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Mexico May Speed Up Tax Overhaul If 2020 Revenue Disappoints

Eric Martin and Andrea Navarro

(Bloomberg) -- Mexican President Andres Manuel Lopez Obrador’s administration may speed up plans for drafting and debating a tax overhaul to generate more revenue if 2020 budget assumptions turn out to be overly optimistic, a top official said.

The finance ministry is exploring different scenarios to revamp taxes rather than increase debt or implement additional spending cuts if resources come up short next year, Finance Undersecretary Gabriel Yorio said. Changes would need to be progressive and fair, he added without providing details.

“The finance team is making sure that we’re ready with a fiscal reform for the president starting next year if things don’t turn out the way that we expect,” Yorio said in an interview at the National Palace on Tuesday. “If we need more revenue to be able to spend more, we’ll need to accelerate the reform.”

Any tax overhaul would incorporate advice of the Organisation for Economic Co-operation and Development, and the nation needs to do a better job of collecting taxes under existing law, according to Yorio. He cited an analysis from the International Monetary Fund that found Mexico’s 16% value-added tax has a 50% evasion rate. By reducing evasion by half, he said, Mexico would raise 250 billion pesos ($11.62 billion), or about 1% of gross domestic product, in additional revenue.

Lopez Obrador has promised not to increase taxes in the first half of his six-year administration. Yorio said that, if conditions make it necessary, an overhaul could be crafted and debated next year to take effect in 2022, still keeping the president’s promise. It would require consensus among political parties and economic players, he said.

The central bank on Wednesday cut its 2019 GDP forecast to a range of -0.2% to 0.2% from the previous 0.2% to 0.7%.

Lagging Peers

Mexico’s tax collection amounts to about 16% of GDP, last among the 36 OECD countries and less than half the average. Latin America’s second-largest economy depends more on corporate and value-added taxes, and less on social security, personal income and property taxes, than the OECD average.

Mexican Congress this year passed a measure to crack down on evasion. In a bid to boost collection without raising taxes, Mexico’s 2020 budget requires digital companies including Uber Technologies Inc., Airbnb Inc. and Netflix Inc. to collect value-added taxes, or VAT, from their users and remit them to tax authorities. That also applies to digital advertising sales from firms such as Google and Facebook Inc.

Regarding Mexico’s investment infrastructure plan announced on Tuesday, where most of the capital comes from the private sector, Yorio said that the government has identified 63 projects worth nearly 150 billion pesos that will be developed immediately at the start of 2020. That will boost GDP growth by 0.5 percentage points and help the government reach its growth target of 1.5% to 2.5% next year, he forecast.

“We estimate there will also be a multiplier effect,” he said. “It all comes from private investment, outside the budget.”

(Adds Banxico’s GDP estimate in 6th paragraph)

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net;Andrea Navarro in Mexico City at anavarro30@bloomberg.net

To contact the editor responsible for this story: Walter Brandimarte at wbrandimarte@bloomberg.net

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