For years, the urgent need for addressing Mexico’s tax collection has been identified. A good deal of criticism has been directed towards state and local governments, particularly regarding the inconsistency between its weak revenue raising capacities – in a sense, prompted by law – and the lack of transparency with whom they manage their expenditures. This controversy was exacerbated with the Revenue Act for Fiscal Year 2013 (LdI2013), which establishes the cancellation of tax debts for states and municipalities. It was foreseeable that such a decision would unravel a controversy on its reach and implications, particularly among private actors. In addition, the matter is gaining relevance with the imminent tax reform and it could be interpreted as a sign of what’s to come.
Specifically, LdI2013 stipulates in its Article 9 the cancellation of ISR-owed debts that local governments withheld from their workers. It is important to point out that this mandate is not new, it just ratifies and extends the effects of the “Decree for those that have been offered fiscal benefits related to income tax, duties and terms” issued by the then-President Felipe Calderón in December 2008. This Decree intended to regularise the credit situation of states and municipalities. Nevertheless, this attempt resulted in a total cancellation in ISR debts prior to 2005 and important fiscal reductions up to 2012. LdI2013 repeated this formula by condoning all debts up to 2012 and by extending tax deductions up to 2014. This preferential treatment is subject to the condition that states and municipalities should let the Mexican Tax Administration System (SAT) know about their ISR corresponding to December 2012.
ISR relief and reduction do not necessarily imply a benefit in workers’ pockets since the law does not stop local governments from retaining the aforementioned tax and using it freely, but it only authorises them not to report it to the Federation. It certainly does provide benefits in the local governments’ coffers. The opacity and irresponsible practices in public expenditure (typical of entities and municipalities) question the appropriateness of this decision. Ultimately, debt relief encourages local governments’ fiscal irresponsibility. In this scenario, legal protections were filed last week by private companies (Liverpool department stores, Telefónica phone company, McCormick food company, among others) with the intention of contesting the measure. They argue that they have received an unfair and discriminatory treatment following a granting of privileges to the public sector. Now, the judiciary has the difficult task to assess whether it’s a constitutional measure or, on the contrary, it establishes unjustifiable distinctions among contributors and, at any given point, to cancel possible effects of the provision.
Even though the decree was issued by the past administration, it is important to point out that the extension of its effects has already occurred in a context in which the current government had an important influence. In a nutshell, the decree would have hardly been enacted in law if the present administration were against it. In addition, another important development are the 150 lawsuits against large taxpayers from the private sector presented by the Mexican Ministry of Finance in the past four months. That way, the picture outlined, prior to the discussion of the tax reform, seems to consist in a tightening policy regarding private sector’s fiscal contributions and a much less strict one for the public sector.
Another way of looking at this phenomenon is by observing the obvious: there is one strategy for the strengthening of the government as a supreme authority but there is no strategy for Mexico’s development. The former is necessary but without the latter it’s just irrelevant.
CIDAC
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