Mexican tax plan weakened further, nears final approval

By Miguel Gutierrez, Michael O'Boyle and Dave Graham MEXICO CITY (Reuters) - Mexico's Senate on Thursday made new cuts to a tax reform plan that President Enrique Pena Nieto proposed to increase the nation's anemic tax take before sending the bill back to the lower house of Congress for final approval. The bill, which includes higher taxes for the rich as well as levies on junk food and on stock market gains, is a cornerstone of a wider reform agenda that Pena Nieto is pushing to lift lackluster growth in Latin America's No. 2 economy. After conservative opponents walked out of the Senate, refusing to support the legislation, ruling party leaders struck a deal with leftist lawmakers on changes to income tax rates that would lower the bill's projected tax take. Lawmakers said the lower house of Congress was expected to pass the bill on Thursday. It would then fall to Pena Nieto to sign it into law. Market players viewed the Senate's weakening of the tax reform as a minor issue, and said it was unlikely to hurt Mexican assets like the peso and bonds. "The poison is already in the price," said Siobhan Morden, a Latin American strategist at Jefferies LLC in New York. Markets were disappointed at the original scope of the reform. Acrimony over the tax plan could complicate efforts to pass reforms of the telecommunications and oil industries. Pena Nieto's Institutional Revolutionary Party (PRI) lacks a majority in Congress and is banking on help from the conservative National Action Party (PAN) to push through the energy reform, which aims to lure investment into the state-controlled sector and help reverse a slide in oil output. The leftist Party of the Democratic Revolution (PRD), which has helped the PRI pass the fiscal reform, opposes breaking the grip of state giant Pemex on Mexico's oil sector. In the Senate, PRD and PRI lawmakers agreed to keep the income tax rate for those earning between 500,000 pesos and 750,000 pesos at 30 percent, not 31 percent as had been proposed. Higher rates will kick in above 750,000 pesos. Lawmakers also increased the percentage of workers' benefits that companies can deduct from their total tax bill. Separately, the Senate voted to raise a planned levy on junk food from 5 percent to 8 percent. The amendments made by the Senate early on Thursday mean the bill will likely reap lower revenues than had been sought. Before the Senate changes, it was expected to yield additional tax income worth 2.7 percent of economic output by 2018. "Without a doubt it's a decrease in revenues that will mean a decrease in spending," said PRD Senator Armando Rios Piter, who negotiated changes to the bill with the PRI. OIL REFORM The PAN pulled out of the Senate debate on proposed amendments to the fiscal bill earlier on Wednesday after accusing the PRI of not taking its concerns seriously. The party was upset when it failed to stop the standard rate of value-added tax of 16 percent from being extended to states on the U.S. border, which now pay an 11 percent rate. Once the fiscal reform is passed into law, all eyes will be on the oil industry overhaul, which aims to bring in fresh private capital with profit-sharing contracts. The PAN feels Pena Nieto's model does not go far enough to attract investment, and lawmakers in the party have pledged to pressure the PRI into providing greater incentives to oil companies, such as production-sharing contracts. That could put the president under attack from leftists who accuse the government of wanting to sell out Mexico's oil wealth to foreigners, and could spark large protests. The government is banking on the energy reform helping to boost economic growth and analysts say it is likely to help the country's international credit rating. "At the end of the day, (energy reform) will still produce what they want in terms of FDI, growth potential, competitiveness gains, that will still deliver a ratings upgrade," Morden said. Mexico is just one rung short of A territory on the scales of two ratings agencies, Fitch and Moody's. Of major Latin American economies, only Chile is rated in the A category. S&P has Mexico two notches below A. The PAN may also push the PRI for a more radical electoral reform aimed at politically weakening the PRI, which held Mexico in an iron grip for most of the last century. Earlier this month, the lower house watered down the tax bill, throwing out measures including plans to apply the sales tax to rents, mortgages, property transactions and school fees. At the same time, the PRI, supported by the PRD, modified the fiscal reform to lift top income tax rates, pushing more of the burden onto the richest section of society. Roughly half of Mexico lives in poverty, while much of its wealth is concentrated in the hands of a few powerful families like that of billionaire telecoms mogul Carlos Slim. The top rate of income tax in Latin America's No. 2 economy is currently 30 percent, but the reform sets out a sliding scale of higher rates capped at 35 percent for those earning more than 3 million pesos ($233,000) a year. Tweaks to the tax bill in the lower house in mid-October created a shortfall in the budget plan for next year. That prompted lawmakers to raise the government's oil revenue estimate and make other changes to close the gap. The tax bill is tied to the budget, which must be approved by mid-November. ($1 = 12.8752 Mexican pesos) (Additional reporting by Alexandra Alper; Editing by Simon Gardner, Vicki Allen and David Brunnstrom)