Mexico's Tax-Free Shopping Incentive

In light of slow economic growth in Mexico, the Tourism Ministry announced a tax credit on May 15 in the hopes of maintaining tourist interest

Wary of losing much-needed cash from recession-battered Americans, Mexico for the first time is dropping its sales tax for tourists.

Starting in June at five main airports, foreign tourists who have spent at least 1,200 pesos ($115) in approved shops will be able to use kiosks to claim back the 15% tax that had been charged on souvenirs and other goods they bought at various resorts and cities, the Mexico Tourism Ministry said on May 15.

Tourism brought $13 billion into Mexico last year and was the country's third most important source of foreign income, after oil exports and money wired home from Mexicans living abroad.

Incentive Tactics

Benjamín Díaz, the Tourism Ministry official charged with improving regulations governing the industry, says 80% of foreign tourists visiting Mexico were from the U.S. The move is aimed largely at keeping working- and middle-class Americans flocking to Mexico's pristine beaches and Mayan ruins.

"We know that Americans are facing a very severe recession and that some of them are choosing to only travel within the United States," Díaz says. "It's important for Mexico to offer those Americans who decide to travel abroad despite the recession an extra economic incentive: giving them back their tax."

The government decided to introduce tourist tax breaks after watching their success in other Latin American countries, including Argentina, says Díaz. The break will apply to shopping, not to hotels or restaurants. It will first be available at Mexico City, Cancún, Guadalajara, Los Cabos, and Puerto Vallarta airports. Five more airports, including those at Cozumel and Mazatlán, will join the list by the beginning of 2009, followed by the rest of the country's airports and cruise ship maritime ports.

Domino Effect

Of the money they can claim back at airports, tourists will be able to get half in cash pesos, up to a maximum of 10,000 pesos ($955). The rest will be credited to their bank accounts or credit cards within 40 days. Officials are hoping the windfall will tempt some returning tourists into the country's own duty-free shops.

Economic growth is slowing in Mexico, as the hit from the U.S. recession offsets a boom in oil revenues. The government expects gross domestic product to expand by 2.8% this year, compared with 3.3% last year. The country depends heavily on manufacturing exports to the U.S., which have slowed due to the U.S. downturn. More than 21 million tourists visited Mexico in 2007, but the figure was only a very slight increase on the previous year. The country is keen to draw in as many tourist dollars as possible after its current account deficit rose to 0.8% of gross domestic product last year, from 0.2% of GDP in 2006.

Oil exports soared nearly 10% last year in cash terms to a record $43 billion as international prices rose. But the country's second most important source of foreign income—cash wired home by migrants living mostly in the U.S.—crept up only 1%, to $24 billion.

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