Can we expect reforms to the Mexican fiscal reform?

Implications: One month after the new fiscal reform was submitted to Congress, the debate has centered on changes to the flat tax (CETU) that will eventually substitute the revenue-based tax regime. Business organizations are lobbying to reduce the CETU from 19 percent to 12 percent. Ironically, the key to the final outcome may lay in the hands of PRI senators.

Analysis: Almost a month ago, the Mexican Treasury sent to Congress its proposal of fiscal reform. Since then, the critiques from all sides of the political spectrum have gradually gained momentum.

On the domestic business front, the Consejo Coordinador Empresarial (CCE), the most influential business council, demands a lowering of the CETU (the flat tax contained in the proposal) from 19 to 12 per cent. The CCE also wants a clarification as to how long the existing revenue tax will coexist with the CETU and assurances that the new tax will be covered under the international taxation treaties so that companies are not subject to a double taxation. Representatives from the maquiladora industry are lobbying to obtain the deduction of payroll and inputs which are temporarily imported into the country. The real estate industry wants the allowance of the Treasury to credit the land owned as part of the assets of a company.

The visit of the Spanish President, José Luis Rodriguez, to Mexico was the occasion for some of the leading Spanish businessmen to also voice openly their concerns about the reform. They argued that the new scheme will have a very negative impact on the hotel industry since the calculation of the CETU will not allow deductions of payroll expenditures nor of interests on debt.

On the political front, the Frente Amplio Progresista, which groups the PRD and other leftist parties, has continued to promote its own version of the reform based on the elimination of fiscal privileges and a large reduction of public expenditure. Although the leader of the PRD and former presidential candidate, Andrés Manuel López Obrador, gave an instruction of “zero negotiation” with the Calderon administration, his followers in Congress have decided instead to actively defend the party’s proposal among legislators.

Some leading PRI Congressmen have conditioned their support to the fiscal reform to the inclusion of changes to the fiscal regime of PEMEX. The National Confederation of state Governors, CONAGO, requests the right for states to administer the VAT and the revenue tax imposed on public workers and individuals.

Nobody questions the need for a reform for a very simple reason: the level of taxation in Mexico is extremely low (11% of GDP) and there is a dangerous dependence of fiscal revenue on oil income (40%), which in all probability will tend to be lower and increasingly volatile. In other words, there are no other choices at this moment, and Mexico desperately needs a reform.

Yet, the growing critiques to this package signal two things: that it will be very difficult for Congress to pass the reform during an extraordinary session as was expected when the proposal was disclosed, and that it will probably include some major changes. From the recent approval of pension reform, the Calderon administration has learned that it might be better off to negotiate a watered-down version of the fiscal reform than paying the political cost of no reform at all.