VZCZCXRO6444
RR RUEHCD RUEHGD RUEHHO RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHMC #0438/01 3272246
ZNR UUUUU ZZH
R 232246Z NOV 09
FM AMCONSUL MONTERREY
TO RUEHC/SECSTATE WASHDC 4125
INFO RUEHME/AMEMBASSY MEXICO 5210
RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHMC/AMCONSUL MONTERREY 9749

UNCLAS SECTION 01 OF 02 MONTERREY 000438 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV ECIN EFIN EINV MX
SUBJECT: NUEVO LEON BUSINESS COMMUNITY PESSIMISTIC ABOUT NEW FISCAL 
PACKAGE 
 
REF: A) Mexico 3205 
 
MONTERREY 00000438  001.2 OF 002 
 
 
¶1.  (SBU)  Summary.  Reaction to the passage of the modified 
2009 Fiscal Law in Nuevo Leon ranges from stoic to pessimistic. 
Local business leaders and economists cite decreasing 
competitiveness, growing uncertainty, uncontrolled spending, and 
a failure to broaden the tax base among their strongest 
criticisms.  While Nuevo Leon's large maquiladora sector shares 
much of this criticism, it expects to suffer fewer negative 
consequences due to changes in the tax code.  End Summary. 
 
 
 
¶2.  (SBU)  The Chamber of Transformational Industry of Nuevo 
Leon (CAINTRA) has been an early and credible critic of the 
fiscal package.  The President of CAINTRA, Andres Garza Herrera, 
argued in interviews with local media before passage of the bill 
that the best way to meet revenue shortfalls was to eliminate 
exceptions to the corporate income Tax (ISR), expand the Value 
Added Tax (IVA) to include food and medicine, and reduce 
spending, concentrating particularly in public retirement 
benefits.  After passage of the bill, Guillermo Dillon Montana, 
Director General of CAINTRA, expressed disappointment with the 
fiscal package, noting that the legislature had made 
insufficient efforts to reduce spending, which had increased 
over 90% in the last 8 years and that no effort had been made to 
expand the taxpayer base. 
 
 
 
¶3.  (SBU)  In a private conversation with Econoff, Dillon 
elaborated on his earlier public comments, noting that while 
other governments were creating stimulus to deal with the 
economic crisis, Mexico's fiscal policy was precisely the 
opposite.  He declared that not only would this package remove 
capital from the most productive sector of Mexico's economy, but 
that many of the taxes seemed almost designed to reduce Mexico's 
competitiveness and punish those most in need of opportunity. 
He cited the tax increase on telecommunications, as an example, 
noting that Mexican internet and telephony were already less 
efficient and more expensive than those in competing nations. 
 
 
 
¶4.  (SBU)  John Castany, President of the Nuevo Leon Maquiladora 
Association (AMNL), was more sanguine about the changes.  He 
explained that while maquiladoras, businesses dedicated to 
assembly for export, represent a great portion of the industry 
in Nuevo Leon, they operate under a special tax regime.  They 
use a transfer pricing scheme to determine their tax burden when 
selling product to their US holding companies, and so are 
minimally impacted by the new fiscal package.  He noted that 
maquiladoras were profitable years ago when the ISR was 34%, and 
so those that pay the ISR now (vice the IETU, a flat rate 
business tax) can handle an increase from 28% to 30%.  Because 
maquiladoras don't sell their product in Mexico, they are 
largely unaffected by the IVA. 
 
 
 
¶5.   (SBU)  The one area where Castany felt maquiladoras might 
suffer was in the proposal to roll back "consolidation," a tax 
avoidance strategy whereby a holding company writes the losses 
of one subsidiary off against the profits of another.   Changes 
made to current law are retroactive, meaning that companies not 
only will have to change their tax strategies going forward, but 
will have to recalculate their obligations going back as far as 
six years.  Castany felt that this was not only burdensome, but 
contributed to an environment of greater uncertainty for 
potential investors. 
 
 
 
¶6.  (SBU)  In Castany's opinion, this greater uncertainty  is 
significant for both Mexico and the US.  He notes that when a US 
corporation relocates operations to Mexico, its supply chains 
are largely left intact.  However, when corporations move 
operations to Asia or elsewhere overseas, they take their supply 
chains with them, resulting in an even greater loss of jobs 
within the NAFTA community.  Thus, he sees the issue of sound 
fiscal policy and tax policy in Mexico as contributing not only 
to the economic health of the country, but to the competitive 
power of North American trade relative to Asia and the European 
Union. 
 
 
 
¶7.  (SBU) Robert Chandler of the Monterrey chapter of the 
American Chamber of Commerce (AMCHAM) echoed Castany's 
conclusion that maquiladoras wouldn't be as adversely affected 
 
MONTERREY 00000438  002.2 OF 002 
 
 
by changes to the tax code as other sectors of Mexican industry. 
 However, he noted that the nation as a whole was growing less 
competitive on an international scale; he felt that the current 
package failed to address this completely, and would, in fact, 
worsen the situation in several respects.  He suggested that the 
effective collection rate for the IVA - generally regarded as 
the most efficient tax collected by the GOM - was only about 
48%, and that other taxes were even less effectively enforced. 
Noting that entrenched patterns of tax evasion and poor rates of 
collection summed with uncontrolled government spending resulted 
in an inability to balance the budget, Chandler stated that the 
GOM ran a serious risk of a decline in its sovereign credit 
rating. 
 
 
 
¶8.  (SBU) Chandler further emphasized that such a loss of 
confidence in Mexico's fiscal policy, combined with factors such 
as overpriced energy and telecommunications which contribute to 
the country's lack of competitiveness, would drive away even 
more foreign direct investment.  He noted multinationals such as 
Caterpillar and Nestle had already chosen to invest in their 
operations in Brazil instead of Mexico, and he expected that 
others would follow suit. 
 
 
 
¶9.  (SBU) Comment.  All the individuals with whom Econoff spoke 
recognize Mexico's need to manage its debt in order to maintain 
its sovereign credit rating, attract foreign investment, and 
foment economic growth.  Yet all see the tax increases levied 
upon the formal sector  in an attempt to do this - in particular 
the portion retroactively altering the rules of consolidation - 
as even more discouraging to foreign direct investment and 
economic growth than increasing the national debt.  Guillermo 
Dillon Montana of CAINTRA, in commenting on this dilemma, noted 
that controlling spending is the only real solution, but that 
this has proven politically impossible.  Accordingly, his 
organization feels that political reform is necessary before 
Mexico can even attempt real economic reforms.  CAINTRA is 
drafting a national reform proposal which will call for such 
dramatic changes as a reduction in the number of elected 
representatives and allowing for their reelection in hopes of 
increasing continuity and technical knowledge among the 
governing class.  CAINTRA hopes to disseminate this proposal 
through Mexico's largest business associations, including the 
Owners Confederation of the Republic of Mexico (COPARMEX), the 
Confederation of Chambers of Industries of Mexico (CONCAMIN), 
the Confederation of National Chambers of Commerce, and the 
Business Coordinating Council (CCE).  Dillon acknowledges the 
magnitude of the challenge involved in affecting such reform, 
but feels that it is the only way forward. 
WILLIAMSON