. (U) Concurrent with giving the states more revenue was the 
desire of the Calderon Administration to make the states more 
accountable for how they spend government funds.  Under the 
new proposal, Congress' Fiscal Auditor is given more power to 
audit transfers of federal resources to the states.  To make 
overall government spending more efficient, opposition 
legislators introduced a proposal to lower the government's 
current expenditures by 20 percent during Calderon's term, 5 
percent every year, in addition to the USD 933 million 
proposed by the government in its 2008 budget package. 
 
¶8. (U) The PAN and PRI included a proposal previously made by 
the PRD to levy company acquisitions through the Mexican 
Stock Market, which are currently tax exempt. 
 
¶9. (U) The Congress is agreeing with Calderon's effort to 
give more teeth to the Tax Administration System (rough 
equivalent of the IRS) to fight tax evasion.  The current 
legislation raises sanctions on accountants who promote tax 
evasion. 
 
¶10. (U) Congressional approval of Calderon's tax reform 
proposal, was made subject to the passage of a PRI proposal 
to reform Pemex's "tax system," i.e. the amount of Pemex 
revenue going directly to the government.  On September 11, 
legislators approved a new tax regime for the state-run 
company, which would provide allow it to keep an additional 
USD 2.7 billion in 2008 and up to USD 5 billion by 2012. 
Legislators will earmark these additional resources so that 
Pemex invests them in increasing its production and research, 
rather than for current expenditures.  The reform is expected 
 
MEXICO 00004970  003 OF 003 
 
 
to help Pemex increase its production to 200,000 of barrels a 
day by 2010 or 2011.  The tax paid by Pemex to the government 
will decrease from 78 percent to 71.5 percent over a five 
year period. 
 
------------------------- 
Proposal Nearing Adoption 
------------------------- 
 
¶11. (SBU) Fiscal reform could be approved by the Chamber of 
Deputies as early as this week and passed to the Senate for a 
vote next week.  Although Calderon's 2008 budget proposal did 
not include additional revenue from tax reform, the Chamber 
could still approve tax reform before the October 20 deadline 
for passing the revenue component of the budget (the "Revenue 
Law").  The Finance Secretariat is working with Congress to 
amend the proposed 2008 budget to reflect changes in 
government revenue made by legislators. 
 
------- 
Comment 
------- 
 
¶12. (SBU) The process of building consensus with different 
political forces, governors, and the private sector proved 
difficult, especially when opposition legislators linked tax 
and electoral reform.  Given Congress' composition, Calderon 
needed PRI support to pass the tax reform bill which has long 
been his priority.  The PRI finally supported the tax reform, 
although with changes to the initial proposal. 
Interestingly, many of the PRI's changes resolved concerns 
registered by the Mexican and international business 
community.  On a broader level, the PRI seems to understand 
that if it wants to contend for the 2012 presidential 
elections, it needs to project an image of itself as party 
working for constructive reform as opposed to a party 
blocking such efforts.  The PRI also seems to appreciate the 
wisdom of addressing existing pressures on public finances 
now rather than facing them in 2012. 
 
¶12. (SBU) The bill heading for adoption does not levy taxes 
food and medicine or cut back on generous special tax 
regimes, and it is not the bold reform many had hoped for. 
It is a step forward, however, and will help reduce pressure 
on public finances, channel resources to the federal 
government's priorities, and give Calderon more credibility 
regarding his power to achieve political consensus.  However, 
a second generation of reforms will be needed to address the 
expected 3.3 percent of GDP deficit in 2012 and channel more 
resources to social development, infrastructure, and 
sustained growth.  End Comment. 
 
 
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http://www.state.sgov.gov/p/wha/mexicocity and the North American 
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GARZA