Mexican Congress Passes Tax Bill With Higher Junk Food Levy

Mexico’s congress increased a proposed junk food levy as it passed a tax bill championed by President Enrique Pena Nieto to reduce the nation’s dependence on oil revenue and promote growth.

The lower house voted 299-160 with one abstention yesterday to impose an 8 percent tax on high calorie foods, such as PepsiCo Inc.’s Cheetos, following the same decision by the Senate. The measure, which also raises income taxes and creates new duties on capital gains and sugary drinks, now awaits Pena Nieto’s signature. The senate version raised the tax on junk food from an originally proposed 5 percent.

Pena Nieto plans to lift growth, which slowed more than the government expected this year, by shifting taxes away from the state-controlled energy sector to spur both public and private investment in oil. The president overcame political opposition to pass the reform, which bodes well for his proposal to break a 75-year state monopoly on oil, according to Alonso Cervera, chief Mexico economist of Credit Suisse Group AG.

“This is the most challenging reform he has faced and he’s been successful,” Cervera said in a telephone interview. “This is a good reform to strengthen public finances and give the government more flexibility to spend.”

The peso weakened 0.4 percent to 13.0680 per dollar at 10:35 a.m. in Mexico City. The yield on fixed-rate peso-denominated government bonds due in 2024 rose five basis points to 6.08 percent.

Soda Impact

The lower house approved changes made by the senate to reduce the income tax for those who earn between 500,000 pesos ($38,384) and 750,000 pesos per year to 30 percent from the 31 percent initially passed by the house. The measure still raises the income tax ceiling to 35 percent from 30 percent for high earners and leaves untouched a new tax on sugary drinks of 1 peso per liter passed by the house.

The National Soft Drink Producers Association, which includes Coca-Cola Femsa SAB and Arca Continental SAB, Latin America’s biggest Coca-Cola bottlers, estimates that a 1 peso per-liter soda tax would result in the loss of 20,000 jobs, from workers who cut sugar cane to those in factories.

Carlos Capistran, chief Mexico economist at Bank of America Corp., said the new levies won’t sufficiently widen the tax base and may negatively impact companies.

Stocks from Latin America’s biggest Coca-Cola bottlers have fallen since Pena Nieto presented the tax bill Sept. 8. Coca-Cola Femsa lost 6.1 percent and Arca has dropped 8.7 percent.

Reduced Incentives

“I worry a bit that the new taxes may reduce incentives to invest,” Capistran said in an e-mailed request for comment earlier this week. “In the end, the reform is getting more resources from debt than from taxes in 2014, which increases public debt and is something to monitor going forward.”

Pena Nieto presented along with his tax measure a proposal for a 2014 budget deficit of 1.5 percent of gross domestic product, excluding investment in Pemex. Congress had approved a balanced budget for this year. He’s also proposed a bill currently before the senate to increase private investment in the energy sector.

Grupo Bimbo SAB, a maker and vendor of bakery products, is reviewing the option of “reformulating” some of its products to lower their caloric density, Chief Executive Officer Daniel Servitje said in an Oct. 24 conference call.

In addition to the junk food tax, the legislation imposes a 10 percent levy on capital gains, a 7.5 percent duty on mining company profits and an increase in sales taxes in regions bordering the U.S. to 16 percent from 11 percent, bringing them in line with the rest of the country.

Last-Minute Accord

The opposition Democratic Revolution Party, or PRD, said it reached a last-minute agreement with the Finance Ministry to change the bill in the Senate on Oct. 30 as yesterday’s deadline loomed for passage of the 2014 revenue portion of the nation’s budget.

The revenue plan was approved late yesterday with a spending budget of 4.467 trillion pesos, 3 billion pesos less than the lower house’s proposal, after the Senate altered the tax reform.

The largest opposition National Action Party voted against the tax overhaul.

Analysts forecast the economy will grow 1.2 percent this year from 3.9 percent in 2012 after the government reduced spending in the first half and exports to the U.S. stagnated, according to an Oct. 22 survey by Citigroup Inc.’s Banamex unit.

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