“The Tax Reform is a great social reform that will accelerate growth and economic stability while guaranteeing social protection to every Mexican; a new fiscal system: just, simple, transparent and federalist”. Mexico´s Federal Government starts with this statement to promote the proposal submitted to Congress and society. Now, while analyzing these initiatives, we shall look after the “entire forest” and start generating constructive alerts about the possible effects on productivity, employment, investment, innovation and, of course, competitiveness of the Mexican productive sector.
In 2010, the Inter-American Development Bank (IADB) in its study “The productivity age” warned that the combination of high-taxes and complicated paperwork has generated evasion and affected the productivity of those that actually fulfill their responsibility to pay taxes. As the IADB stresses out, every time fiscal obligations relay more on the larger enterprises, the latter reduce their investments on high-technology, development for their workers and re-investment, which fracture their productivity and the country’s long term economic growth.
This phenomenon would clearly exacerbate with the elimination of the immediate deduction for fixed assets, which is proposed in the initiative. The latter would occur since the fiscal stimulus in the Income Tax Law has represented an impulse for renewing machinery and high-tech equipment inside businesses. By erasing this incentive, organizations will have to asses if they invest now or put off the modernization of their facilities depending on the cash-flow and the growth expectations. Therefore, we can also talk about the impact on the feasibility on investing in renewable energy which is also considered in the Energy Reform.
In addition, with the reform, companies will only be possible to deduct up to 41 % of exempt remunerations given to the worker; experts on the matter have recently suggested that this could add up to 7 % more in the businesses’ payroll cost. This definitely could be a barrier for formal employment and an incentive for a “labor-benefits black market”, which would imply another problem to the low productivity of Mexico’s labor force; more important than removing the benefits, it would be to strengthen this scheme by fostering employment.
The reform also considers a carbon-tax proposal, which would on average charge 70.68 pesos per ton sent to the atmosphere and may dramatically vary between sectors according to the fuel employed. While in theory this tax seeks to mitigate the greenhouse-gases effect, it actually pursues two purposes: increasing tax-collection and preserving Mexico’s image as a first-world country. Nevertheless, this is also a strike to industrial sector, mainly to the steel and cement industries which, in order to avoid this tax, will have to invest in new more efficient and less-pollutant technologies but, of course, without the benefits of the immediate deduction for fixed assets.
In addition, the Tax Reform initiative aims at erasing the special regimes in terms of ISR (Income Tax) and IVA (Value Added Tax). These modifications have a clear recipient: The maquila (in-bond) industry (IMMEX). Here, it is important to analyze the double-effect. On one hand, we see that the reform does eliminate the privileges within a sector which one could argue does not generate added value and is not developing productive chains, mostly with SMMEs, but, on the other, the in-bond industry employs 55 % of the formal jobs in the transformation industry and is responsible for 65 % of Mexico´s manufactured exports, the ones that have maintained the already marginal economic growth over the last years.
Other sectors that end up being amongst the most affected by the possible 2014 Tax Reform are the brewing and the wines-liquors industries. The reform pretends to maintain the current IEPS (Special Tax on Products and Services) Law, which already includes a temporary article stating a of 26.5 % on beer with an alcoholic content up to 14° G.L. and of 53 % for alcoholic beverages with high content (over 20° G.L). For the second case, one must considerer that over the last years, the non-registered alcoholic beverages, the ones that do not pay taxes, have showed important growth rates, mainly motivated, among other factors, by the high-taxation, which reaches up to 33.1 % of the total volume of the commercialized market. With his initiative there is a deal breaker in the attempt to achieve a larger formal market; it is expected that the tax-collection will not rise but that consumption of not-registered beverages will increase, thus, creating a sign of alert in terms of health problems.
And let us not forget about the special tax on sodas, one peso per liter, which equals an increase of 10 % (9.5 % - 10.5 %) in the products’ price. There have been warnings on the fact that this measure would affect the productive chain of sugarcane, fruit producers, flavored-beverages producers and the very own stores (whose soda-sales earnings represent over 30 % of their total sales). This chain generates 540 thousand direct jobs and over 3 million indirect jobs. The most important aspect of this issue is that there is no solid evidence that soda consumption is the main cause of the obesity pandemic that, as a matter of fact, affects the population and how this tax will change the commercialization of these beverages.
It is clear that there are many other potential effects on the national productive sector if the initiative is approved as it is today. There are positive measures such as eliminating the IETU (Unique Rate Business Tax) and the simplification process. We also have to look at the transversal effects, the ones that impact the productive chains. Here, we should refer to investment in innovation. Reality has shown to us that lies upon the fact that the large enterprises are the ones which pursue innovation for they have the capability to do so, and it is expected that these companies act as engines of the technological breakthroughs for the supply-chains mostly integrated by SMMEs. If such outcome is gone as a result of this reform, we would be moving away from the goal of investing at least 1 % of the GDP in science and technology. In this context we need to promote investment in innovation through flexible mechanisms.
We ought to pay attention not to enter a vicious-circle of low-investment, low-productivity, fewer-jobs, lower income, downside-consumption, poor savings and, again, low-investment. The latter is clearly not aligned with the idea of fostering a true flexible, dynamic and long-term industrial policy, which strives at boosting innovation, democratizing productivity and increasing the country’s competitiveness. While the proposal has yet to be approved by the Congress and signed by the Executive Power, it is imperative to keep in mind that Mexico shall at all times reinforce a tax scheme that works as a stimulus for rewarding productivity.