10/30/2013 05:25 am ET Updated Dec 30, 2013

Mexico Debates Tax Overhaul, Poised To Enact Increased Rates For The Wealthy

By Dave Graham and Miguel Gutierrez

MEXICO CITY, Oct 30 (Reuters) - Mexican senators debated on Wednesday parts of a tax overhaul aimed at boosting government revenues, with early voting suggesting they are unlikely to make many changes to what is a cornerstone of the president's economic reform agenda.

The Senate approved the general outline of the bill late on Tuesday and began a marathon debate through the night over sections that lawmakers have sought to repeal or change.

The bill would have to return to the lower house of Congress if senators amend it. With time running out to approve the plan, the ruling Institutional Revolutionary Party (PRI) of President Enrique Pena Nieto wants to avoid major changes.

The bill, which increases income tax rates for the wealthy and slaps levies on sugary drinks and junk food as well as a charge on stock market gains, seeks to raise total tax revenues by nearly 3 percent of economic output by 2018.

In general terms, the Senate approved the fiscal package with 73 votes in favor and 50 against before the chamber began going through it in more detail.

The PRI, which lacks an outright majority in both houses of Congress, looked to have secured enough votes from opposition benches to thwart modifications it opposes.

The tax overhaul is a part of a series of reforms also taking in the telecoms and energy sectors that Pena Nieto hopes will strengthen the economy and help boost a growth rate that has lagged that of other major emerging markets.

Earlier this month, the lower house watered down the tax bill, throwing out some measures including plans to apply sales tax to rents, mortgages, property transactions and school fees.

But at the same time, and supported by the leftist Party of the Democratic Revolution (PRD), the PRI modified the fiscal reform to lift top income tax rates, pushing more of the burden onto the richest section of society.

Roughly half of Mexico lives in poverty, while much of its wealth is concentrated in the hands of a few powerful families like that of billionaire telecoms mogul Carlos Slim.

The top rate of income tax in Latin America's no. 2 economy is currently 30 percent, but the reform sets out a sliding scale of higher rates capped at 35 percent for those earning more than 3 million pesos ($233,000) a year.


Senate lawmakers are still considering proposals to raise a planned levy on junk food from 5 percent to 8 percent.

Under the reform, junk food is defined as products that contain more than 275 calories per 100 grams which, in the land that gave it its name, would apply to chocolate.

Opposition conservatives fought against much of the bill and pushed hard to strip out a measure to raise the value-added tax (VAT) rate for states on the U.S. border to 16 percent from a reduced rate of 11 percent they currently enjoy.

The Senate upheld that part the plan, however.

Changes to the tax bill in the lower house in mid-October created a shortfall in the budget plan for next year.

That prompted lawmakers to raise the government's oil revenue estimate and make other changes to close the gap. These are due to be voted by the Senate later on Wednesday.

The tax bill is tied to the 2014 budget, which must be approved by mid-November.

The last major reform pending in Congress is the president's planned overhaul of the state-controlled energy sector, which the government hopes will attract investment, help stem a slide in oil output, and power economic growth.

Pena Nieto proposed an energy revamp in August that would loosen the grip on the sector of state oil monopoly Pemex and offer private companies profit-sharing contracts.

If approved as presented, this would mark the largest opening of the energy sector to the private sector in decades.

However, the reform has stopped short of offering production-sharing contracts or concessions that oil majors had been hoping for, and many viewed it as cautious.

Some lawmakers believe the energy plan could still be amended to attract more investment.



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