VZCZCXRO8135
RR RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #2832/01 2731540
ZNR UUUUU ZZH
R 301540Z SEP 09
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC 8421
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC

UNCLAS SECTION 01 OF 05 MEXICO 002832 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/MEX, WHA/EPSC, EEB 
NSC FOR RESTREPO, FROMAN 
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GWORD 
TREASURY FOR NANCY LEE, IA 
ENERGY FOR WARD, LOCKWOOD AND DAVIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD ENRG ELTN EAIR PGOV PINR SENV
MX 
SUBJECT: THE GOM'S 2010 REVENUE PROPOSAL 
 
REF: A. MEXICO 2639 
     ¶B. MEXICO 2537 
     ¶C. MEXICO 2709 
 
¶1. (SBU) Summary. Fiscal reform has become a critical element 
in addressing the GOM's 2010 budget shortfall, resulting from 
plunging revenues (due to falling oil production/prices and 
economic recession), and public expenditure that grew in 
tandem with skyrocketing oil prices from 2002-08 (see 
reftels).  On September 8, the GOM submitted to Congress the 
2010 economic bill, which contains proposals to amend the tax 
laws. The most important tax proposals are: 
-     Increasing the corporate and maximum individual income 
tax rate from 28 to 30%, and imposing limits on companies 
filing consolidated returns; 
-     Eliminating the flat tax &loss credit8 against income 
tax due in the same fiscal year; 
-     Increasing the tax on cash deposits and lower the 
exemption cap; 
-     Introducing a new contribution similar to the VAT to 
combat poverty that would tax all activities at 2%; and 
-     Significantly increasing the excise tax on specific 
goods and services. 
 
The GOM's economic package has been criticized for largely 
focusing on attaining short-term fiscal stability for the 
purpose of preventing a downgrade from the rating agencies 
(see reftel C). It achieves this stability through regressive 
taxes and other measures that hurt the country's 
competitiveness.  End Summary. 
 
-------------------------------------- 
Overview of Mexico's Revenue Structure 
-------------------------------------- 
 
2.(U)  Mexico's revenue structure can be divided into 3 broad 
categories:  tax, nontax, and public enterprise revenues. 
The later consists basically of revenues from Pemex, the oil 
company; CFE, the electricity company; and IMSS, the Social 
Security Institute.  Nontax revenue is mostly related to oil 
exports on which the government collects a hefty percentage 
through a &royalty8 that is not considered a tax. 
 
¶3. (U) Tax revenue on its own represents approximately 10% of 
GDP, which ranks Mexico among the lowest in the world.  This 
consists of income tax, 48% of the total; value added tax 
(VAT), 38%; and special taxes on products and services 
(IEPS), 6%; and all other taxes, 8%.  (Note:  Because of 
loopholes, deductions, and exemptions associated with the 
income tax (ISR), the GOM in 2008 introduced the corporate 
flax tax (IETU) of 17% minimum.  In 2008, the traditional ISR 
collected 4.6% (including individuals) of GDP and the IETU 
registered an additional 0.4%. End Note.)  Although the VAT 
is 15%, the structure is full of exemptions and exceptions 
such as food and medicine.  As a result, the entire VAT 
recollection accounts for only 3.8% of GDP, which points to a 
very inefficient tax administration. 
 
----------- 
Tax Reforms 
----------- 
 
¶4. (U) On September 8, the GOM presented its proposed revenue 
package to Congress with significant tax law changes. The tax 
reform includes permanent and temporary tax proposals to 
increase both consumption and production taxes.  These 
proposals are subject to Congressional approval and changes 
are likely prior to final approval. Primary taxes still 
remain in effect, including income tax (ISR), flat tax 
(IETU), the VAT, excise taxes and others. A summary and 
commentary of the more significant proposed changes follow in 
paragraphs 5 )15. 
 
Consumption Taxes 
----------------- 
 
¶5. (U) Anti-Poverty Tax (Anti-Poverty Contribution - CCP):  A 
new 2% sales tax similar to the VAT would be enacted to help 
reduce poverty, and would have few exemptions, such as export 
 
MEXICO 00002832  002 OF 005 
 
 
sales. This tax would be creditable by businesses. While 
value-added tax (VAT) remains unchanged at 15%, the proposed 
sales tax would mean a 17% de facto rate, and cover all goods 
and services, including many currently exempt from VAT 
(particularly foodstuffs, medicines, and health services). 
 
¶6. (SBU) Mexican economist Rogelio Ramirez de la O told 
econoff that this tax was introduced as a &sales tax8 
because PRI party statues forbid the approval of a &VAT8 on 
food and medicine.   Separately, Price Waterhouse Cooper 
(PWC) analysts ) which, according to Econ sources, 
participated in the pre-budget negotiations among the GOM, 
PAN, and PRI ) said the idea behind the CCP is to gradually 
(over the next few years) replace the VAT, which has many 
exemptions.  Some critics note that the tax will affect 
economic drivers such as tourist services and call centers. 
Comment:  The GOM is essentially trying to enact a parallel 
tax, as it did at the end of 2007 with a flat-rate business 
tax, known as IETU, which is a parallel income tax without 
existing exemptions and loopholes.  End Comment. 
 
¶7. (U) To justify the name of the tax as a contribution 
against poverty, 36% is earmarked for an anti-poverty program 
called &Oportunidades.8  This would represent an estimated 
50% increase (from MX$47 to MX$74bn) in subsidies to poor 
households through Oportunidades.  There would also be an 
additional 20% increase in the program Seguro Popular 
(national health insurance), which provides limited medical 
coverage with subsidized premiums. Seguro Popular is 
administered by each of the states; federal resources are 
transferred to the states through the National Health System, 
the Mexican Social Security Institute (IMSS), or through 
Oportunidades. (Comment:  States receive over 90% of their 
funds from the federal government.  State finances are 
generally perceived as lacking in adequate 
oversight/accountability measures. End comment.) 
 
8.(U)  Excise taxes (Special Tax on Production and Services - 
IEPS): The GOM is proposing an additional tax increase on 
beer, alcohol, tobacco, telecommunications charges, and 
gambling/lottery activities.  While the demand on these 
products in considered by some to be relatively 
&inelastic,8 PWC analysts note that if the tax increases 
beyond the equilibrium, more revenue will not necessarily be 
generated and it could cause market distortions (i.e. black 
markets, contraband). 
 
9.(U)  The GOM is also proposing a 4% tax on 
telecommunications (except in rural areas).  Telecoms, 
considered to be one of the most important sectors for 
increasing the country's competitiveness, will be hit hard 
with the 4% IEPS plus the 2% CCP.  The average telephone, 
internet, and paid television user would pay a total of 
MX$138 (approximately US$10) of tax per month for those 
services; a sum equivalent to almost 3 days minimum wage 
salary.  Currently the average telcom user spends MX$758 (or 
US$58) per month.  The proposal would reduce new 
infrastructure investment, drag on growth in mobile and 
internet penetration, and disproportionately fall on low 
income users. 
 
 
Income Taxes 
------------- 
 
10.(U)  Regular Income Tax Rates (ISR): The highest marginal 
regular income tax rate (for corporations and individuals) 
would temporarily increase from 28% to 30% for three years 
(2010, 2011 and 2012), and would be reduced to 29% in the 
fourth year (2013), finally scaling back to 28% in 2014. For 
the primary sector (i.e. agriculture, cattle, etc.), the 
maximum rate would increase from 19% to 22.5%.  While many 
other countries are reactivating their economies by cutting 
corporate taxes in order to spur investment and employment, 
the GOM is taking the opposite approach by proposing a 
production tax increase.  However, unlike other economies 
with stronger fiscal systems, Mexico's tax revenues are very 
low (10% of GDP) and there is a heavy dependence on oil 
revenues (see reftels). 
 
MEXICO 00002832  003 OF 005 
 
 
 
11.(SBU)  Minimum Flate-Rate Tax (IETU):  This tax was part 
of the fiscal reform passed in 2007.  Because of loopholes, 
deductions, and exemptions associated with the ISR, the GOM 
introduced a minimum flat tax on businesses of 17%. 
Currently, if a taxpayer generates a tax loss credit for IETU 
purposes, the credit may be applied against the income tax of 
the year.  Though a rule included in the Federal Revenue Law, 
deductions and credits would not be allowed in the same year. 
This provision would only apply for 2010 unless enacted again 
in future years.  There is also a concern for U.S. companies 
operating in Mexico that the U.S. will no longer recognize 
and credit the IETU, so U.S. companies will end-up having to 
pay double taxes. 
 
¶12. (U) Tax Consolidation Regime (TCR): Significant changes 
would be made to the TCR.  Although qualifying taxpayers 
would continue to be allowed to offset losses against profits 
of other entities within a consolidated group and to 
distribute dividends tax-free between group members, the 
following changes are proposed: 
 
-- 60% of any deferred income tax would have to be paid in 
the fifth year following the year in which such losses were 
offset or dividends paid, with the balance of 40% to be paid 
in equal amounts over the subsequent 4-year period.  This 
provision would be applicable for all prior fiscal years 
under tax consolidation (current rules allow deferral until 
certain deconsolidation events take place).  Thus, if this 
amendment is passed, 60% of separate company unamortized tax 
losses generated in 2004 and in prior years would be 
triggered in 2010. These new recapture rules would also apply 
to deferred taxes on intercompany dividends within the 
consolidated group and other similar consolidation benefits. 
-- A group would be deemed deconsolidated if the deferred tax 
was not paid. 
-- An independent auditor would be required to review and 
certify the calculation and payment of the deferred tax. 
 
13.(U)  Under this proposal, the GOM expects to collect 
MX$27.6bn, which is 16% of the total amount that the GOM 
expects to collect from all taxes or the whole reform.  While 
the business sector is unhappy with the increase in the 
corporate income tax, they are especially concerned about the 
reform in the consolidation regime.  They complain that the 
changes do not give legal certainty to investors and are an 
excessive fiscal burden particularly for exporters. 
 
Financial Services 
------------------ 
 
¶14. (U) Tax on Cash Deposits (IDE): The tax on cash deposits 
would be increased from the current rate of 2% to 3%, and the 
monthly limit on the aggregate tax-free cash deposits would 
be reduced from a current floor of MX$25,000 to MX$15,000. 
Fortunately, the IDE would still be creditable against other 
taxes. Last year, IDE collected MX$17bn. 
 
Other Noteworthy Measures 
------------------------- 
 
15.(U)  Other significant and/or controversial 
revenue-generating measures include: 
 
-- Terminating the freezing of energy prices, which will be 
reflected in a steady monthly increase.  In gasoline, the 
price would jump by 17.1% in 2010.  It is worth noting that a 
similar increase was responsible for the pick up in inflation 
in 2008.  Comment:  Most analysts would revise their 2010 
inflation projections upward (near 5%) under this fiscal 
reform plan. End Comment. 
 
-- Giving the Tax Administration System (SAT) the authority 
to freeze taxpayers, bank accounts whenever money is due to 
the Finance Secretariat and also allowing them to collect 
what is due from those accounts. 
 
--------------------- 
Analysts, Impressions 
 
MEXICO 00002832  004 OF 005 
 
 
--------------------- 
 
16.(SBU) Dr. Jose Luis de la Cruz, an economist at Monterrey 
Tech (ITESM) told econoffs that the tax proposals aim to 
recover the fall of budget revenue but there is no clear 
long-term policy that will increase growth and 
competitiveness.  He also noted that the budget maintains the 
same current expenditures while lowering investment. 
Similarly, other analysts we spoke to say the GOM's fiscal 
reform will have a short-term collection effect, but lacks a 
long-term strategy to make everyone pay taxes.  (Note:  The 
total number of taxpayers is 9 million; the total number of 
companies paying taxes is 600,000, whereas the informal 
sector reaches 12 million in a population of 105 million 
inhabitants. End Note.) 
 
¶17. (SBU) Moreover, the projected cuts in spending and 
increases in tax revenue satisfy the immediate cash needs of 
the GOM, but only at the cost of accentuating the recession 
by weakening consumer demand. PWC analysts note that the 
income tax increase for individuals will have a higher impact 
on the medium and upper classes since their net income will 
be reduced by -2.11% for those earning MX$60,000 a month, 
-1.49% for those earning MX$25,000, and -1.07% for those 
making MX$13,000. Discouraging consumption in effect hurts 
sales of companies and employment. Unemployment in Mexico is 
already at 6.25% -- its highest level in 13 years ) and the 
2008 poverty rate is 47.4%, up from 42.6% in 2006.  While 
some of the negative effects will be offset through 
Oportunidades grants to low-income households, other 
households (i.e. the middle class) will suffer a negative 
impact additional to the loss in disposable income from job 
losses, reductions in nominal wages, and price increases. 
(Note: Mexico's official definition of unemployment leads to 
an underestimate of the jobless, because it excludes some 
persons who could be counted as unemployed under the U.S. 
concept.  Moreover, it masks a large number of persons in 
unstable marginal jobs. End Note.) 
 
¶18. (U) The Mexican Competitiveness Institute (IMCO) also 
criticized the tax reform for raising the cost of production, 
which will have a negative impact on competitiveness.  IMCO 
recommends instead a general consumption tax and making 
transfers to vulnerable groups so that they are not affected 
by the tax (as it is regressive). 
 
------------------- 
Opposition Response 
------------------- 
 
¶19. (SBU) Although some observers believe the economic 
package was pre-negotiated between the GOM and the leadership 
of the PRI, many perceive the rank and file of the PRI as 
reluctant to pass significant tax increases or subsidy 
reductions.  At the same time, the PRI wants to be seen as a 
responsible opposition and they know something has to be done 
to improve the country's public finances so they do not 
inherit the same problems if/when they come to power in 2012. 
 The 2% sales tax is clearly the toughest political battle. 
While the PRI and the PRD have made alot of noise opposing a 
new tax, the PRI might vote in favor of it if food and 
medicines are excluded.  On September 23, PRI Senate leader 
Manlio Fabio Beltrones said the discussion lies not on the 
income part (new/increased taxes) but how the new revenue 
will be spent to create more jobs.  Hence, much of the noise 
against the new taxes may just be &theatrics8 so that 
Calderon and the PAN absorb the political cost of the reform. 
 
¶20. (U) The PRI has also circulated alternative/supplemental 
proposals.  The most noteworthy include: 
 
-- Eliminating some of the tax exemptions included in the 
current VAT, such as education, transportation, books, etc. 
(without touching food and medicine). 
 
-- Instead of increasing the income tax (ISR) and approving 
the 2% CCP, the PRI has proposed a revision/elimination of 
the 200 existing loopholes in the ISR.  Comment:  This would 
be politically difficult given the various interest and 
 
MEXICO 00002832  005 OF 005 
 
 
business groups that benefit from these special regimes.  End 
Comment. 
 
-- Amending the Federal Royalty Law:  A PRI lawmaker from 
Guanajuato introduced an initiative to levy mining 
extractions and exploitation with a 4% tax on metallic and 
non-metallic products.  The revenue collected will go to the 
states: 20% to the &Fondo General de Participaciones8; 80% 
to a fund for the states where the mines are located. 
Analysts at Price Waterhouse think both the PRI and the GOM 
will approve this measure, despite the precarious situation 
of the mining sector. 
 
------- 
Comment 
------- 
 
21.(SBU)  The GOM's economic package has been criticized for 
largely focusing on attaining short-term fiscal stability for 
the purpose of preventing a downgrade from the rating 
agencies (see reftel C). It achieves this stability through 
regressive taxes rather than taking on larger structural 
deficiencies like trying to eliminate special regimes 
(loopholes, subsidies) which currently represent an estimated 
3.9 percentage points of GDP in forgone revenue.  This, 
however, would be a larger political battle than proposing 
new/increased taxes given all the vested interests that 
currently benefit from these special tax regimes.  The 
reforms also reduce Mexico's competitiveness by increasing 
the cost of production.  In short, the GOM has opted to 
balance the budgets on the backs of SMEs and the 
middle-class, rather than confront monopolies and major 
businesses. 
 
¶22. (SBU) At the same time, given Mexico's history and bad 
experience with large foreign debt, deficits, and economic 
crisis, the GOM is taking the orthodox approach of preserving 
macroeconomic stability.  Unlike other developed economies, 
Mexico still has significant contingent liabilities that make 
it difficult to increase the public deficit and debt. 
Currently, total accumulated public borrowing requirements 
total 40% of GDP.  (Note:  De la Cruz told econoffs that if 
we take into consideration past pension regimes before the 
reforms of the Mexican Social Security Institute (IMSS, 2005) 
and Security and Social Services for Government Employees 
(ISSSTE, 2007), as well as the states and other government 
parastatals, the broad debt would amount to 100% of GDP.  End 
Note.) 
 
¶23.  At the same time, if the GOM fails to get its tax 
proposal through Congress and expenditures remain constant, 
the GOM will face a fiscal gap for 2010 and may have to 
resort to incurring more debt.  There is no clear indication 
that the GOM has an alternative to its tax proposal. 
Meanwhile Secretary of Finance Agustin Carstens is pressing 
states to pursue their own funds through property tax 
collection; a clear strategy remains to be seen on this front 
as well. 
 
24.(U)  This cable focuses on the revenue side of the GOM's 
2010 Economic Plan.  A separate report will follow on the 
expenditure component. 
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 / 
 
FEELEY