The International Monetary Fund (IMF) has suggested tax reform in Mexico once the country recovers from the Covid-19 pandemic to boost the economy and support the spending in the short to medium-term. We don’t yet know the scope or dynamics of this possible tax reform, but some members of Morena, President Lopez Obrador’s party, have proposed a wealth tax and an inheritance tax in response to the IMF and the OECD recommendations.
However, circumstances have changed.
Mexico held one of the biggest legislative elections in the history of the country on June 6th, 2021, because of both the number of voters and the number of leaders to be elected. Morena was able to maintain a simple majority at the lower house of the Mexican Congress but did not reach a qualified majority. And after the election results, the lower house looks fragmented.
In the face of loss of political power after the election results, Lopez Obrador will need to start negotiating more with other political leaders if he is to have a significant tax reform happening anytime soon. A few factors may seem to indicate that an aggressive tax reform in Mexico will not happen as some have anticipated.
First, the country is recovering from a sanitary crisis, not only an economic one. Assistant Secretary of Treasury, Gabriel Yorio, has admitted that this is not the time to increase the burden of taxpayers with additional taxes, especially during the recovery phase, indicating that the country will focus its efforts on increasing tax reporting efficiency and increase the country’s taxpayers’ base.
Second, although Mexico’s economy shrank 8.5% in 2020 due to the pandemic, high-profile government officials are of the opinion that Lopez Obrador will be wise to consider Colombia’s case as a “warning” after a post-pandemic tax reform triggered weeks of fatal protests in Colombia and resulted in the resignation of the country’s Ministry of Finance.
Lastly, private investment organizations and businesses representations increased lobbying have been looking out for the future of the tax reform in Mexico and the federal budget for 2022 with a narrative based on the importance of investment to reactivate the economy and keep jobs alive. One of their main arguments is that without businesses and investment, there are no taxes, and thus the federal government will not have the funds needed to maintain social programs and solve national problems.
Since his presidential campaign, Lopez Obrador promised not to create new taxes or increase the current tax rates in the country during the first three years of his sexennial. Such term ends in December. As a result, prior to the legislative election of June, there was an increased concern on many fronts about the potential approval of a wealth tax and an inheritance tax in Mexico. Now, we are expecting to see a less ambitious tax reform.
We will continue to monitor these and related events to help clients plan appropriately.
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