Steep taxes dim Mexico's allure for U.S. business

March 20, 1992|By John M. McClintock | John M. McClintock,Mexico City Bureau

MEXICO CITY -- With cries of "Kill the auditor" and "Down with fiscal terrorism," Mexico is in the midst of a major tax revolt embroiling thousands of businesses, from huge U.S. corporations to mom-and-pop grocery stores.

Next month, the National Confederation of Chambers of Commerce is holding a taxpayers convention in Guadalajara to rail against some of the government fiscal policies that went into effect on the first of the year.

U.S.-border business executives now are having second thoughts about Mexico as a place to invest. And some warn that they will withdraw their support for the free-trade agreement being negotiated by the United States, Canada and Mexico.

Uncertainty and anger over the tax issue have put on hold more than 20 new U.S. projects or plant expansions on the Mexican side of the border, these business executives say.

The loudest complaints came from more than 3,000 U.S. executives who were shocked to learn that they will have to pay steep Mexican income taxes.

The executives, who reside in the United States but work in Mexican-border plants, had been paying U.S. income taxes at lower rates than they will now have to pay in Mexico.

The business executives have prevailed on senior Mexican officials to cut the tax rate from 30 percent to 20 percent. Meanwhile, they hope to convince President Carlos Salinas de Gortari that they are better off in the tender hands of the Internal Revenue Service.

The effective income tax rate in Mexico is far higher than in the United States because it forbids deductions.

Another gripe was the sudden announcement of a 2 percent payroll tax to create retirement accounts for company workers. "They changed the rules on us without any warning," snapped Tony Ramirez, an American who runs two plants in Tijuana. "You can't do business this way."

Other complaints concern a new requirement that all retail businesses buy a $1,000 tamper-proof cash register.

Tax cheating, once Mexico's national pastime, has lost its charm, and the financially strapped government has tried to increase collections. About 154 people have been charged with tax evasion since Mr. Salinas took office in 1989, a huge increase considering that only two were convicted in the previous 50 years.

To be charged with tax evasion is no light matter in Mexico. Under the criminal code, a suspect is jailed pending trial without the possibility of bail. A joke making the rounds here is that it is better to shoot the auditor than to be charged with tax evasion since murder is a bailable offense.

As the fear of audits increased, more people began paying up. The number of taxpayers has grown nearly 70 percent from 1.6 million in 1988 to 2.7 million in 1991.

But with an estimated 40 percent of the economy underground and impervious to collectors, it will be hard for Mexico to find new taxpayers.

The federal government collected about $60 billion in revenues last year, but the new tax measures are expected to raise that figure to nearly $90 billion this year.

The current outrage has caused some business executives to ask for the resignation of Pedro Aspe, Mexico's suave treasury secretary, who is widely perceived to be Mr. Salinas' logical successor. Many accuse Mr. Aspe of dictating major tax policies without consulting the people most affected by the policies.

"He sits up there like some king and decides that millions of businesses must now buy a new cash register," said Julio Carvajal, owner of small grocery store here. "Well, he can take his cash register and put it where the sun don't shine."

The cash register is aimed at merchants who fail to report all of their

sales, thus avoiding the 10 percent value-added tax. The machines are sealed by the treasury department and are capable of making a paper copy for the auditors.

The six companies that sell the government-approved machines stand to reap millions in profits. And some opposition politicians have called for an investigation to determine if the companies have silent partners with good government connections.

"The cash register idea is typical of this kind of government," said Eugenio Elorduy, the treasurer for Baja California, a state run by the opposition National Action Party. "They have a tendency to dictate things without realizing the consequences."

The screams of U.S.-border business executives have aroused little sympathy because their plants generate little tax revenue for the government. Year after year, the business executives have successfully won an exemption from Mexico's 2 percent tax on assets, and their plants are not subject to the corporate income tax.

The plants belong to Mexico's "maquiladora" system, which allows foreign companies to assemble goods tax-free before shipping them back to the country of origin. In the case of goods shipped back to the United States, U.S. customs duties are paid only on the value added in Mexico.

George Baker, a Mexico expert at the University of California at Los Angeles, estimates that the tax burden of a typical maquiladora is lower than 3 percent of operating costs -- compared with more than 30 percent in the United States. "Those companies must share some of the blame for the border's lack of infrastructure, the lousy roads and polluted environment," he said.

Mr. Aspe has said a major reason Mexico embarked on a tax crackdown is to generate funds to combat pollution and to meet other infrastructure needs. But to Mr. Elorduy and other critics, the system strongly favors the central government, which captures most of the taxes.

"Twenty percent of the revenues our state generates is returned; 80 percent is kept by the federal government," said the Baja California treasurer. "We have a crying need for new roads and sewers, but we just can't get the money. If the government is truly serious about tax reform, it has got to reshape the whole system."

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