Mexico border factories cry foul on new taxes

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MEXICO CITY -- Industry groups say President Enrique Pena Nieto's proposed tax overhaul, set for Senate approval Tuesday night, could strangle one of Mexico's economic success stories, the border factories known as maquiladoras.

Owners of the maquiladoras, which turn out everything from auto parts to candy for the U.S. market, argue that the plan would harm the border city of Ciudad Juarez just as it begins to recover from a three-year wave of brutal drug-gang killings.

"The businesses, the stores, the restaurants have just begun opening up again," said Claudia Troitino, head of the Ciudad Juarez maquiladora association. "The economy was just beginning to recover ... This will be a heavy blow."

It's one of numerous business sectors opposed to the tax proposal already approved by the lower house and a Senate committee. Mining companies, soft drink bottlers and employer associations all protest tax hikes that supporters say are needed to strip some tax privileges away from the wealthy and help remedy deep income inequalities. The current tax code, for example, encourages business executives to create fleets of corporate jets to get tax deductions.

The legislation to raise taxes on businesses and top-end wage earners and end some deductions has drawn full-page ads and radio spots from opponents warning it will discourage investment.

But supporters point out that Mexico currently has a low tax collection rate of just 10 percent of GDP, far less than the average 34 percent among developed countries, leaving little for government social programs. They argue it would bring some social justice to Mexico's lopsided distribution of wealth.

"Seldom has there been such a blunt, undisguised campaign by private interests, a massive and virulent campaign against the tax reform," dozens of intellectuals wrote in an open letter to Congress this week. "Apart from the poor and those who can't meet their basic needs, what product, service, industry or company, corporate group or region deserves special privileges?"

The plan would end tax deductions for rich foreign businesses such as mining companies, which for the first time would have to pay a 7.5 percent royalty tax. Mining companies in Mexico currently pay tiny per-acre concession fees but no royalty payments on the minerals extracted, a tax commonly charged elsewhere in Latin America.

Business leaders say that reducing those benefits could prompt them to invest elsewhere.

The new royalty tax "would bring Mexico up to an effective tax rate of 73 percent," said Rosalind Wilson, who heads the Canadian Chamber of Commerce's Mining Task Force. "So you might as well forget any new investment."

Mr. Pena Nieto has proposed ending the maquiladoras' current exemption from the country's 16 percent sales tax on goods imported for assembly. It says maquiladoras would be reimbursed for the new tax once the finished products are exported, but industry leaders say that would be a costly, lengthy and bureaucratic process. Industry leaders say the plan would also significantly raise the maquiladoras' low corporate income tax rate of 17.5 percent.

Adding to the opposition is the overhaul's proposal to raise Mexico's border-area sales tax from the current preferential rate of 11 percent to the 16 percent rate in effect in the rest of the nation. About 5,000 people marched through Ciudad Juarez in protest last week.



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