July 23, 2013

Commerce News

Higher Border Sales Tax Opposed

Mexican business leaders in the northern border region are mobilizing against an increase in sales taxes that could result from a looming tax reform. In a petition to their federal government, the presidents of 12 border area chambers of commerce argue against a possible sales tax hike on the grounds that it would harm local businesses and benefit competitors just across the border in the United States.

Mexican residents of the northern border region currently pay an 11 percent value-added tax known as the IVA, which functions as a sales tax, on many formal commercial transactions, while residents in the interior of the country pay a 16 percent tax. Business leaders have long maintained- and continue to do so- that their proximity to the United States with its lower sales taxes makes a reduced IVA in the border region a necessity.

“We are not asking for additional benefits or privileges,” said Carlos Escobar Royval, president of the Ciudad Juarez Chamber of Commerce. “Rather, we want (government) to make us more competitive because of the economic and geographic zone we live in and free us from so much administrative burden.”

Shoppers in Ciudad Juarez, Tijuana and Mexicali and other Mexican border cities pay the 11 percent tax on their purchases, but consumers in the U.S. sister cities of El Paso, San Diego and Calexico pay sales taxes in the 8-8.5 percent range.  Every year,  Mexican shoppers spend billions of dollars on the U.S. side of the border in search of bargains.

Mexican business representatives contend that standardizing the border IVA with the national IVA will accelerate the outflow of money. Baja California alone, they assert, could see additional losses in the neighborhood of $300 million annually, not to mention thousands of jobs. The business leaders are also petitioning for other policy changes, including an easing on restrictions connected to the spending of U.S. dollars in Mexico.

The business petition came at a moment when the administration of President Enrique Pena Nieto is preparing a tax reform package that’s aimed at reducing dependence on oil revenues while securing new revenue streams  in order to maintain and/or expand education, health, social security and infrastructure development programs.

The urgency of tapping into new revenue streams was most recently underscored by the United Nations Economic Commission for Latin America and the Caribbean (Cepal), which warned that “financing and fiscal sustainability” were threatened by declining oil production.  According to Cepal, Mexico tops the list of Latin American oil producers experiencing production declines. Mexican oil reserves plummeted from 60 billion barrels in 1995 to 15 billion barrels n 2010, the international organization stated.

In this context, new tax legislation is expected to be introduced in the Mexican Congress in September. Yet, hiking the IVA or taxing food and medicine are highly controversial propositions likely to touch off stiff public opposition.

Reportedly, the Pena Nieto administration is considering proposals to mollify opposition to an IVA increase. One such measure would increase income taxes on individuals earning $4,600 or more per month, an amount which is more than ten times the average monthly Mexican income of $430. Another change under consideration would tax processed food but exempt staples like beans, corn and rice.

In 2003, President Pena Nieto’s Institutional Revolutionary Party (PRI) defeated a proposal by the administration of then-President Vicente Fox to tax food and medicine. More recently, however, the PRI changed its party statutes to permit the taxation of the two items. Together with its allies from other political parties in the Pact for Mexico, the PRI is believed to have the sufficient number of votes to pass a tax reform in the Congress in the coming weeks.

Sources:  La Jornada, July 22, 2013. Article by Susana Gonzalez G. El Diario de El Paso/Wall Street Journal, July 20, 2013. Norte, July 19, 2013. Article by Nancy Gonzalez Soto.

Frontera NorteSur: on-line, U.S.-Mexico border news
Center for Latin American and Border Studies
New Mexico State University
Las Cruces, New Mexico

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