December 22, 2017 / 10:32 PM / a year ago

UPDATE 1-Mexico to review possible tax changes after U.S. overhaul

(Recasts throughout; adds details, background)

By Sharay Angulo

MEXICO CITY, Dec 22 (Reuters) - Mexico’s government will evaluate whether to make fiscal changes in response to the sweeping U.S. tax overhaul without widening the public sector deficit, according to a Finance Ministry document seen by Reuters on Friday.

U.S. President Donald Trump on Friday signed into law the largest tax overhaul since the 1980s, which slashes the corporate rate from 35 percent to 21 percent and temporarily reduces the tax burden for most individuals.

Mexican business leaders and lawmakers are concerned that the U.S. tax cuts could draw away investment from Mexico, where the corporate taxation rate is 30 percent, hurting an economy already under pressure from Trump.

In the document, which summarized how the Mexican government assessed Trump’s sweeping tax overhaul, the ministry said that local taxes meant that the effective U.S. average corporate levy would be around 27 percent, not far below Mexico’s rate.

“Nevertheless, there will be an assessment of whether modifications should be made to Mexico’s fiscal framework,” the document said, noting that any potential changes could not be allowed to widen the government’s fiscal deficit.

“Any modification of the corporate tax rate will need to be compensated with other fiscal modifications which leave the tax take unchanged,” the ministry said in the document.

Any prospective cut in Mexico’s corporate tax rate would need to include compensatory steps like limiting the deductibility of items such as interest payments, local taxes and losses, among other measures, the ministry said.

Calculating average income tax levies in the United States, including local taxes, remained significantly higher than in Mexico even after the U.S. tax overhaul, the ministry said no changes to the Mexican income tax rate would be necessary.

The U.S. tax overhaul has added fresh economic pressure on Mexico at a time its commercial ties with Washington have been threatened due to the U.S. president’s opposition to the North American Free Trade Agreement (NAFTA).

Trump has threatened to dump NAFTA if he cannot renegotiate it in favor of the United States, but talks between U.S., Mexican and Canadian officials have made only halting progress.

Some business leaders believe Mexico must look to capture the significant chunk of economy which currently works off the books to create room for corporate cuts.

Mexico will elect a new president in July 2018, making the coming months a challenging time to try to enact a fiscal shakeup. (Writing by Dave Graham, editing by G Crosse)

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