Viewpoint: Ricardo González Orta
The main pillars of the Mexican tax system are federal corporate and personal income tax, value-added tax, excise tax and foreign trade tax, as well as social security contributions. Since 1980 Mexico has transitioned to a system of tax coordination where it was agreed that the federal government would retain the right to collect the most important taxes while granting the states a share in such collection, thus avoiding double taxation and allowing the states to levy certain taxes such as real estate transfer tax, payroll tax and property tax.
Recent tax policy has been focused on improving the efficiency of the tax collection system by eliminating special tax regimes and preferential treatment, limiting deductions and expanding the taxable base of indirect taxes. Although tax revenues have increased in recent years, they have not reached a level to adequately finance public spending. According to data from the Organisation for Economic Cooperation and Development (OECD), tax revenues in Mexico represented 17.4% of GDP in 2015, the lowest figure of all OECD members, whose average was 34.3% of GDP.
The informal sector explains part of this gap. This sector is comparable in size and economic value to the formal sector, at 57.9% of workers versus 42.1%. Even though the potential collection from incorporating the informal economy is low, we believe that gains in productivity and a culture of compliance would be important benefits.
Given the global trend towards reducing direct taxes, Mexico faces the challenge of remaining competitive in its corporate income tax rate. Corporate profits are currently taxed at 30%, which, when added to the obligation to share 10% of profits with employees, brings Mexico to an effective tax rate of 37%. This rate compares poorly with countries like Switzerland, Ireland, the UK and Sweden, which have reduced their tax rates to 8.5%, 12.5%, 20% and 22%, respectively, thus reactivating their economies. Moreover, corporate income tax could become even less competitive if the proposal by the new US president to cut their corporate income tax rate from 35% to 15% is approved.
To increase competitiveness in the global market, Mexico must invest more to become a centre of innovation. To do so, the government needs to incorporate incentives that truly promote technology development and innovation, as existing incentives are inadequate. Investment in this field today represents only 0.5% of GDP, while the average of OECD members is 2.4%.
One of Mexico’s biggest advantages is its extensive network of commercial treaties consisting of 12 free trade agreements with 46 countries, 32 agreements for reciprocal promotion and protection of investments with 33 countries, and nine reduced tariff agreements within the framework of the Latin American Integration Association. Mexico is also a signatory to 55 tax treaties.
The manufacturing sector has benefitted from the network of commercial agreements and special rules on tax and customs matters. Mexico currently has a privileged position as one of the main exporters of manufactured products, with emphasis on vehicles and electronic goods. The export sector will continue to consolidate with the 2017 designation of several special economic zones in which companies can be established with a favourable customs regime and a highly preferential income tax regime.
In recent years, the government has executed a set of structural reforms in the key areas of education, labour, telecommunications and energy – through which the latter can be opened to private sector investment. If these reforms are implemented properly, they will allow Mexico to achieve healthy, sustained growth of its economy and will greatly enhance its competitiveness in the global market.
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