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October 17, 2013

Tax bill with junk food levy advances in Mexican Congress

MEXICO CITY — Mexico's lower house finance committee Thursday approved changes to a bill to raise taxes, including a new levy on junk food, as President Enrique Pena Nieto's party joined with an opposition party to advance his reform.

The committee voted 30-12, with one abstention, to approve a modified version of Pena Nieto's proposal, increasing the top income tax rate to 35 percent and adding a 5 percent tax on high-fat foods, according to a draft of the bill. The bill goes to full lower house debate as soon as Thursday.

Pressure from lawmakers caused the Pena Nieto administration to strip out sales taxes on private education tuition, mortgage interest and home rentals from the original proposal. A junk food tax would help make up the shortfall, although it's taking a toll on food companies such as Grupo Bimbo, the world's largest baker, and Gruma, the world's biggest tortilla maker.

"This won't be easy" on companies, Carlos Hermosillo, a stock analyst with Grupo Financiero Banorte, said in an emailed response to questions. The tax on items containing 275 kilo-calories per 100 grams "would include many products."

Lawmakers from the National Action Party, the biggest opposition group in Congress, opposed the bill after Pena Nieto's Institutional Revolutionary Party, or PRI, refused to drop its plan to increase the sales tax in states that border the U.S., including traditional strongholds for the party known as PAN.

A higher tax rate for top earners and duties on high-fat foods were proposals pushed by the Democratic Revolution Party, or PRD, the second-largest opposition group.

"The strategy of the government is very clear: they're bringing in the PRD and they're giving certain concessions in order to get their votes," Benito Berber, a strategist at Nomura Holdings, said in a telephone interview from New York. "This is a victory for the president and the finance minister. They found an ally that allows them to pass a not-so- diluted fiscal reform."

Under the plan approved last night, the maximum income tax rate would increase to 35 percent for people making more than 3 million pesos ($235,000), to 34 percent for those making more than 1 million pesos, 32 percent for more than 750,000 pesos in annual income and 31 percent for more than 500,000 pesos.

The current top income tax rate is 30 percent. Pena Nieto had proposed increasing the top tax rate to 32 percent for more than 500,000 pesos in income.

The lower house finance committee is still debating next year's budget, and the full chamber has a deadline of Oct. 20 to pass the revenue portion of the budget.

The fiscal bill that Pena Nieto presented on Sept. 8 would have increased tax revenue by 1.4 percentage points of gross domestic product in 2014 and 2.9 percentage points by 2018.

While the changes backed by the committee last night may raise less than that since some proposed taxes were removed, the duties supported by the PRD will help compensate, Nomura's Berber said.

        

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