Mexico Lower House Approves 3% Telecommunications Tax

Mexico’s lower house of congress approved a bill to apply a 3 percent tax on telecommunications services, forcing America Movil SAB (AMXL) and other carriers to decide whether to absorb the cost or pass it on to consumers.

Lawmakers also passed excise taxes on alcoholic beverages, tobacco and gambling in an economic package that includes the 2010 budget. The Senate is scheduled to vote on the income part by Oct. 30.

The legislation also would boost taxes on income and sales, presenting a “worst-case scenario” for America Movil, said Andres Coello, an analyst at BBVA Bancomer SA. The wireless carrier, controlled by billionaire Carlos Slim, may find it difficult to pass the tax increases to customers because about 92 percent of its Mexican clients use prepaid phone cards for a package of minutes, Coello said today in a research note.

Absorbing the taxes would reduce cash from operations by 8.4 percent next year, Coello said.

Cash flow at Telefonos de Mexico SAB, Mexico’s largest land-line phone company, may drop 16 percent if the company swallows the cost of the taxes to keep prices competitive, Coello said. He expects shares of America Movil and Telmex, both based in Mexico City, to perform worse than the broader market.

America Movil fell 8 centavos to 31.04 pesos at 4 p.m. New York time in Mexico City trading. Telmex dropped 13 centavos to 11.34 pesos.

To contact the reporter on this story: Jens Gould in Mexico City at jgould9@bloomberg.net; Crayton Harrison in Mexico City at tharrison5@bloomberg.net

To contact the editor responsible for this story: Julie Alnwick at jalnwick@bloomberg.net

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