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Mexico’s secretary hacienda rules out lowering corporate taxes at the expense of higher debt

Mexico City, Mexico — Mexico will not respond to the US tax reform with a reduction in the corporate tax, since it would be charged to the public debt, according to a Treasury document.

In view of the approval of the tax reform in the United States that will reduce taxes to companies and individuals starting 2018, Mexico will not respond with a decrease in corporate taxes at the expense of contracting more debt, says the document from the Ministry of Finance.

“In no case is it expected to increase the public deficit to modify the tax structure of Mexico,” it says adding, “Any change in the level of the corporate ISR rate should be compensated with other tax modifications that leave the collection unchanged.”

Luis Foncerrada, general director of the Center of Economic Studies of the Private Sector, said that the most important thing before any change in the tax framework is not to raise the deficit, since reacting precipitously with a reduction of income to Trump’s fiscal plan could imply more debt.

“It’s outrageous when we talk about a strategy or mirror response. We cannot because we do not have fiscal space. We’re not going to borrow more. We cannot and we should not,. Any new debt increases the exchange rate and inflation more and it’s something that we can not accept for any reason.”

He added that many things can be done. “We have to compensate with other income, for example, we have consumption taxes, although they will hardly want to play in the electoral year,” he said.

The corporate rate in Mexico, of 30 percent, is similar to that of the US, which will be 27 percent on average, after adding state taxes to the federal rate of 21 percent, assures the Treasury analysis.

In addition, the maximum marginal rate for individuals will be 45 percent on average, higher than the 35 percent rate for Mexico. “The international evidence, as well as in the US states, shows that differences in corporate ISR rates are not the most important elements for attracting investment, nor for the competitiveness of an economy,” the report shows.

Héctor Villarreal, general director of the Research Center in Economic and Budgetary, considered ‘prudent’ the decision of the authorities not to raise the deficit and see that the collection does not fall.

“At a given moment, the government could tighten a bit in administrative aspects, fighting tax evasion and avoidance and trying to formalize those outside the economy to maintain the collection. Opening the discussion of a fiscal reform in the election year would be dangerous,” he said.

For Carlos Serrano, chief economist at BBVA Bancomer, the government’s position is good because Mexico will continue to be more competitive than the US, even with the reform. He added that the reduction of the corporate tax would not revert the greater Mexican manufacturing competitiveness.

The government emphasizes that it will continue evaluating if it is necessary to modify the fiscal framework, but reiterated that since there is no margin to increase the debt, it will not propose to fund a lower income tax with deficit.

“Any proposed reduction in the corporate ISR rate in Mexico will have to be accompanied by compensatory measures such as those implemented in the US, limit the deductibility of interest paid by companies, meet the deductibility of local taxes, limit deductibility of losses, withholdings for income from royalties, among others “.

Manuel Herrera, president of Concamin, said that in Mexico it is necessary to “level the playing field” in tax matters for companies, since there will be important implications for the country’s competitiveness, especially in global chains of value.

“We will have to react to quickly match the field with our main trading partner, where more than 80 percent of our exports are directed and many companies from many countries are installed in Mexico to take advantage of export capacity,” he said.

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