Mexico Should not Lose Sight of the U.S. Tax Reform


The interview published in El Economista of our partner Manuel Toledo about the repercussions of the U.S. tax reform in Mexico is shown below:

https://www.eleconomista.com.mx/economia/Mexico-no-debe-perder-de-vista-la-reforma-fiscal-de-EU-20171218-0149.html

“Tax analysts have proposed lowering the corporate income tax rate and compensating the resulting drop in tax revenue by standardizing VAT with the exception of the basic consumer basket; this topic should be kept in mind by the presidential candidates”, they pointed out.

Experts in these matters agree that the Mexican government should not lose sight of what the final version of the tax reform backed by U.S. President Donald Trump (Rep.) will be.

According to Manuel Toledo, Tax and Legal Services Partner at Andersen Tax & Legal Mexico, although the proposal to lower corporate income tax is for 21% and not 20% as bandied about earlier, this change would be insignificant.

“A 1 percent variation of the proposal that may be approved this week really doesn’t make much of a difference with respect to what we have now, so we should be concerned and on our toes to see what we should do,” he explained.

He explained that with the corporate tax at 21% plus state taxes, the rate that United States companies have to pay would be about 26%, much lower than the rate in Mexico, taking into account that companies here pay 30% income tax, 10% on dividends and another 10% in employee profit sharing.

Therefore, he added, Mexico should look for alternatives to cope with the reform, to attract and maintain investments. In this regard, organizations such as the Mexican Institute of Finance Executives, the Mexican Institute of Certified Public Accountants and tax analysts have proposed lowering the corporate income tax rate and compensating the resulting drop in tax revenue by standardizing the Value Added Tax (VAT).

“Being able to lower the income tax rate by Executive Order would be important as a tax incentive for new investments and thus be more or less competitive,” Manuel Toledo assured us.

On the other hand, Hector Villarreal, the General Director of the Center for Economic Budget Investigation, warned that beyond how the tax reform may affect Mexico and capital flow into the country, it would be a blow to tax collection.

“It could hit us hard in tax collection but first we have to see how the complete package is approved… our income tax represents 4 points of the Goss Domestic Product, of which 3 points are paid by companies invoicing 500 million pesos or more each year,” he explained.

Both analysts agree the United States tax reform is a topic that the presidential candidates should keep in mind next year; no matter who wins, he will have to analyze the effects and look for proper measures for containing any kind of risk.
Last Friday a draft of the tax reform leaked and was sold by Trump as a “Christmas present” for those in the United States, while some Democrats consider it a gift for the wealthiest due to the drop in corporate taxes from 35 to 21 percent.

WE MUST NOT OVERREACT

Although the tax reform is important, not only for Mexico but also for other countries, we should not overreact; rather we should wait for the final document to analyze it properly, warned Hector Villarreal.

“We have to keep calm and make the necessary analyses. We have to be very much aware of the topic but we don’t have to overreact. We have to keep calm and watch what happens. We have to make serious analyses,” he added.

He added that logistic channels of distribution and production that took years to build cannot be eliminated overnight and the same occurs with investments. Also Mexico continues to be competitive due to labor costs and with the exchange rate; it is substantially cheaper than in the United States.

He also warned that if Mexico lowered its tax rate to one similar to that of the United States and even if it standardized the VAT rate, it would lose about 1 percentage point in tax collection.

“We are going to monitor income tax revenue and if collections begin to drop, we will try using legal and other kinds of tools to control it. If it becomes disastrous and a lot of the collection is lost (due to the reform), then there is no way we can get out of standardizing in 2019 but it is too soon to be talking about that now,” he said.

FAVORABLE IN THE SHORT TERM

Meanwhile, Alejandro Werner, Director of the Western Hemisphere Department of the International Monetary Fund, argued that the United States tax reform will bolster added demand and in the short term, this will be favorable for Mexico.
This aspect and the expectation that inflation will slow down next year, will support the economy and compensate for “the uncertainty of the North American Free Trade Agreement and certain noises heard during the election process.”
When interviewed by El Economista, he anticipated that the Mexican economy will have a very similar scenario in 2018 to that of 2017, which led him to forecast growth of about 2%, similar to what was expected for 2017. (With information from Yolanda Morales).

The changes:

  • The reform will go into effect on January 1, 2018
  • Corporate taxes drop from 35 to 21 percent
  • The current seven tax brackets remain and the maximum rate drops from 39.6 to 37%
  • Tax incentives for private companies that subsidized bus fare, parking and bicycle use by employees are eliminated
  • Inheritances up to 11 million dollars will be free of inheritance tax for single taxpayers, while it will be tax-free for married couples up to 22 million dollars.
  • The deduction of local and state taxes is reduced to 10,000 dollars.
  • Mortgage interest deductions are reduced to no more than 750,000 dollars
  • The tax credit for each child is increased from 1,000 to 2,000 dollars.
  • A special 12% tax is levied one time only on United States companies repatriating earnings.