Mexico Lower House Approves Tax Law Adding Junk Food Levy

Mexico’s lower house passed a bill to raise taxes, including a new levy on junk food, as President Enrique Pena Nieto tries to shift part of the burden of financing the government from the oil industry to consumers.

The house voted 317-164 yesterday to approve a modified version of Pena Nieto’s bill that increased the top income tax rate to 35 percent from a proposed 32 percent and created a 5 percent tax on high-fat foods. The bill, which stripped out the initial plan to tax private education tuition, mortgage interest and home rentals, now heads to the Senate.

Pena Nieto is pushing reforms to boost investment in the energy sector, which accounts for 6.2 percent of the economy, according to Barclays Plc, as he seeks to lift growth above 5 percent. Latin America’s biggest economy after Brazil has expanded less than the region in the past decade, with growth missing analyst estimates in the first two quarters of the year as the government reduced public spending and oil output heads for an eighth straight year of declines.

“It’s a victory for Pena Nieto,” Alonso Cervera, chief Mexico economist at Credit Suisse Group AG, said in a phone interview. “This helps public finances in that you have a stronger fiscal responsibility law and you have reduced dependence on oil-related revenues.”

Stock Declines

The yield on fixed-rate government peso bonds due in 2024 were unchanged at 5.71 percent as of 9:02 a.m. in Mexico City after plummeting 14 basis points yesterday after the bill passed a lower house committee and the U.S. reached an accord on its debt ceiling. The peso weakened 0.1 percent to 12.7918 against the U.S. dollar after strengthening 0.5 percent yesterday.

The junk food tax sparked stock declines yesterday for food companies such as Grupo Bimbo SAB, the world’s largest baker, and Gruma SAB, the world’s biggest tortilla maker.

“This won’t be easy” on companies, Carlos Hermosillo, an equity analyst with Grupo Financiero Banorte SAB, said in an e-mailed response to questions. The tax on items containing 275 kilo-calories per 100 grams “would include many products.”

Gruma fell 0.5 percent today to 80.25 pesos after dropping 3.3 percent yesterday in Mexico City. Bimbo rose 1.8 percent to 41.37 pesos today, paring yesterday’s decline of 2.2 percent. The benchmark IPC index increased 0.8 percent after declining 0.4 percent yesterday.

Bimbo said in an e-mailed response to questions that it’s studying the legislation and tax contributions should be “just and adequate, and applied transparently and responsibly in favor of society.”

Border Tax

Lawmakers from the National Action Party, the biggest opposition group in Congress, opposed the bill after Pena Nieto’s Institutional Revolutionary Party, or PRI, refused to drop its plan to increase the sales tax in states that border the U.S., including traditional strongholds for the party known as PAN.

A higher tax rate for top earners and duties on high-fat foods were proposals pushed by the Democratic Revolution Party, or PRD, the second-largest opposition group.

The government is “bringing in the PRD and they’re giving certain concessions in order to get their votes,” Benito Berber, a strategist at Nomura Holdings Inc., said in a telephone interview from New York. “This is a victory for the president and the finance minister. They found an ally that allows them to pass a not-so-diluted fiscal reform.”

Revenue, Budget

Under the bill approved yesterday the maximum income tax rate will increase to 35 percent for people making more than 3 million pesos ($235,000) from 30 percent. Pena Nieto had proposed increasing the top tax rate to 32 percent for more than 500,000 pesos in income.

The lower house is still debating next year’s spending plan, and the full chamber has a deadline of Oct. 20 to pass the revenue portion of the budget.

Pena Nieto’s proposal to reduce the tax burden of state oil company Petroleos Mexicanos was removed from the fiscal bill. It will be discussed along with a separate energy reform later this year, Videgaray said.

Mexico’s economy will grow 1.7 percent this year after expanding 3.9 percent in 2012, according to government estimates.

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