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Cablegate: Further Reaction to Mexican Fiscal Reform Plan

VZCZCXRO1142
PP RUEHCD RUEHGD RUEHHO RUEHMC RUEHNG RUEHNL RUEHRD RUEHRS RUEHTM
DE RUEHME #4151/01 2152234
ZNR UUUUU ZZH
P 032234Z AUG 07
FM AMEMBASSY MEXICO
TO RUEHC/SECSTATE WASHDC PRIORITY 8295
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 WASHINGTON DC

UNCLAS SECTION 01 OF 04 MEXICO 004151

SIPDIS

SENSITIVE
SIPDIS

STATE FOR A/S SHANNON
STATE FOR WHA/MEX, WHA/EPSC, EB/IFD/OMA, AND DRL/AWH
STATE FOR EB/ESC MCMANUS AND IZZO
USDOC FOR 4320/ITA/MAC/WH/ONAFTA/GERI WORD
USDOC FOR ITS/TD/ENERGY DIVISION
TREASURY FOR IA (ALICE FAIBISHENKO)
DOE FOR INTERNATIONAL AFFAIRS KDEUTSCH AND ALOCKWOOD
NSC FOR DAN TOMLINSON
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: FURTHER REACTION TO MEXICAN FISCAL REFORM PLAN

REF: A. MEXICO 3246

B. MEXICO 3859
C. MONTERREY 725

-------
Summary
-------

1. (SBU) Six weeks after the introduction of the Calderon
Administration's proposal for fiscal reform (ref A),
companies and business organizations continue their
objections to the most controversial aspects of the plan, a
flat minimum tax on revenues (CETU) and a tax on cash
deposits (ICI). Some Congressional analysts have called the
plan unconstitutional. Mexico's labor-intensive maquiladora
sector warns its tax burden will increase 600%. Business
organizations are calling for reduced rates, more
deductibility of expenses, and improved government spending
oversight. U.S. firms could be particularly hard-hit if the
CETU is not creditable against U.S. taxes. U.S. pension plans
have raised this and other concerns with the Embassy.
Japanese firms apparently do not face this double taxation
threat. Mexican Finance Ministry officials have raised the
double taxation concern with U.S. Treasury. Meanwhile,
Calderon and Government economists defend the plan as
essential to pay down government pension and infrastructure
debt and to construct future infrastructure projects. End
Summary.

----------------------------------
Controversial Minimum Business Tax
----------------------------------

2. (U) The centerpiece of President Calderon's June 20 fiscal
reform proposal is an alternative minimum tax, CETU (Single
Business Contribution) (ref A). Administration analysts
expect the additional tax revenue generated by the CETU to be
1.8% of GDP. Though the Mexican Congress may change the
proposed CETU rate, now set at 16 percent in 2008 and 19
percent starting in 2009. Many in the private sector have
vocally opposed this tax and demanded that it be reduced to
12% or that it allow labor deductions. The private sector's
main complaint has been that CETU does not allow companies to
deduct the cost of labor, payroll, social security
contributions, pensions, and other allowances, from income.
Although the government has reassured the private sector that
a salary credit included in the reform would compensate
companies for the losses, business, employers, financial,
outsourcing, maquiladoras and many other associations argue
that CETU will hurt job creation, investment plans, and
competitiveness.

-------------------------------------
Risk of being an unconstitutional tax
-------------------------------------

3. (U) Recently, the Chamber of Deputy's Parliamentary Law
and Investigations Research Center called both the CETU and
the tax on the informal economy (ICI), also included in the
Calderon reform plan, unconstitutional because they violate
the Constitution's principles of equity and proportionality.
According to the Center, the CETU violated the
proportionality principle because it includes revenues
without allowing deductions. The Center warned about a wave
of injunctions or "amparos" against the CETU if it is
approved. The Research Center also determined that the tax
on the informal economy violated the principle of equity by
levying only deposits in cash while exempting deposits made
by electronic means. In order to formally declare the CETU
unconstitutional, legislators would have to challenge it and
file a case before the Mexican Supreme Court of Justice.
However, the Chairman of the Finance Committee of the Chamber
of Deputies, Jorge Estefan (PRI), believes that the CETU is

MEXICO 00004151 002 OF 004


the cornerstone of the reform, and announcing "there will be
no reform, without the CETU".

--------------------------------
Ministry of Finance Defends CETU
--------------------------------

4. (U) Juan Manuel Perez Porrua, Head of the Revenue Policies
Unit of the Ministry of Finance (Hacienda) met with members
of the Parliamentary Research Center. He explained that the
tax reform's overall goal was to generate additional tax
revenue totaling 3% of GDP. Without the CETU, the GOM would
not be able to reach that goal and address the country's
infrastructure and social needs. The National College of
Economists also recommended that legislators not reduce the
CETU to 12% as proposed by many in the private sector since
such a drop would reduce overall collections under the reform
from 3% of GDP to only 1.2 to 1.4% of GDP.

----------------------------------
Industry Complaints About the CETU
----------------------------------

5. (SBU) The National Maquila Industry Council (CNIME),
raised its concern over member firms being subject to double
taxation as a result of the CETU. CNIME has reports that the
CETU will increase member firms tax burden by as much as 600%
because the sector is so labor intensive. Outsourcing
services are in a similar situation. The Mexican Human
Capital Association (AMECH) has said that outsourcing
companies may see their tax payments increase 500%, affecting
job creation or promoting the creation of poor-quality or
temporary jobs with no benefits. Large employers and trade
associations, such as CCE (Business Coordinating Council),
Coparmex (Mexican Employers' Confederation), Concamin
(Mexican Confederation of Industrial Chambers), Concanaco
(National Confederation of Commerce Chambers), ANTAD
(Department Stores National Association) agree that Mexico
needs a tax reform, but they are demanding changes to CETU
and a commitment from the government that the additional
resources would be used to alleviate poverty and not for the
government's current expenses. (Comment: Former Finance
Minister Pedro Aspe (protect) who now heads one of Mexico's
leading consultant companies, told Econoffs that almost all
the increased tax revenue would go to fund additional
salaries for teachers agreed to by President Fox with the
national teacher's union in October/November 2006, an
agreement quietly ratified by the Calderon Administration in
May 2007. As part of the effort to resolve the teacher's
strike in Oaxaca, Fox agreed to raise teachers' salaries in
order to eliminate the three-tier system that had teachers in
southern and other parts of Northern Mexico earning less than
their counterparts in more prosperous parts of the country.
END COMMENT)

6. (U) Citibank, Procter & Gamble, Daimler Chrysler, and 33
other multinationals under the Executive Council of Global
Corporations (CEEG) requested that Congress amend the tax
reform. In a letter to the GOM, the organization asked it to
expand the taxpayers' base, control government spending, and
give large companies the certainty that resources will be
spent on social programs, such as health, education, housing,
and infrastructure. The organization had already announced
its member firms' planned USD 3 billion in investment could
be postponed until there is more certainty about the reform.
Although large banks largely agree that the tax reform is
fundamental to generate the needed resources to help the
country grow, they also consider that the tax on cash
deposits more than 20,000 pesos that attempts to capture the
informal sector and the CETU affect their interests since
they will be forced to invest in order to comply with the new
law.


MEXICO 00004151 003 OF 004


-------------------------------------------
Will U.S. Firms be Hurt by Double Taxation?
-------------------------------------------

7. (SBU) Refs B and C report strong concerns by U.S. firms
that the CETU is not creditable against U.S. income tax,
leading to double taxation under the U.S.-Mexico tax treaty.
Ministry of Finance officials have raised this issue with the
U.S. Department of Treasury. Post sent Treasury a July 11
letter to the Embassy from Prudential's Chief Operating
Officer for Real Estate Investors in Latin America, Maite
Igareda (protect). In the letter, Igareda says that under
U.S. Federal Regulation 1.901-2, the CETU does not meet the
requirements to qualify as a foreign income tax that is
creditable by U.S. tax residents against their U.S. income
tax. Japanese Embassy Economic Counselor Yoshiko Kajima told
Econoff her country's firms are not concerned about double
taxation, because the Mexico-Japan "tax arrangement" would
cover the CETU. (COMMENT: Post will be querying other
countries' representatives to see if they fear double
taxation. END COMMENT)

-------------
Japanese View
-------------

8. (SBU) Kajima said the Japanese Society of Companies in
Mexico was "very seriously concerned," however because the
CETU would be a "big shock" to Japanese maquiladoras, raising
taxes on them 600% to 900% because several have large numbers
of employees. The Japanese Ambassador is planning to raise
this concern with the Ministries of Finance and Economy.
Kajima said Japanese maquiladoras have been cooperating with
US, Mexican, Korean maquiladoras to raise their concerns with
the Mexican Congress, and found some Mexican Senators shared
their concerns and planned to amend the fiscal reform to
lessen the impact on maquiladoras. (COMMENT: Current taxes
on maquiladoras are extremely low, possibly around 3 percent.
END COMMENT)

----------------------------
U.S. Pension Funds Concerned
----------------------------.

9. (SBU) In the July 11 letter, Igareda the proposed tax
reform would have a "very negative impact" on "United States
pensions plans and non-tax investors." In addition to the
problem of double taxation, she says the CETU does not grant
to non-Mexican private and public pension plans the same
tax-exempt status that Mexican Income Tax Law grants with
respect to income from rental payments, capital gains and
interest payments. The CETU would therefore tax pensions
plans that are currently tax-exempt in Mexico. Finally, she
says the CETU does not consider fiscal year 2007 as a
creditable year for its purposes, which would generate a
large amount of CETU payable in 2008 for payments made before
2008. Igareda notes that Prudential Real Estate Investors
currently sponsors six estate funds in Mexico with
commitments in excess of USD 1.2 billion. Post has been
working with Igareda, who is preparing a paper for the USG on
the views of the wider pension plan sector on the proposed
tax reform.

---------------------------------------------
Calderon Urges Congress to Approve the Reform
--------------------------------------------

10. (U) President Calderon asked Congressmen to approve the
tax reform to address the imminent financial pressures from
increased pension liabilities and "Pidiregas" (off-government
balance sheet infrastructure borrowing) maturities next year.
The President also warned that without a tax reform, the
government would not be able to develop the infrastructure

MEXICO 00004151 004 OF 004


projects that the country needs. Congress would have to
approve the tax reform during a special session before
September 8, when the Executive has to send forward its FY
2008 budget package.


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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