Mexico’s long-awaited tax proposals were given a muted welcome by bankers and economists, who had been hoping for a more fundamental reform of Mexico’s fiscal base.
The government expects that its reforms will increase aggregate tax receipts from the private sector by 3% by 2018. The government needs to increase the proportion of its tax revenue from non-Pemex sources to be able to reform the state energy company as part of its energy reforms and free up Pemex’s cashflow for greater investment. Most of the additional tax burden will come from the middle class, with income tax for those earning over $38,100-equivalent rising to 32% from 30% and lots of loopholes being closed. There is also a new 10% tax on dividends and capital gains that will hit insurers and equity fund managers. Moody’s says the new capital gains tax on equities “will constrain earnings and capital generation given that currently all capital gains are tax-exempt”.The government stepped back from widely expected extensions of value-added tax to food and medicine – judging that previous education, labour and energy reforms had expended much of the new government’s political capital. “It’s disappointing in terms of the structural scope of the reform, as it only really sorts out the flaws in income – and it has been done in a very timid way,” says Marco Oviedo, chief economist of Barclays in Mexico City. “It was a pragmatic approach to maintain a certain level of cooperation from the [opposition party] PRD. In addition food prices have been rising in recent months, so having extra inflationary pressure from VAT would have been too much.”
As of December 2010 insurers had 11% of total investments in equities. “In recent years investment returns have contributed significantly to internal capital generation, mainly in asset-intensive insurance companies such as life and pension companies.” Moody’s estimates that the industry’s five year return on capital has been about 20%, and these new taxes will lower profitability.
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