Mexico Tax Proposal Said to Exclude Food, Medicine From VAT

Mexico’s government will present a bill today to boost tax collection without applying a sales levy on food or medicine, according to two people with direct knowledge of the proposal who asked not to be identified before the plan is announced.

The measure will also seek a levy on sugary drinks and on capital gains from stock-market transactions, and raise the personal income tax ceiling to 32 percent, while leaving it at 30 percent for companies, one of the people said.

President Enrique Pena Nieto has pledged to boost tax collection as part of his plan to boost economic growth that has remained below the regional average over the past decade. Thousands of people took to Mexico City’s streets today to march against the government’s plans for everything from education to the oil industry ahead of the tax bill’s presentation. The country’s second-largest opposition party said it opposes a tax on food and medicine because it would hurt low-income earners.

“Food and medicines are things that affect everybody,” Eric Farnsworth, head of the Washington office of the Council of the Americas, said in a telephone interview yesterday. “The last thing the PRI wants to do is give one of their primary opposition parties a silver platter way to attack tax reform.”

Pena Nieto’s Institutional Revolutionary Party, known as the PRI, sparked speculation that a value-added tax on food and medicine would be imposed after it ended a ban in March that prohibited its members from voting to approve such levies.

Street Protest

The president will propose the tax overhaul today at the presidential manor after his administration delivers the 2014 budget plan to congress. His office and the Finance Ministry press department declined to comment about details of the tax reform.

Pena Nieto’s economic proposals will bring “social instability to the nation,” Alejandro Sanchez Camacho, secretary general of the opposition Democratic Revolution Party, said yesterday in a statement.

Andres Manuel Lopez Obrador, runner up in last year’s presidential election, is leading a street protest today against food and medicine taxes and Pena Nieto’s bill to open the energy sector to more private investment. Marchers gathered blocks from the Zocalo, the capital’s main square, which for weeks has been occupied by a tent city of demonstrators against Pena Nieto’s separate education overhaul.

Cesar Camacho, the PRI’s president, said in a Sept. 4 interview he’s against charging duties for medicine.

Pemex Taxes

Pena Nieto’s tax changes are seeking to wean Latin America’s second-largest economy off its dependence on oil revenue. Income from oil funds about a third of the federal budget, and tax revenue in Mexico is the lowest as a percentage of gross domestic product among 34 members of the Organization for Economic Cooperation and Development.

The president has promised to lower the tax burden for state-owned oil producer Petroleos Mexicanos, or Pemex, so the company can bolster investment. He’s said the overhaul will also ensure those who earn more pay more taxes and will help guarantee pensions and unemployment insurance for all Mexicans.

The tax bill would seek to increase non-oil levies Mexicans pay by 1.4 percentage points of gross domestic product next year and by 3 percentage points by 2018, and would lift the value-added tax at border cities to 16 percent from 11 percent, one of the people with knowledge of the bill said. The president will also propose a constitutional amendment to guarantee pensions for all Mexicans, the person said.

Budget Deficit

The reform would end a tax benefit that allows holding companies to postpone paying taxes. The government will seek a budget deficit of 1.5 percent for 2014, excluding investment in Pemex, while requesting this year’s balanced budget be revised to allow a 0.4 percent deficit, the person said. It wasn’t clear whether Pena Nieto would propose food and medicine taxes in the future if the economy improves, the person said.

Growth slowed more than analysts forecast this year, leading the central bank to unexpectedly cut its benchmark rate by 25 basis points, or 0.25 percentage point, to a record-low 3.75 percent on Sept. 6. The government on Aug. 20 reduced its 2013 growth estimate to 1.8 percent from 3.1 percent after exports stagnated and government spending slowed.

About 46 percent of the Mexican population, or 53.3 million people, were living in poverty last year, according to the national council on social development policy.

Deficit Concerns

If the details of the government’s plan are correct, the fiscal overhaul probably won’t trigger a ratings upgrade right away, while next year’s 1.5 percent budget deficit might be viewed negatively by the market, said Nomura Holdings Inc. strategist Benito Berber.

Credit-ratings company Moody’s Investors Service has said it will closely follow the tax overhaul proposal. To receive an upgrade from Moody’s, which has rated Mexico Baa1 since 2005, the country’s revenue base would need to be “widened, diversified enough for the Mexican government not to rely so much on oil tax-related revenue,” Alberto Jones, the ratings company’s Mexico chief, said at the July 10 Bloomberg Mexico Conference in New York.

The government’s tax bill would be considered “diluted” if it fails to generate more than 2 percentage points of GDP in additional taxes unrelated to oil revenue, Berber wrote in a Sept. 6 research note.

“It might not meet all expectations,” Berber said of the tax overhaul today by phone from New York, saying he wouldn’t call it ’diluted.’ If the government requests a 1.5 percent budget deficit “it’s a total fiscal deficit of close to 4 percent. I think the market in that regard might not treat it very well.”

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