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Mexico Urged To Undertake Ambitious Tax System Reforms

Mexico Urged To Undertake Ambitious Tax System Reforms
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Mexico Urged To Undertake Ambitious Tax System ReformsIn its new Economic Survey for Mexico, the OECD has urged Mexican authorities to more comprehensively reform the corporate and personal income tax systems and value-added tax. In particular, it has called for Mexico to lower headline rates by broadening the base of each tax.

The OECD notes that a narrow tax base and high tax evasion rates limit the resources to finance needed infrastructure investment and policies to reduce poverty and inequality. It urges the Mexican authorities to develop a comprehensive tax reform package for implementation in the medium term.
It recommends that this should include broadening the VAT base by cutting exemptions and abolishing reduced rates while compensating low-income taxpayers with subsidies. The standard VAT rate in Mexico is 16%, slightly above the average in Latin America (15.4%), but lower than the OECD average of 19.3%, the report notes. However, the revenue from VAT compared to its theoretical revenue is the lowest among OECD countries due to a narrow VAT base, with only around 40% of domestic consumption being subject to the standard rate, on top of low levels of voluntary compliance, it adds.

Other recommendations include that Mexico should increase the progressivity of personal income tax by lowering the income threshold for the top rate and further cutting back tax allowances or converting them into tax credits. Further, it calls on the authorities to create a nationwide property register and consider the use of blockchain for property tax administration. Revenues from property taxes amount to just 0.3% of GDP, against the OECD average of 1.9%.

The report says a key challenge is to reduce reliance on oil revenues. The new government took office on 1 December 2018. In January 2019, the Government introduced measures to stimulate economic activity along the US border. Under the changes, eligible taxpayers can apply for a refund that lowers their CIT rate to 20% and the headline VAT rate to 8% from 16%.



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The OECD noted that, at 30 percent, the statutory corporate tax rate is high by international standards and well above the OECD average of 24 percent. However, effective tax rates are lower due to accelerated depreciation on investments in buildings and machinery, and below the median in a sample of OECD and G20 economies.

The report says:

"Overall, Mexico would benefit from an in-depth review of its tax system that would take all these objectives into account. The government acknowledges these challenges and is working on strategies to address them. In the near term, this involves improving the tax administration and reducing regulatory loopholes which facilitate tax evasion and avoidance. In the second half of the Executive's term, the government intends to undertake a comprehensive tax reform aimed at increasing the progressivity of tax policy, enhancing tax revenue, and reducing price distortions."

 

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