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Mexico Tax Plan Signals Belt-Tightening, JPMorgan Says

Pena Nieto Tax Plan Means Mexico Belt-Tightening to JPMorgan
A worker makes deliveries of Coca-Cola products in Mexico City. Photographer: Susana Gonzalez/Bloomberg

Mexican President Enrique Pena Nieto may propose applying new food and soft-drink levies, boosting income tax rates, tightening corporate tax rules and scrapping gasoline subsidies, JPMorgan Chase & Co. analysts said.

The 2014 budget and tax proposal will attempt to increase the government’s non-oil revenue while lightening the fiscal burden on state-owned oil monopoly Petroleos Mexicanos, JPMorgan’s Nur Cristiani, Gabriel Lozano and Steven Palacio said in a report today. The plan is set to be unveiled Sept. 8.

Pena Nieto’s plan “will likely involve a heated discussion as many of the matters under review are highly unpopular,” the JPMorgan analysts said. “The government will need to carefully balance tax collection with lower dependency on oil revenues and current economic and consumption deceleration.”

Mexico’s central bank changed the backdrop for Pena Nieto’s announcement with the second cut this year in its benchmark interest rate after inflation decelerated to within its target range and the economy expanded at the slowest pace since the 2009 recession. Lower rates may stimulate growth, easing the sting of possible tax increases.

Stocks reversed an earlier decline on the surprise rate cut, sending the IPC index up 0.6 percent at the close in Mexico City. The gauge slid 5.3 percent in the month that ended yesterday.

Inflation Effect

Pemex, which provides about a third of government revenue, will be one focus of Pena Nieto’s plan, according to the JPMorgan report, “Tighten Your Belts, Fiscal Reform Is Coming.” The company has said it needs lower taxes and more investment as it strives to reverse eight straight years of production declines.

Changes in the tax mix may produce a “long-term” increase in non-oil government revenue of as much as 2.8 percent of gross domestic product, the New York-based bank said.

The plan may include an increase in the income tax rate for higher earners to as much as 38 percent from the current level of 30 percent, and changes to corporate tax law that raise the effective rate, according to the JPMorgan analysts. Also possible is the imposition of a tax on gasoline and an end to subsidies for the fuel, the analysts said.

Food Tax

Pena Nieto may also propose applying a 4 percent value-added tax to food, which could gradually climb as high as 8 percent in subsequent years, JPMorgan said. Medicine and basic foods would probably be exempt. A 20 percent excise tax on beverages, excluding bottled water and milk, is also possible.

Under the plan, Mexico’s annual inflation rate may rise by about 1.8 percentage points next year, plus a cumulative 0.5 percentage point over the following three years, according to JPMorgan. Annual inflation rose to 3.54 percent in the 12 months through mid-August, the government said on Aug. 22.

The need to boost tax receipts goes hand in hand with Pena Nieto’s August proposal to allow more private investment in the energy industry.

“The fiscal bill will be equally important, as changes aiming to liberalize the energy sector -- including a revision of Pemex’s current fiscal regime -- would need to be accompanied by changes aimed at boosting non-oil public revenues,” the JPMorgan analysts wrote.

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