Mexico’s Senate on Wednesday passed an amendment to President Enrique Peña Nieto’s far-reaching fiscal reform law that will eliminate special value-added tax (VAT) rates and economic benefits for assembly plants located in cities and regions that border the United States and Central America.
Starting on January 1, the VAT rate would be raised in these areas from the current 11 percent to 16 percent, equal to what is charged in the rest of Mexico. Assembly plants, which have been one of the country’s leading economic vehicles, will no longer get any tax breaks as they have been receiving for the past 30 years. Those who are in favor of the reform argue that the state will be able to raise more revenue which can then be invested in communities in the frontier zones. But critics believe that the manufacturers and other businesses will lose out to industry across the northern border in the United States.
Peña Nieto has been under pressure from local businessmen and foreign-owned corporations. They have threatened to shut down operations and leave the country if the government raises taxes.
Workers at various assembly plants have threatened to call strikes, which would impact the economies on both sides of the border.
These conflicts only add to Mexico’s long-running problem with the drug violence and insecurity that has plagued the country’s northern states over the past seven years. Among the things Peña Nieto’s fiscal reform calls for are tax raises for high earners and price-hikes on sugary soft drinks and other products that cause obesity.
In the 1960s, many businesses began setting up shop on the Mexican side of the border after the government began to take advantage of the proximity to the United States, offering advantageous conditions for companies to establish assembly lines. Among the manufacturers are those that make televisions, automobiles, shoes, furniture and clothes.
According to the country’s INEGI statistics institute, some 670 companies, which bring in revenue totaling 17 percent of Mexico’s GDP, are taxed at special rates. The raw materials and components that are imported by foreign-owned companies come into the country free of duties.
“This tax reform is going to cause economic chaos because of the effect it will have on taxes,” said Carlos Ángulo, a deputy for the conservative National Action Party (PAN), who voted against the law.
Business owners calculate that some 230,000 workers will be laid off if the assembly plants move out.
But Senator Armando Ríos Píter, of the leftist Democratic Revolutionary Party (PRD) and who voted in favor of the amendment, said that he believed that the majority of opposition voices come from those who have benefit from a VAT rate that is five-percent lower than the national average. “These savings have meant lower prices for the consumer, but instead have lined the pockets of some businessmen’s pockets. This money must be made public so that it can be reinvested in the border and the rest of the country,” Ríos Píter said during the Senate debate.