Finally a fiscal reform coming up in Mexico

Implications: After three months of debate, the PRI and PRD have reached an agreement on changes to the fiscal reform package proposed by the Calderon administration. There is a good chance the reform will be passed by Congress in September. 

Analysis:

The bad news on the fiscal front in Mexico is that there is a zero chance of an extraordinary period in the Mexican Congress to vote on the fiscal reform. The good one is that, after almost three months of intense debate, the opposition parties PRI and PRD have reached an agreement on changes to make to the original draft submitted by President Calderon, which opens the way to its approval.

The changes include:

With regard to wages and employment:

§The proposed CETU (Contribución Empresarial de Tasa Unica) is replaced by an ITU (Impuesto de Tasa Unica or Single Flat Tax), which is kept at 16 per cent in 2008 and 19 per cent thereafter.

§Social security expenses become deductible.

With regard to investment and inventories:

§100 per cent of investments made in 2007 will be deductible, as well as the total amount of inventories held at the end of 2007.

§Companies will be able to credit those losses previously accumulated under the income tax.

With regard to the “tax on informality”:

§There will be no changes with regard to the current fiscal regime

With regard to the stock market:

§A new tax will be imposed on stock market operations when they imply a change or transfer of the control of the companies. There are no details as to how this tax would be applied.

With regard to tax on gasoline:

§Instead of a state tax, there would be a federal tax of between 4 to 5 per cent. The states would share the revenues.

With regard to donations:

§Philanthropic institutions and schools will not be subject to flat tax.

With regard to control of the expenditure:

§The resources obtained through the reform would be labeled for specific purposes, instead of just adding them to the general budget.

By the end of next week, the Treasury Commission of the Lower House will conclude its analysis of the proposed reform. This pronouncement will then be brought to the floor of Congress on September 3. Presumably, the proposal would be voted on September 5 so that the Ministry of Finance may take it into consideration in their budget for 2008.

Some informed political analysts argue that there is still a chance that the reform could be passed until mid or late September because the PRI wants to obtain additional electoral concessions out of the government.

Bottom line: there is optimism about the consensus reached and a good chance that the fiscal reform will be approved. Instead of the 2.8 per cent GDP that the Treasury sought from the reform, it will only get 2.6 per cent. It is not a high price to pay by the Calderon administration in view of current financial turbulence and bigger economic woes in the future.