Ricardo González Orta, Partner, Deloitte México: Viewpoint

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Ricardo González Orta, Partner, Deloitte México,

Viewpoint: Ricardo González Orta

Economic growth and tackling poverty are two of the most important challenges the government faces. In this regard, the National Development Plan 2019-24 contains three broad priority areas: strengthening the rule of law; ensuring the well-being of the population; and fostering economic development. The plan also addresses three issues that will be prioritised in all public policies: gender equality, non-discrimination and inclusion; tackling corruption and improving public administration; and territorial and sustainable development. Over the last decade Mexico registered average economic growth of 2.2% per year, which is below the estimated global growth of 3.3% for 2019. Some factors contributing to the lower growth rate include inefficient allocation of resources, low investment, and high levels of corruption and informal economic activities.

The tax system is the government’s main mechanism to secure resources to finance public spending, but it is also used as a tool to reduce income inequality, improve the quality of life of the population, and promote investment and job creation. Although tax revenues have grown and tax evasion has been reduced as a result of the 2014 tax reform, collection remains low. It is inadequate to cover all public spending and address significant challenges regarding competitiveness, infrastructure, health, education, poverty, family support and social security. Tax revenues represented 16.2% of GDP in 2017, whereas the average for OECD member countries that same year was 34.2% of GDP.

To strengthen public finances, the executive branch issued a decree on May 20, 2019 that abolished the practice of forgiving tax liabilities, i.e., waiving tax debts in whole or in part, and granting preferential treatment to tax debtors, i.e., exempting certain taxpayers, such as those with significant tax debts, from the payment of tax. While tax debt waivers and tax amnesties can result in some sort of tax revenue, they also represent a detriment to the public Treasury. The suppression of this practice in the decree, as well as a proposal to modify the constitution to prohibit the waiver of tax liabilities in any way, means that, in the future, taxpayers will not expect tax amnesty decrees similar to those granted in previous years that allowed liabilities to be forgiven in exchange for tax regularisation. Furthermore, to protect budget revenue and tackle tax evasion, the Senate recently approved a rule that defines tax fraud as organised crime, with pre-trial detention in cases involving the purchase and sale of tax invoices for non-existent operations. The rule has created concern within the business sector, particularly because it could potentially lead to criminal liability for taxpayers acting in good faith. As of September 2019 this was pending validation by the House of Representatives, however it will likely be approved without any changes.

In 2018 about 60% of planned public spending went to social development – including education, health, social welfare, housing and services, recreation and culture – representing 10.8% of GDP. Although social spending has risen over the last decade, it represents only one-third of the average OECD figure, and the results of the fight against poverty remain limited: in 2016 the number of Mexicans considered to be living in moderate or extreme poverty was about 53m, according to the latest estimate by the National Council for Evaluation of Social Development Policies. In 2018 there were 150 federal social programmes, 93 of which were aimed at eradicating poverty or improving effective access to social rights. In 2019, 18 social programmes have been cancelled and 14 created.

To make the fight against poverty both economically and politically sustainable, welfare and transfer programmes require not only a structural overhaul of public finances to guarantee proper resource allocation, but the consolidation of social, labour and infrastructure development policies linked to this goal. Educational and health services must be improved, informality in the labour market reduced, and transparency in the performance of infrastructure projects increased.

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The Report: Mexico 2019

Tax chapter from The Report: Mexico 2019

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