Peña Nieto decides not to impose VAT on medicines and foodstuffs

Mexican president unveils his tax reform which includes offering jobless benefits for the first time

Enrique Peña Nieto, Mexico's president, makes a speech on fiscal reform at the presidential residence in Mexico City on Sunday.
Enrique Peña Nieto, Mexico's president, makes a speech on fiscal reform at the presidential residence in Mexico City on Sunday.Susana Gonzalez (Bloomberg)

Faced by a wave of teachers’ protests over his education reform and threats of nationwide demonstrations by leftists angry at his energy plans, Mexican President Enrique Peña Nieto on Sunday backed off from his proposal to introduce value-added tax (VAT) on prescription medicine and food.

He made the announcement as he presented his latest reform – a restructuring of the tax code – and promised Mexicans that they will soon have a national social security system and unemployment benefits for those who hold a recognized job. But Peña Nieto said he was backing away from imposing the VAT on medicine and foodstuffs because it was an unpopular measure and discussion about the levy was having “a negative effect” among Mexicans. The VAT proposal had been an important part of his Institutional Revolutionary Party’s (PRI) electoral platform last year.

The government’s tax reform – which Peña Nieto said will be based on the principle of “those who make more will pay more” – aims at strengthening Mexico’s financial capacity so that the government can invest more on education and infrastructure. The PRI administration also wants to stop the surge of the number of jobs that pay their employees under-the-table, spark growth in the faltering economy, and introduce a simplified and fair income-tax structure for all Mexicans.

Tax revenue after the reform would make up 1.4 percent of the GDP next year and three percent of GDP by 2018, Peña Nieto said.

Among the measures being proposed are the elimination of some deductions and tax breaks currently allowed in personal income tax. Among the most striking changes are an introduction of a 10-percent rate on stock-market dividends, capital gains taxes, raises in the tax rate from 30 percent to 32 percent on citizens making more than 500,000 pesos (some $38,000) annually, and a gradual elimination of gasoline subsidies, which would mean periodic increases in gasoline prices.

The government also proposes to introduce a “green tax” and taxes on sugary soft drinks in an effort to combat obesity, especially in children. According to the Organisation for Economic Co-operation and Development (OECD), Mexico is the second nation in the world after the United States with the highest obesity rates.

Taxation for the state-owned oil company Petróleos Mexicanos (Pemex) will also be restructured under Peña Nieto’s new policy. Only 60 percent of Pemex’s total revenue would go to the national treasury instead of the current 79 percent, he said.

A priority of the tax-restructuring plan is to encourage Mexicans to emerge from the underground economy

Plagued by mismanagement and a lack of funding with which to modernize its operations, in recent years Pemex has fallen behind other international oil giants in production and marketing. One of Peña Nieto’s key but most controversial reforms is to open the country’s state-owned industry to private investment. Over this measure, leftist parties have threatened to call massive demonstrations because many of their members feel that the president will change the historical nationalization laws of 1938.

The president also stressed that the priority of his tax-restructuring plan is to encourage Mexicans to emerge from the underground economy. Two out of three Mexican workers work “informally.”

The PRI and the conservative National Action Party (PAN), which has signed on to the reforms, have enough votes in Congress to pass the measures. Afterward, 17 of Mexico’s 32 state legislatures, including the Federal District, will have to ratify the changes.

In his own intervention, Treasury Secretary Luis Videgaray enumerated a series of circumstances which give an idea of the challenges the government and Mexican society face:

—The Mexican economy has not grown to reach its maximum potential in the past 30 years. The average annual growth rate has been at two percent due to sluggish productivity.

--“We have the same number of poor people we had 30 years ago,” the secretary said, pointing out that 45 percent of Mexico’s estimated 116,220,947 citizens live in poverty.

--Mexico is the only country in the OECD that doesn’t provide unemployment benefits to its workers.

--Of Mexico’s entire workforce, 60 percent hold “informal” jobs.

--Because of scarce tax revenue, public spending in Mexico stands at 19.5 percent while the Latin American average is at 27 percent and 46 percent among the members of the OECD.

--Fuel consumption in Mexico per person is more than double what it is in Chile and triple compared to Brazil.

Amid such a panorama, Peña Nieto also faces social pressures from teachers, who are opposed to the education reform that was passed last week in the Senate. The gist of the changes would reduce the power currently held by the influential National Syndicate of Education Workers (SNTE), which for decades has controlled the hiring process in the classroom and has acted as a political interest group.

The union’s former leader, Esther Gordillo, is in jail awaiting trial after she was arrested in February on corruption and money-laundering charges.

“It is possible to transform Mexico with everyone’s help,” Peña Nieto said.

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