There are two groups of tax measures to offset the effects of the United States tax reform in Mexico. The first group, viable and immediate, implies the use of executive authority, whereas the second group, while ideal, is not the most practical at this political moment for the country, says Roberto Arena, managing partner of Gardere Arena y Asociados.
Although he admits that it is too soon to know which industries in Mexico will be the most affected by the tax reform, the tax law practitioner notes that in the short term, the changes in the United States will generate certain instability.
“The U.S. economy is in full employment and any increase in its activities will cause inflationary pressures, resulting in new federal interest rate increases,” says Arena.
“It has been said for many years that Mexico needs an integral tax reform, and this still holds true, but if we add in the United States’ reform factor, this situation turns critical. I foresee a tax reform needed in the following administration,” he underscores.
Arena expects at minimum four measures following the conversations held between the Mexican government and the business community:
“Given the situation, which may be deemed emerging for the national economy, it would be preferable for these measures to be implemented through an executive order,” comments Fernando Camarena, a partner in Gardere, Arena y Asociados' tax practice. "There are other measures, but with low margins of success: reducing the corporate rate from 30 percent to 21 percent to make it equivalent to the rate in the United States, and the possibility of giving general applicability to the value-added tax, or applying it to medicine and food products.”
It is estimated that if in this juncture Mexico reduced its corporate tax rate from 30 percent to 21 percent, as some suggest, the Mexican economy would have a short-term growth of only 0.3 percent, while the tax collection of the Federal Treasury would drop in an amount equivalent to 1.1 percent of the gross domestic product.
Camarena stresses that the inaction of the Mexican government to mitigate the negative effect of the United States’ reform in Mexico is unacceptable, and says that such inaction could result in consequences for one of the most productive sectors in Mexico, manufacturing.
“We know that the manufacturing industry is performing a competitive analysis comparing what is offered to them by the U.S. and Mexican economies, evaluating the incentives of both countries. To the extent there is a decrease in the manufacturing activity this may affect the Mexican exportation industries,” says Camarena.
In their analysis, the partners of Gardere, Arena y Asociados agree that the measures that affect the Mexican economy directly are:
“All of these provide more competitiveness and attractiveness to investments in the U.S. in the short and medium terms, and for which Mexico has no tax alternatives to mitigate the competitiveness effort in Mexico. The faster the Mexican government reacts, the better,” Arena concludes.