Saturday, September 28, 2013

Fiscal reform draws protest in Baja California Proposed tax increase would end differential for border region

Fiscal reform draws protest in Baja California
Proposed tax increase would end differential for border region
By Sandra Dibble Sept. 23, 2013

Sales at this clothing store at Plaza Rio Tijuana would be taxed higher under a proposed federal measure. - David Maung/Bloomberg

TIJUANA - A federal fiscal reform package that would raise the sales tax by five percentage points in Mexico's border regions, putting them on par with the rest of Mexico, has been stirring furor across Baja California.

The state's business leaders have sprung into action since President Enrique Peña Nieto submitted the proposed changes to Congress this month. They are calling meetings, staging news conferences, issuing protest statements, forging alliances with opponents in other parts of the border and flying to Mexico City to meet with legislators and members of the president's administration.

Critics said the envisioned tax hike is the latest evidence that Mexico's federal government doesn't understand the distinctive dynamics of the country's northern border. The measure is fueling worries that prices will rise in Baja California, which would likely prompt more people to shop in California and impose a greater financial burden on those without crossing documents who can least afford to pay more.

If the tax overhaul goes into effect, "it will be fatal," said Ernesto Ruffo, a senator from Baja California who led a formal protest in the senate. "It will do away with our way of life."

The proposal is part of a sweeping tax-reform package that Peña Nieto hopes will boost government revenues and fund efforts to reduce economic inequality by establishing "universal social security" and investing in strategic sectors such as education and infrastructure.

His administration argues that residents in border regions, where the average income is 27 percent higher than the national average, shouldn't be granted special privileges. The plan, submitted to to Mexico's Chamber of Deputies on Sept. 8, would set a uniform sales tax of 16 percent nationwide and end the 11 percent rate currently in place in Baja California and other border areas.

"Our country is the only one with a tax differential in its border communities," reads a statement from the president's office. The lower tax rate not only leads to lower revenues, but also causes administrative problems, "opening opportunities for tax evasion and elusion," it said.

Border zones have had a lower sales tax - technically known as a value-added tax - for more than three decades. The affected areas include a 12.5-mile zone that run along Mexico's entire U.S. border, a section of Sonora outside of the strip, the state of Baja California, Baja California Sur and parts of the states of Chiapas and Quintana Roo on the southern border.

The lower tax rate was once justified by the "isolation of border populations from the rest of the country," according to the president's proposal. Now, Peña Nieto said, the exemption should no longer apply because of improvements in communications and infrastructure.

That reasoning is generating little sympathy in Baja California, where residents have vigorously protested earlier federal mandates. In 2010, for example, members of the state's business community protested new federal rules limiting U.S. dollar deposits in Mexican banks. They said the restrictions ignore the realities of border transactions, where many bills are paid in dollars.

As for the newly proposed tax hike, Baja California Gov. José Guadalupe Osuna Millán said in Tijuana last week: "What we need to explain to our friends from the center of the country is that this difference in the value-added tax is no privilege. It's because we are competing with the (U.S.) market."

He and other critics said the president's tax-reform push is a double-whammy for Baja California: Besides raising the sales tax, Peña Nieto wants to eliminate a tax waiver granted for imports temporarily brought into Mexico for assembly in the export-oriented maquiladora manufacturing facilities.

The second measure would affect maquiladoras across Mexico, an industry that employs close to 2.3 million people, said Federico Serrano Bañuelos, president of Tijuana's maquiladora association. The sector directly employs more than 248,000 people in Baja California.

The idea behind canceling the maquiladora waiver is to crack down on tax evasion, not to collect more revenue. Legitimate maquiladora owners would be able to seek reimbursement once their finished goods leave Mexico.

But critics including Serrano said the rule would hurt the sector's cash flow, lead to new administrative expenses and discourage foreign investment that has been so critical to maquiladoras.

"They're going to lose competitiveness," said Ruffo, the senator from Baja California. And if that happens, "businesses overall are going to lose customers."

Opponents of the border sales-tax hike have been citing a study released in February by Colegio de la Frontera Norte, a border-wide think tank based in Tijuana. The study found increasing the sales tax would have an inflationary effect on prices and prompt consumer flight to the United States. People without the option of crossing the border would bear the brunt of the higher prices, said Noé Arón Fuentes, an economist and the study's author.

Though the border has escaped previous efforts to raise its sales tax to the national level, "for the first time, we're at great risk that the reforms will pass," Fuentes said. "We have to offer alternatives."

Among those knocking on doors in Mexico City last week was Karim Chalita, president of the Tijuana Chamber of Commerce. In an interview from the capital, he said he hoped to meet with legislators from other parts of the country "so that those who are taking decisions can know the realities of the border."

Chalita said a wide range of businesses - from restaurants to doctor's offices to tourist operators - could be harmed if the tax package passes.

Foes of the sales-tax hike have won support from the central leadership of Mexico's National Action Party, better known as the PAN, and powerful national business groups such as COPARMEX. But leaders of the president's Institutional Revolutionary Party - also called the PRI - and its chief ally, the Green Ecologist Party of Mexico, remain staunchly behind the proposal.

"The first people who have to be persuaded are authorities in the Treasury Secretariat," said David Pérez Tejada, a freshman legislator from Baja California and a member of the treasury committee in the Chamber of Deputies. Though he is a member of the Green Ecologist Party, he openly opposes the border tax-increase proposal, as have some PRI lawmakers from border areas.

Starting this week, opponents of the two border-related tax measures - and those with other criticisms of the tax-reform package - will have a chance to speak out in Mexico City during hearings before the treasury committee.

Among those prepared to testify is Juan Manuel Hernández, president of the Tijuana's Business Coordinating Council, an umbrella organization.

"They say that all of Mexico has to be equal and there is no difference between regions," Hernández said. "We're saying just the opposite. What's good for Oaxaca is not good for Baja California."

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