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US tax reform will prove challenging for Mexico

Tuesday, 5 December, 2017

The International Monetary Fund (IMF) and the Inter-American Development Bank (IDB) have warned that changes in the US tax system will increase the pressure on Mexico to undergo similar reform, including the lowering of income tax (ISR).

IDB economist Paolo Giordano noted: “If it were the case that the rate paid in the United States fell substantially, Mexico would clearly be in a pressurized situation to bring its rate down” – suggesting that, if Mexico were not to do so, the incentives to invest in the US would be greater.

The US Senate approved President Donald Trump’s proposed tax reforms on December 1, 2017, including the Republicans’ move to reduce the corporate tax rate from 35 percent to 20 percent.

Speaking at the 45th Convention of the Mexican Institute of Finance Executives, Alejandro Werner, director of the Western Hemisphere department of the IMF, pointed out that any changes to the corporate income tax system of the world’s largest economy would have “global repercussions”, and added that it would lead to further discussions about reducing ISR and continuing to increase base and indirect taxes.

The former Undersecretary of the Ministry of Finance and Public Credit (SHCP, Secretaría de Hacienda y Crédito Público) has suggested that Mexico should look to strengthen its tax system in 2018, and ensure that any changes such as the lowering of ISR are mitigated elsewhere, for example through value added tax (VAT).

However, Carlos Serrano Herrera, chief economist at BBVA Bancomer, has suggested that Mexico will continue to be competitive, regardless of US tax reform, and has cautioned the government not to rush into lowering ISR rates.

Next year will see change and uncertainty for Mexico, as beyond its neighbour’s tax reforms, 2018 heralds a general election, and continuing NAFTA talks with the US and Canada.