President Faces Uphill Struggle to Implement Tax Reforms - International Law Office

International Law Office

Corporate Tax - Mexico

President Faces Uphill Struggle to Implement Tax Reforms

August 21 2009


Mexico's recent elections, which saw the main opposition party win control of the Chamber of Deputies, have changed the balance of political power. The Chamber of Deputies plays a key role in Congress's approval of tax bills and the change will force President Calderón to negotiate with the opposition parties in pursuing the tax reforms that are needed to remedy Mexico's complicated economic situation.

The mid-term congressional elections on July 5 2009 were marked not only by a low turnout,(1) but also by the opposition's gains. The results have changed the political outlook for the final three years of the Calderón administration, as the National Action Party (PAN) has lost its simple majority in the Chamber of Deputies, which is now controlled by the Institutional Revolutionary Party (PRI).

During the first three years of the Calderón government, the PAN's control of the Chamber of Deputies(2) allowed it to pass the flat-rate business tax - which came into force on January 1 2008 following publication of the legislation on October 1 2007 - as well as many other tax bills. However, for the next three years the PRI will hold 237 seats (a 47.4% share), compared with the PAN's 143 seats (28.6%). Although this gives neither party an absolute majority, the Green Party is connected to the PRI and will presumably add its 21 seats to the new main party's voting bloc.

The implications of this new balance of power for fiscal policy and the president's ability to introduce timely tax measures are all the more serious in view of the state of Mexico's economy and the global financial crisis. The Bank of Mexico expects gross domestic product to fall by 6.3% during 2009, whereas the International Monetary Fund predicts a 7.3% drop - either scenario will result in less tax revenue. Mexico urgently needs a reform programme that allows the government to increase its tax revenue and become less reliant on income from petroleum. The president is due to submit a preparatory bill on the 2010 Federal Budget by September 8 2009 - this annual pre-budget outline is usually accompanied by amendments to tax measures, and experts will scrutinize it for indications of the president's future fiscal policy.

The passage of future tax reform measures has been further complicated by the recent announcement by Manlio Fabio Beltrones, the PRI's leader in the Senate, that his party will not approve measures on value added tax on food and medicine. Beltrones has also called on the Ministry of Finance and Public Credit to choose between income tax or flat-rate business tax, declaring that the imposition of both taxes is an excessive burden in light of the economic problems faced by Mexican taxpayers.

For further information on this topic please contact Christian R Natera or Jose Pizarro at Natera y Espinosa SC by telephone (+52 55 5249 4400), fax (+52 55 5249 4401) or email (cnatera@natera.com.mx or jpizarro@natera.com.mx).

Endnotes

(1) Over 55% of the electorate did not vote, with a further 5% casting invalid votes.

(2) The PAN held 206 seats (a 41.2% share), followed by the Party of the Democratic Revolution with 125 seats (25%) and the PRI with 106 seats (21.2%).


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