Mexico Tax Reform Diversifies Tax Base

Will Mexico stop relying on Big Oil? Analysts have long warned of Mexico's dependence on oil revenues to keep its federal budget afloat-and now it seems Mexico may finally be doing something to change that. Last week, thanks to a rare collaboration between the country's two largest political parties, Mexico's Congress approved a key tax reform bill that will diversify the tax base.

The tax reform is expected to generate an additional $10 billion in government revenue its first year alone.

The tax overhaul includes controversial new taxes on corporations and on gambling operators, as well as a tax on large bank deposits aimed at tax evaders who work "off the books." At the same time, it reduces the percentage of revenues that Pemex (Petroleos Mexicanos, the Mexican national oil company) must pay to the federal government each year.

For several decades, the federal government has depended on Pemex revenues for up to 50% of the federal budget. However, in the last few years Pemex's most profitable oil fields have entered a phase of declining production?and the company has lacked the funds to explore new oil fields. The tax reform provisions achieve two goals: they reduce government reliance on Pemex by creating new sources of tax revenue, and they free up Pemex revenues that can be devoted to new oil exploration and extraction.

Approval of the tax bill is the first legislative victory for President Felipe Calderón, who took office last December. The government of his predecessor, Vicente Fox, was marred by political infighting that stalled much fiscal and social reform. President Calderón is known as a skilled negotiator?a talent he is clearly putting to use.

Best Regards,

Suzan Haskins
Editor, Mexico Insider
International Living

P.S. As we've mentioned, Mexico is the #1 retirement destination this year in International Living's Global Retirement Index. There are many reasons for this-and we'll tell you about all of them at Puerto Vallarta next week. You still have time to join us.