Mexican News Briefs

News items pertinent to ex-pats on the Baja–with particular emphasis on San Felipe and its northern and southern beach communities. This is news, not events or announcements. Send items to:


More on the Mexican Tax Reform that Began January 1, 2014

“TIJUANA — After months of public outcry and political debate, Mexico’s Senate on Wednesday gave final approval to a measure that will raise the sales tax in Baja California and other border regions by 5 percentage points.

The legislation will create a uniform sales tax across Mexico starting Jan. 1—and erase lower rates for border areas. It has inspired a state secession movement and stirred bitter criticism of federal legislators from Baja California who supported the change. The state’s business leaders are weighing legal action to block the tax hike, which they said will lead to price increases and encourage consumers to shop across the border in the United States.

“They’re causing harm to some 9 million Mexicans who live on the border,” Gov. José Guadalupe Osuna Millán said Wednesday after the measure’s passage. Business owners across the border in California “are already rubbing their hands” in anticipation of more revenues brought by Baja California customers, Osuna Millán said.

Wednesday’s Senate vote raises the sales-tax rate from 11 percent to 16 percent. The legislation is part of a broad tax-reform package spearheaded by President Enrique Peña Nieto, who wants to boost the government’s revenues and reduce economic inequality through actions such as the creation of an unemployment fund and greater financial support for education and infrastructure projects.

Backers of the changes said they will bring Mexico’s tax-collection structure more in line with those of other mid-tier countries and stop Mexico’s practice of relying on oil revenues to compensate for its low tax collection, which is about 10 percent of the country’s annual output.

The newly approved legislation includes a set of changes affecting maquiladora factories, such as elimination of the sales-tax exemption for temporary imports but also provisions that allow them to receive a 100 percent tax credit or post bond until the finished products are exported.

Those measures also would end the preferential corporate income-tax rate for maquiladoras, raising it to the general 30 percent business standard. And it would bring a partial elimination of deductions for certain fringe benefits paid to factory workers.

The changes “are pretty complex,” said José Larroque, principal partner with the Baker & McKenzie law firm in Tijuana. “You need to sit down and understand it, but there are going to be more taxes to be paid.”

Baja California’s top business groups — Coparmex, Canaco and Consejo Coordinador Empresarial — have staunchly opposed the sales-tax increase from the beginning. But as the issue came to a head in recent weeks, the outcry has broadened.

Journalists cornered legislators who supported the tax changes, mostly members of Peña Nieto’s Institutional Revolutionary Party, the PRI, demanding a public accounting. A Facebook community that advocates secession, Republica de Baja California, has garnered 131,000 “likes” in recent weeks. “Baja California for Baja Californians,” one supporter wrote Wednesday.

Members of the Peña Nieto administration have said that residents in Mexico’s border regions, where incomes are on average 27 percent higher than the national average, should not pay less sales tax than those living in poorer areas of the country

“It is a pity that the (central government) doesn’t understand us,” said Osuna Millán, who will end his six-year term Friday. The border “is a different region, that every day must compete with a powerful country like the United States.”

A study by Colegio de la Frontera Norte, a federally funded think tank based in Tijuana that studies issues on Mexico’s northern border, concludes that the sales-tax hike will harm Baja California’s economy. The revamp will lead to price increases “and reduce the quantities that residents of Baja California consume,” the report said.

Some residents may turn to the state’s informal retail sector, while others will cross into the United States to make purchases, said Alejandro Brugués, an economist and one of the study’s authors. “One possibility is that the shrinking of the economy could mean that instead of increasing tax collection, it could be decreased.”

On Wednesday, Sen. Ernesto Ruffo of Baja California said during a speech on the Senate floor: “In the medium term, we’ll lose many jobs, and perhaps long term, all of them. On the border, a 16 percent tax takes us out of the competition.”

But Ruffo’s party, the pro-business PAN, was unable to win enough votes in the Senate or Mexico’s Chamber of Deputies. Support for the Senate bill came from members of the PRI, who joined forces with the Green Party of Mexico and some members of the Party of the Democratic Revolution.

Kenn Morris of San Diego, president of the market-research firm Crossborder Group Inc., said the tax changes could both benefit and hurt business interests in Southern California.

“One the one hand, Baja California’s consumers will have even more incentive to go shopping and spend some of their discretionary money on goods in southern California stores,” he said. “One the other hand, U.S. companies that supply the maquiladora industry may see some of their sales decrease once Mexico’s maquiladoras are going to be taxed 16 percent upfront on those industrial inputs.””


Mexican Tax Reform 2014 Summary

On October 17, the Mexican Congress modified the proposed tax reform that was prepared by the executive branch (led by President Enrique Peña Nieto) and forwarded to Congress on September 8. The executive branch’s tax proposal had met with opposition from conservatives in Congress and many in the global business community who expressed concern that the adverse tax impact on multinationals and domestic corporations would negatively affect Mexico’s investment climate. Many of the corporate tax increases proposed by the executive branch were removed in the tax reform legislation prepared by Congress.

The two houses of the Mexican Congress (i.e., the Chamber of Deputies and the Senate) will debate provisions of the tax reform package during the next few days, and the reform is expected to be approved—either in its current form or with amendments—by October 31. Notable provisions are described below, including tax rate changes, flat tax repeal, VAT reform, and other provisions affecting the popular maquila program, foreign residents, and Mexican individuals and companies.

Income Tax

The main income tax proposals are as follows:

New Dividend Tax. An income tax will be imposed on any dividend received by individual Mexican residents and corporate and individual nonresidents from a distributing Mexican company. Dividends distributed to Mexican corporate shareholders will be exempt. The dividend tax will be imposed at the shareholder level (unlike the executive branch proposal to impose the tax at the distributing company level). The tax rate will be 10 percent of the gross dividend amount, subject to reduction pursuant to one of the 56 double tax treaties Mexico has in force. The tax is imposed only on profits generated after 2013. The tax is collected through a withholding regime imposed on the distributing company.

Corporate Tax Rate. The corporate tax rate, which was scheduled to be reduced to 29 percent in 2014 and 28 percent in 2015 and future years, will remain at 30 percent (as proposed by the executive branch).

Individual Tax Rate. The individual tax rate will be increased from 30 percent to 35 percent. This increase goes beyond the more modest proposed increase to 32 percent by the executive branch.

Treaty Benefits. In related party transactions, foreign residents claiming treaty benefits may be asked to appoint a Mexican resident as their legal representative that will furnish a written declaration under oath stating that the relevant transaction is in fact taxable in the foreign country, including the foreign legal provisions that generate such double taxation. The legal representative will be jointly liable for unpaid taxes of the foreign resident.

Foreign Tax Credit. A new foreign tax credit system will be introduced on a per-country basket basis. The system will allow, in some cases, an indirect tax credit when Mexican taxpayers receive dividends from foreign companies.

Fringe Benefits Deduction Limitation. The deduction for nontaxable fringe benefits provided to employees, such as the savings fund, grocery coupons, etc., will be limited to 41 percent of the cost of said benefits paid to the employees.

Immediate Deduction of Investments. The immediate expensing of certain investments will be disallowed, as originally proposed by the executive branch.

Deduction of Deemed Costs for Real Estate Developers. This deduction, which had been proposed to be eliminated by the executive branch, will remain in effect.

Deduction for Insurance Companies. This deduction, which had been proposed to be eliminated by the executive branch, will remain in effect.

Sustainable Energy Accelerated Deduction. This 100 percent deduction allowable for these investments, which had been proposed to be eliminated by the executive branch, will remain in effect.

Foreign Related Party Deductions. An executive branch proposal—to prohibit the deductibility of payments to foreign related parties when income derived from those payments is taxed abroad at a tax rate less than 22.5 percent—will be substituted with a new prohibition to deduct payments to hybrid entities not subject to income tax in their country of residence or establishment. Additionally, payments made by Mexican taxpayers to foreign related parties will not be deductible if those payments are also deductible in the foreign country.

Capital Gains Derived from Sales Through the Mexican Stock Market. Individuals who are tax resident in Mexico and foreign tax residents will no longer be entitled to the tax exemption on capital gains derived from sales through the Mexican Stock Market. As proposed by the executive branch, a 10 percent capital gains withholding tax will be imposed, to be withheld and remitted by the intermediaries trading the stock through the Stock Market.

Maquila Definition. The executive branch proposal to limit the definition of “maquila” to exporters of 90 percent of their sales is rejected. However, in order for existing permanent establishment protection and other favorable tax rules to apply, the maquila must derive all of its income from designated maquila operations. In addition, new requirements will be introduced as to which entity must own the equipment used by the maquila in its manufacturing operations.

Shelter Maquila. The period in which a shelter maquila is allowed to pay reduced income taxes under the regime will be broadened from three to four years.

Consolidation Regime. The current tax consolidation will be eliminated (as proposed by the executive branch) and replaced with a similar regime (so-called “integration regime”), which is similar to the consolidation regime. A significant difference will be that the consolidation regime allowed a five-year tax deferral, and this new integration regime will limit deferral to no more than three years.

Flat Tax Elimination

The 17.5 percent flat tax, which is an alternative cash basis tax, will be eliminated.

Value Added Tax

Border Region. The current 11 percent tax rate applicable in the border area will be increased to 16 percent.

Tax Exemptions. The proposal by the executive branch to eliminate the tax exemptions for mortgage interest, sales of personal residences, and tuition for private schools will be rejected, and these exemptions will remain in effect.

Maquila Regime. The proposal by the executive branch to impose a 16 percent VAT on the sale of maquila-produced goods located in Mexico between foreign residents or between a foreign resident and a maquila will be rejected. The 0 percent VAT tax rate for these transactions will remain in effect.

The proposal of the executive branch to eliminate the exemption applicable to a maquila’s importation of goods will likewise be rejected. Instead, the VAT will be technically imposed on maquilas for goods that are imported for use in maquila production, but the tax would be eliminated by a 100 percent tax credit; accordingly, there will be no cash VAT imposed on these transactions. In order to be eligible for the credit, each maquila will have to be certified by the tax authorities beginning in 2015 according to rules that will be published once the VAT reform is enacted.

Excise Tax

Junk Food. A five percent excise tax will be imposed on the sale of high-caloric food. This is a new tax and was not included in the executive branch proposal.

Fuel and Pesticides. An excise tax will be imposed on fuels and pesticides.

Soft Drinks. A tax of one Mexican peso per liter of soft drinks will be imposed, as proposed by the executive branch.

Mining Fee

A fee for mining rights will be charged at the rate of 7.5 percent of net profits of mining companies, as proposed by the executive branch.

Next Steps

The Mexican Congress will debate the provisions of the Tax Reform package during the next days, and the reform is expected to be approved (either in its current form or with amendments) by October 31.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


Article by Joseph A. GoldmanRodrigo GómezLuis Ignacio Martel and Javier A. Cortés

Mexico Plans Infrastructure Improvements

Mexican President Enrique Pena Nieto has announced plans to invest $100 billion in rail, road, telecom and port projects over the next five year, including the country’s first high-speed rail links.  Planned infrastructural improvements include four new or expanded airports, seven new seaports, and around 3,500 miles of new highway.  Authorities also aim to improve broadband Internet in the next five years.


 Solar Plans for Mexico

Default Solar energy brings new push to Mexican economy | Marc Roca
October4, 2013 
Mexico, poised to allow foreign oil extraction for the first time in 75 years, is finding its abundant natural resources also appeal to investors in a much cleaner energy: sunshine.First Solar Inc. (FSLR) of the U.S. has bought its first projects in Mexico, while more than a dozen other developers including Germany’s Saferay GmbH and Spain’s Grupotec Tecnologia Solar SL own licenses there. Local investor Gauss Energia opened Latin America’s largest photovoltaic plant in the country last month.The project “will open the way for the development of the photovoltaic sector,” Gauss Chief Executive Officer Hector Olea said in an e-mail. “There have been multiple announcements but very little real development work so far even though the regulatory system is sound and conducive to bankable projects.”Mexico, a top 10 oil producer, plans to generate 35 percent of its power from clean sources by 2026, up from less than 15 percent now, to curb emissions and diversify its energy mix. A global surplus of solar panels has made them cheaper, while the costly oil-fired plants common in areas such as Durango, Sonora and southern Baja California make solar a competitive option.Gauss and Portugal’s Martifer SGPS SA opened a 30-megawatt plant in La Paz, Baja California, on Sept. 12 with funding from International Finance Corp. and Nacional Financiera SNC bank. While Mexico doesn’t subsidize large solar, the $100 million project offered an economic alternative to fossil-fueled power in the area, where solar radiation exceeds the national average.Hydro-Heavy
Most of the country’s clean energy comes from hydroelectric stations. Wind and solar, making up less than 1.5 percent of power output, have been slow to take off as developers struggle to reach deals with electricity purchasers, banks and regulators unfamiliar with the nascent industries. Yet the tide is turning.Local and foreign companies have amassed initial permits for 215 megawatts of solar plants, mainly in Mexico’s sunnier northern regions, figures from industry regulator CRE show. That’s enough to power more than 40,000 homes, and would increase the country’s solar capacity more than fivefold.The government set up a renewables council in June to draft an energy program including the nation’s first capacity targets. The Energy Ministry forecasts solar capacity of as much as 2,170 megawatts and a 10-fold growth in wind to more than 14,000 megawatts by the end of the decade.Oil Overhaul
Oil still generates about a third of Mexico’s power output. Changes are afoot across the industry, with President Enrique Pena Nieto proposing a carbon levy on fossil fuels and increased tax collection to help cut reliance on oil income, which funds about a third of the budget. A bill filed in August would allow non-state companies to pump crude for the first time since 1938.While the solar industry is minute by comparison, the country may complete large-scale projects totaling as much as 70 megawatts this year, about 125 megawatts in 2014 and 120 megawatts in 2015, Bloomberg New Energy Finance has forecast. In Latin America, only Chile and Ecuador will build more solar parks next year, according to the researcher.“We expect a small boom in utility-scale installations in the north and western regions due to high solar radiation, falling system costs and foreign developers and manufacturers in search of new markets,” said Maria Gabriela da Rocha, a former BNEF analyst in Sao Paulo. “Longer term, residential and commercial-size projects are set to drive growth in the country because solar now makes economic sense for many customers.”CFE Deals
Developers such as Gauss can take advantage of the Small Electricity Producers’ Program, under which the Comision Federal de Electricidad, the state utility known as the CFE, buys power from solar projects of as much as 30 megawatts. The utility offers 20-year deals fixed at 98 percent of its average cost of generating power in the area over the previous year.First Solar, the largest solar company in the U.S., has acquired several projects in Sonora state as part of an agreement with Element Power US LLC, it said in August.

“The pipeline strategically positions First Solar for our entry into the market,” Tim Rebhorn, senior vice president for business development, said at the time. “We are excited by the opportunity to explore new relationships with CFE, commercial and industrial customers, and the Mexican government.”

The sunshine in Mexico, where average solar radiation is almost 60 percent higher than in Germany, the world’s largest market, has also engendered a growing market in rooftop solar.

Economic Sense
Solar energy makes economic sense for about 3.5 million commercial customers and 500,000 high-use residential consumers who pay “extremely high” electricity rates, according to BNEF. Installations of under 500 kilowatts benefit from net metering, a system that credits generators for the power they can’t use.

Gauss is also considering an alternative funding model for future projects known as self-supply. Under the arrangement, already used to fund wind farms in Mexico, developers can sign long-term power-purchase agreements with non-state companies, which commit to buying electricity at a fixed price.

Such a model has attracted Ford Motor Co. (F), which in June agreed to buy 3 megawatts from a 20-megawatt solar plant planned in Sonora. The project also has purchase agreements with seven local authorities for the remaining capacity.

Solar power from megawatt-scale plants remains uncompetitive in most regions of Mexico because the country’s average cost of power generation is only about 12 cents a kilowatt-hour, according to Gauss’s Olea. That compares with about 30 cents in the southern tip of Baja California.

For large projects, more funding and power-purchase deals are needed for the market to “take off,” said Stuart Smits, CEO of the U.S.’s New Energy Ventures LLC. The company plans to develop 2-megawatt to 3-megawatt projects for Mexican municipal authorities, many of which pay higher-than-average power prices.

“A few solar deals are needed to mark price points and give confidence,” he said. “Once this happens, the market will boom.”


Elections and conspiracy theories in Mexico

The battle of the Baja

Jul 5th 2013, 9:07 by H.T. | TIJUANA

WHY should outsiders care about the hotly contested election for governor of Baja California on Sunday July 7th? Quite simply because it will help determine the future of the Pacto for Mexico, the strangely schizophrenic accord between Mexico’s three biggest parties which, in the coming months, is expected to address two of the most important reforms in Mexico in decades: oil and taxes.

Baja California is a historic battleground. In 1989 it became the first state in the country to bust the political monopoly of the Institutional Revolutionary Party (PRI). The conservative National Action Party (PAN) won the governorship, albeit with a nod and a wink from President-at-the-time Carlos Salinas de Gortari. He was happy to see his own party, the PRI, lose if it meant that the PAN would support his economic reforms. Also, it helped him cast himself (cynically as it turned out) as a great democratiser.

There are those who think that once again, a stitch-up is under way in Baja California, orchestrated from the epicentre of the PRI’s political power in Mexico City. But after a trip to Tijuana on June 29th and 30th to observe the closing of the campaigns, I doubt it. Even in the dubious case that he could throw an election, which is increasingly hard, Enrique Peña Nieto, Mexico’s fledgling president, has too much to lose by resurrecting the ghost of Mr Salinas. The crowd of red-shirted Baja Californian priistas attending a closing rally on Sunday simply wouldn’t take it.

According to the dark theorists, the conspiracy goes like this. Even though this will be the first state election since Mr Peña brought the PRI back to power last December (and hence a significant gauge of his early popularity), his government, they allege, would prefer the PAN to retain power in Baja California, which it has held for 24 years, rather than surrendering it to the PRI. This, they believe, would be a way of keeping the PAN, which is bitterly divided over the Pacto, on side. They even use the word“concertacesión”, a neologism coined in the Salinas era to describe his alleged ability to concede some power to the opposition while keeping everyone else mostly happy.

In fact, the election is being fought by two candidates—Fernando Castro Trenti of the PRI and Francisco “Kiko” Vega of the PAN (allied with the left-wing Party of the Democratic Revolution)—who have wanted the governorship for decades. They would surely resent any meddling that sealed their defeat or soiled their victory.

Neither is particularly thrilling. Both are socially conservative (Mr Vega is anti-abortion, Mr Castro is anti-gay marriage), and both have been smeared by the media for having lots of expensive houses acquired while they were public servants. Yet the contest is nail-biting.Zeta, an independent weekly, reported on June 30th that in its opinion poll only 0.3 percentage points (or 3,000 votes) separated them. That means everything is to play for.

It is also enlivened by juicy rivalries. Part of the PRI in Tijuana loathes Mr Castro Trenti because he had fallen out with the popular but hugely controversial former mayor, Jorge Hank Rhon. Mr Castro Trenti’s team made much of the fact that their candidate’s closing rally was held in Mr Hank Rhon’s “Caliente” football stadium, which suggested a last-minute rapprochement. However, days later, one of his sons sat next to Mr Vega at an event, which sent a very different message.

Likewise, in the PAN camp, the race is deliciously poignant.  Having been trashed in the presidential election last year after 12 years in power, losing Baja California—the PAN’s “iconic state”, as Zeta’s editor Adela Navarro calls it—could be a “knockout punch”. A win may help shore up the current leadership, whose help Mr Peña needs in securing thePacto. A loss could deepen the potentially ruinous split within the party, making any reforms much harder to achieve.

All of which helps explain why the conspiracy theorists believe Mr Peña may be prepared to go to extraordinary lengths to meddle. He won’t. As Víctor Alejandro Espinoza of the Tijuana-based Colegio de la Frontera Norte says, the PRI top brass was in Tijuana constantly in June supporting Mr Castro. The party controls the state’s electoral institutions. And it is determined to lead the Pacto negotiations from a position of strength. It would not agree to a pre-ordained defeat.

What may indeed help the PRI, Mr Espinoza believes, is low turnout. This is probably true across the country, where races for mayor and other elected officials will take place on Sunday in 14 states. Voters have every reason to decide to stay at home instead of voting. Not only has there been a rash of election-related violence (including what look like at least two killings) in recent days. Governors are also being hounded in several states for what appears to be feudal misuse and theft of public funds. In the past this would have reflected particularly badly upon the PRI, but now no party seems any better than the other. It simply undermines the whole political process.



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