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Cablegate: American Chamber of Commerce Concerns About

VZCZCXRO3879
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4191/01 2191912
ZNR UUUUU ZZH
P 071912Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8329
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 03 MEXICO 004191

SIPDIS

SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR RICHARD MILES
STATE PASS TO USTR (MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON EFIN PGOV MX
SUBJECT: AMERICAN CHAMBER OF COMMERCE CONCERNS ABOUT
MEXICAN FISCAL REFORM PLAN

REF: A. 8/3/07 E-MAIL LKIRKCONNELL TO AJEWELL AND
AFAIBISHENKO
B. MEXICO 3246
C. MEXICO 2518
D. MONTERREY 725
E. MEXICO 4151
F. MEXICO 3859
G. MEXICO 351
H. 06 MEXICO 7015
I. MEXICO 4150

1. (U) Summary: In ref A, Post sent Treasury's Office of
International Affairs the Spanish-language presentation from
the American Chamber of Commerce about its concerns regarding
the fiscal reform proposal that President Calderon submitted
to Mexico's Congress (ref B). Below is an English-language
summary of the AmCham presentation. Post initially reported
on AmCham's concerns in ref F. AmCham's concerns include
possible double taxation since the "CETU" (Single Rate
Business Tax, an alternative minimum tax) does not appear to
meet the requirements of the U.S.-Mexico tax treaty, the
effect of the CETU on U.S. firms with large numbers of
employees, and the effects of the CETU on U.S. maquiladora
firms (firms assembling products for export.) End Summary

Double Taxation
----------------

2. (U) The AmCham presentation begins with a cover letter
explaining AmCham's overall concerns, including double
taxation. The letter quotes the AmCham Mexico President as
claiming AmCham is working very closely with US Treasury and
Mexican Finance Ministry officials to resolve the problem of
possible double taxation under the CETU. Later in the
presentation, AmCham says the Finance Ministry is discussing
the possible non-creditability of the CETU against U.S. taxes
with the U.S. Treasury Department, and that so far there has
not been a determination although it seems very difficult for
the CETU to be creditable given its nature. The AmCham says
non-creditability of the CETU goes against agreements with
the United States to avoid double taxation, and will not only
raise the cost of doing business for U.S. firms but will
reduce their competitiveness in attracting investment and
generating jobs. (Comment: A recent report from accounting
firm Ernst and Young/Mexico says Mexico has 34 tax treaties
that would not cover the CETU because the CETU is not
considered an income tax. End Comment.)

Conditional Support for Improving Mexico's Public Finances
--------------------------------------------- -------------

3. (U) AmCham begins is presentation by welcoming any
initiative to improve Mexico's public finances, as long as
the measures protect and promote investment, employment
generation and raise the level of competitiveness. The
AmCham says the positive aspects of the fiscal reform are:
its evaluation of the budget based on measures and objectives
to make sure spending is more transparent and efficient;
improved capacities and obligations of the states for tax
collection and harmonizing accountability at all three levels
of government (federal, state and municipal); multi-year
budgeting for investment and infrastructure projects; and the
effort to tax the informal economy.

Possible Constitutional Problems
---------------------------------

4. (U) The AmCham says the CETU may face a constitutional
problem because temporary imports by maquiladoras, labor
costs and charitable donations are not deductible. The
AmCham recommends reducing the CETU to rate to 12 percent.
(Comment: The proposed CETU rate starts at 16 percent, and
rises to 19 percent in future years. The very purpose of the
CETU is to get around the many legal tax exemptions currently
provided to firms and individuals in Mexico. End Comment.)
The AmCham also claims that the proposed reform

MEXICO 00004191 002 OF 003


inappropriately holds lawyers, public accountants or advisors
accountable for the fines of taxpayers, which would violate
Mexico's constitutional guarantee that individuals can
"freely practice" their professions.

Need for a Transition Period, Deductions Under the CETU
--------------------------------------------- ----------

5. (U) The AmCham calls for a transition period before the
CETU takes effect, saying the transition period should be
clearly defined and recognize depreciation and losses from
previous years. The AmCham complains that there is no
transition mechanism that would allow deductions for pending
investment, and no clarification for the treatment of
payments for investments made in previous years. The AmCham
predicts a paralysis of investment in the second half of 2007
due to uncertainty about tax implications for 2008.

6. (U) The AmCham calls for social security payments and
salaries to be deductible from the CETU, especially for firms
whose principal asset is human capital. The AmCham also
calls for research and development and charitable
contributions to be deductible. The AmCham says many of its
members would be adversely affected if donations are not
deductible.

Impact on Maquiladoras
----------------------

7. (U) The AmCham claims that the CETU will raise taxes on
maquiladoras by 700 percent, and that 80 percent of this
increase is due to insufficient provisions for crediting
social security payments, profit sharing payments, Christmas
bonuses and overtime against the CETU. The AmCham complains
that the proposal holds owners of the maquiladoras
responsible for tax charges for workers who are themselves
exempt from tax because of their low salaries (Comment: Post
will be meeting with the Mexican Maquiladora Association and
will report further on their views. End Comment)

Informality Tax
---------------

8. (U) The AmCham welcomes the proposal for a 2 percent tax
on bank deposits over 20,000 Mexican pesos a month in order
to capture revenue from the informal economy, and as a means
to identify those who do not declare their income to tax
authorities. AmCham suggests, however, that this
"informality tax" only apply to physical persons and
businesses not currently registered with the Finance
Ministry. For those who do pay taxes, the AmCham says the
"informality tax" should be creditable not only against
income tax, but also against the Value Added Tax and the
CETU. (Comment: Ref I reports that 25 to 43 percent of
Mexico's working age population is employed in the informal
economy. End Comment)

Conditional Support for Efforts to Fight Tax Evasion
--------------------------------------------- --------

9. (U) The AmCham supports the Calderon Administration's
efforts to combat tax evasion in the proposed fiscal reform,
but expresses concern about the idea of restricting the right
of taxpayers to offer evidence that they have complied with
their tax obligations. AmCham claims this would limit access
to justice and be a step backward from the fiscal code of
1967 which has subsequently been expanded by court decisions.
(Comment: According to a Chamber of Deputies Finance
Committee staffer who worked on fiscal reform, one of its
purposes is to shift the balance from current laws that
strongly favor taxpayers to a more balanced system such as in
the United States. See ref H. End Comment) The AmCham also
criticizes the proposal to raise the criminal statute of
limitations for tax violations to eight years, claiming the
applicable term should be five years.


MEXICO 00004191 003 OF 003

Further Fiscal Reform is Needed
------------------------------

10. (U) The AmCham concludes its presentation by expressing
the hope that once the fiscal reform is approved, work will
begin on a second reform to deal with VAT taxes on
consumption, so that Mexico's public finances can be truly
viable. (Comment: As reported in ref C, both opposition
parties the PRI and the PAN oppose expansion of the
value-added tax. End Comment)

Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity and the North American
Partnership Blog at http://www.intelink.gov/communities/state/nap /
GARZA

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