Mexico plan to beef up tax revenues nears final Senate approval


By Michael O'Boyle, Miguel Gutierrez and Dave Graham

MEXICO CITY, Oct 30 (Reuters) - Mexico's Senate on Wednesdaywas close to passing a package of measures to bolster thecountry's weak tax revenues, including higher taxes for therich, levies on sugary drinks and junk food, as well as a chargeon stock market gains.

After giving general approval to the fiscal bill late onTuesday, the Senate must still vote on divisive sections thatlawmakers want to repeal or amend, a process which has been heldup by opposition from conservatives.

On Wednesday evening, leftist opposition lawmakers said theyhad agreed to changes that would further lower the bill'soverall tax take and require the reform to be sent back to thelower house for final approval ahead of an end-of-Thursdaydeadline.

The fiscal reform is one the main planks of PresidentEnrique Pena Nieto's economic agenda, and although it will notraise as much new revenue as had originally been hoped, it hasprompted vigorous attacks from opponents and lobbyists.

Disputes over the bill, which aims to introduce a new topincome tax rate of 35 percent, risk complicating negotiationsover other reforms sought by the Revolutionary InstitutionalParty, which lacks a majority in Congress.

At the center of the president's reform ambitions is hisproposal to open up the state-run oil industry to more privatecapital. On this front, the PRI is banking on assistance fromthe conservative National Action Party, or PAN.

But the PAN has been at loggerheads with the PRI over thefiscal reform, forcing the PRI to work with the leftist Party ofthe Democratic Revolution (PRD) to improve the tax take. ThePRD, by contrast, is against Pena Nieto's energy reform.

The PAN walked away from the Senate debate on proposedamendments to the fiscal bill early on Wednesday after accusingthe PRI of not taking its concerns seriously.

The PAN was upset when it failed to stop the standard rateof value added-tax of 16 percent from being extended to borderstates that now pay an 11 percent rate, and has said it will notreturn to debate the proposed amendments.

Senators took up discussion of the bill again on Wednesdayevening, with lawmakers expecting a speedy vote on the reformthat will boost Mexico's tax receipts by less than thepreviously estimated 2.7 percent of economic output by 2018.

Senators said they did not yet have an estimate for theimpact the agreed-to changes would have on overall tax receipts.

"Without a doubt it's a decrease in revenues that will meana decrease in spending," said PRD Senator Armando Rios Piter,who negotiated changes to the bill with the PRI.


Once the fiscal reform is passed, Congress will set aboutapproving Pena Nieto's energy overhaul, which aims to lureprivate capital with profit-sharing contracts.

But the PAN feels Pena Nieto's model does not go far enoughto attract major investment, and lawmakers in the party havepledged to pressure the PRI into providing greater incentives tooil companies, such as production sharing contracts.

That could put the president under attack from leftists whoaccuse the government of wanting to sell out Mexico's oil wealthto foreigners and could mobilize large protests.

The PAN may also push the PRI for a more radical electoralreform aimed at weakening the PRI's hold on power in Mexico.

The tax overhaul is a part of a series of reforms that PenaNieto hopes will strengthen the economy and help boost a growthrate that has lagged that of other major emerging markets.

Earlier this month, the lower house watered down the taxbill, throwing out some measures including plans to apply thesales tax to rents, mortgages, property transactions and schoolfees.

At the same time, the PRI, supported by the PRD, modifiedthe fiscal reform to lift top income tax rates, pushing more ofthe burden onto the richest section of society.

Roughly half of Mexico lives in poverty, while much of itswealth is concentrated in the hands of a few powerful familieslike that of billionaire telecoms mogul Carlos Slim.

The top rate of income tax in Latin America's No. 2 economyis currently 30 percent, but the reform sets out a sliding scaleof higher rates capped at 35 percent for those earning more than3 million pesos ($233,000) a year.

PRD senators said they had agreed with the PRI to keep theincome tax rate for those who earn between 500,000 pesos and750,000 pesos at 30 percent, versus a proposed 31 percent.

They also agreed to raise a planned levy on junk food from 5percent to 8 percent, and increase the percentage of workers'benefits that companies can deduct from their total tax bill.

Changes to the reform require the bill to be sent back tothe lower house of Congress.

Changes to the tax bill in the lower house in mid-Octobercreated a shortfall in the budget plan for next year.

That prompted lawmakers to raise the government's oilrevenue estimate and make other changes to close the gap. Theseare due to be voted by the Senate by Oct. 31. The tax bill istied to the budget, which must be approved by mid-November.

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