September 13, 2012 / 10:17 PM / 5 years ago

RPT-Mexico needs to raise taxes by at least 6 pct of GDP-tax expert

By Krista Hughes and Carlos Ocampo

MEXICO CITY, Sept 13 (Reuters) - Mexico needs to raise its tax take by at least 6 percentage points of GDP - or about $72 billion a year - to fund the incoming president’s spending plans, a senior tax expert with links to the federal government said on T hur sday.

Herbert Bettinger, a partner in Ernst & Young who advised the Institutional Revolutionary Party (PRI) on its last tax reform proposal, said party officials were considering several alternatives to boost revenue and improve tax collection.

In an interview with Reuters and Dofiscal, a Thomson Reuters tax and accounting information service, Bettinger said Mexico’s $1.2 trillion economy needed to boost its tax take by 6 to 6.5 percentage points of gross domestic product, but this would be difficult to reach without faster economic growth.

President-elect Enrique Pena Nieto has promised to make fiscal reform one of his top priorities, along with increasing growth to 6 percent or more and raising spending on education, training and a social security overhaul.

At 18 percent of GDP in 2010, Mexico’s tax take was the lowest in the 34-member Organization of Economic Co-operation and Development.

“Fiscally it will be difficult... in the short term,” Bettinger said. “In the long term, maybe three or four years, I think that you could, considering the dynamism of the country, the growth. The forecast is that we will grow at 6 percent.”

One proposal was to build on fiscal reforms proposed last year by former PRI Senator Manlio Fabio Beltrones, now the party’s leader in the lower house of Congress, which would have raised the tax take by 2 percentage points partly by extending value-added tax to all but basic foodstuffs. The proposal never came to a vote.

Bettinger said another 3.5 percentage points could be raised through measures such as lifting the VAT rate in border regions from 11 percent to 16 percent and taxing most food, which would reap another 1.1 percentage point.

One percentage point could come from more efficient tax collection and a further 1.5 percent from adjusting the ISR capital gains tax, which was set to be scaled back from 30 percent to 25 percent under the original Beltrones plan.

Another proposal being circulated in Congress involves allowing states to levy a 2 percent tax and extending the 16 percent VAT to food and medicine but allowing shoppers to reclaim 2-3 percent for purchases in shops and supermarkets.

This would effectively give shoppers a bonus for avoiding the black market, which experts estimate costs the country $75 billion annually in taxes and lost business.

“There are several proposals being analyzed, possibly none of them will work out or they could be merged into one,” Bettinger said, noting that the timeframe was tight to get the plan passed by Congress.

“If (the reform) doesn’t come out this December, or next December, I think it will be very difficult.”

None of the proposals under discussion involved a tax on stock market profits, but there had been “isolated discussions” about such a tax, he said.

The PRI’s statutes currently ban increased taxes on consumption, including extending the VAT to more food and medicines. But a close associate of Pena Nieto’s told Reuters the PRI will hold a general assembly by February at the latest to consider changing its rules.

Moody’s sovereign ratings analyst Mauro Leos said on W ednesday that Mexico’s tax take was 10 percentage points below the average for countries rated in the Baa category, the lowest investment-grade grouping.

Moody’s rates Mexico Baa1, partly because its low tax take pushes up its interest repayment burden as a share of income.

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