Cablegate: U.S. Firms React to Mexican Fiscal Reform Plan

VZCZCXRO8673
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #3859/01 2012047
ZNR UUUUU ZZH
P 202047Z JUL 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8093
INFO RUEHXC/ALL US CONSULATES IN MEXICO COLLECTIVE
RHEHNSC/NSC WASHDC
RHMFIUU/CDR USSOUTHCOM MIAMI FL
RHMFIUU/CDR USNORTHCOM
RUEHC/DEPT OF LABOR WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 MEXICO 003859

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
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, DAN FISK
STATE PASS TO USTR (EISSENSTAT/MELLE)
STATE PASS TO FEDERAL RESERVE (CARLOS ARTETA)

E.O. 12958: N/A
TAGS: ECON ELAB EFIN PINR PGOV MX
SUBJECT: U.S. FIRMS REACT TO MEXICAN FISCAL REFORM PLAN

REF: MEXICO 3246

Sensitive but unclassified, entire text.

Summary
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1. (SBU) While American Chamber of Commerce in Mexico
(AmCham) member firms object to many portions of the Calderon
Administration's fiscal reform plan, they have given their
qualified support to the proposal. The draft law would set
up a minimum business tax in an attempt to plug the numerous
loopholes companies use to reduce their tax payments
(reftel). The AmCham member firms noted that proposed
additional taxes would potentially not be deductible from
U.S. taxes under the U.S.-Mexico Tax Treaty; hurt labor
intensive firms, harming employment; and limit a firm's
ability to shelter income. Nonetheless, because of the
political momentum behind the reform, as well as its
significance, AmCham leadership cautioned U.S. firms against
rejecting the tax outright.

Reform May Disadvantage American Companies. . .
--------------------------------------------- --

2. (SBU) U.S. companies in Mexico expressed their concern
over the Calderon administration's plan for fiscal reform
through the AmCham's participation in a Chamber of Deputies
(lower house) Competitiveness Committee hearing. The AmCham
will also be meeting with Finance Secretariat (Hacienda)
officials, and they are seeking a meeting with Finance
Secretary Carstens to share their views. While the reform

SIPDIS
will raise the tax bill for many companies operating in
Mexico, AmCham executives believe passage of the proposal is
both necessary and politically inevitable, thus, they have
chosen to urge modification, rather than to reject the bill.

3. (SBU) Of greatest concern, U.S. firms may not be able to
credit taxes paid under the reform's proposed "Single Rate
Business Tax" (CETU) toward their U.S. tax bill because the
tax is not structured like a U.S. income tax. This could put
U.S. firms in Mexico under a significant disadvantage.
Businesses have said that the failure to achieve
creditability of this tax would have a negative impact on
investment and employment, as it would be more expensive to
operate in Mexico.

4. (SBU) AmCham representatives also told the Committee
that, despite Hacienda's claims to the contrary, the CETU
will cost jobs in the maquila sector, specifically among
firms with large labor inputs, because neither the cost of
labor nor the cost of maquila manufacturing inputs would be
deducible under the CETU regime. In his testimony, the
AmCham representative told the congress this could send
operations to other countries in Central America and the
Caribbean.

5. (SBU) The AmCham analysis also raised concerns over the
lack of any transition between the current system and the
CETU regime and suggested that the CETU rate be dropped to
12% from 19%. The CETU applies to all businesses under a
parent equally, keeping companies from using losses at one
business unit to offset earnings in another. Additionally,
under the CETU, businesses would not be able to "carry
forward" losses to offset gains in future years.

6. (SBU) Turning to a second aspect of the Calderon
proposal, a plan to levy a 2% tax on monthly cash bank
deposits over about USD 2000 in an attempt to tax the
informal economy, the AmCham called for the proposal to be
limited to individuals. AmCham member analysis also
suggested the new draft rules favor the taxing authority
rather than the taxpayer as do current Mexican tax rules.

MEXICO 00003859 002 OF 002

. . . But the Plusses Still Outweigh the Minuses
--------------------------------------------- ---

7. (SBU) Despite the AmCham's concerns over the provisions
of the reform, AmCham leadership suggested to its member
firms that the organization "tread lightly" with its
differences on the fiscal reform package. Substantively and
on the positive side, the AmCham believes that legislation
would increase accountability of all taxpayers. They also
applauded its multi-year budgeting proposals which would do
away with paralyzing annual fall debates over the Mexican
budget. The AmCham President also noted the importance of
this proposal to President Calderon, making the business
community's ability to change it less likely.

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 /
BASSETT

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