Other Articles by Bill Masterson

Published: February 2002

During the closing hours of 2001, and early on January 1, 2002, Mexican lawmakers approved a US $7.5 billion hike in taxes. Expat residents and tourists alike are subject to these increases.

President Vicente Fox Quesada asked Congress to approve a 15% value-added tax (IVA) on medicine, books and private school tuition, to name just a few of the previously exempt categories; he had hoped to raise an additional US $12 billion in 2002. However, Congress discarded the President’s proposal and adopted one of its own. In addition to raising taxes on consumers, several long-standing corporate tax breaks were eliminated.

The top tax rate on the income of individuals was cut from 40% to 35%, and will continue to decrease 1% per year until in reaches 32% in 2005 (all brackets drop proportionately); the top corporate tax rate will decrease similarly.

Lower tax bracket rates also dropped, proportionate to the top rates. Certain other corporate tax-breaks were also eliminated.

Tax-evasion/avoidance in Mexico is something of a national sport, and the country has one of the lowest rates of tax collection in the world. Faced with pressure from international lenders, Mexico has been struggling to find ways to increase its revenues at a time when demands for services are on the rise and revenues are stagnant. Even with the increases passed this week, Mexico will still not collect enough money to meet its obligations or satisfy its "wish list."

Telephone services will be newly-taxed at 10%. The tax applies to most local and domestic long-distance services, but excludes international calls, calls from rural areas, basic Internet access and pre-paid cellular telephone calling cards.

Cable and satellite television services will be taxed at 10%, but charges for internet services will be exempt. Cigarettes will have an additional 5% tax. A 10% tax on bottled drinks exempts soft drinks made with cane sugar and those sold in small mom-and-pop stores. A 20% tax applies to soft drinks sold in soda-fountain machines, such as those at movie theaters and fast-food restaurants, except for those made with cane-sugar sweetener. The liquor tax is projected to cause the retail price of tequila, as just one example, to rise anywhere between 20 and 36%, while the quality is expected to decline.

An additional 5% "luxury tax" (total tax of 20%) applies to, among other things, the following: caviar; salmon (both fresh and smoked); baby eels (considered a delicacy by many in Mexico); perfume; guns; yachts; camping equipment; jet skis; cigarettes and cigars; watches costing more than 5,000 pesos; automobiles that carry 15 or more persons; certain motorcycles; airplanes; televisions with screens larger than 25"; stereo or sound systems costing more than 5,000 pesos; computers and related equipment costing more than 25,000 pesos; hand held computerized calendar-type devices such as a Palm Pilot®; video cameras; compact disc recorders; VCRs costing more than 5,000 pesos; DVD players/recorders; gold, jewelry and/or artistic ornamentation costing more than 10,000 pesos; commemorative national or international medallions or coins; membership services for golf, equestrian, polo, car racing and water sports.

There are more categories affected by the tax increases and the rules are still being written by the appropriate government agencies, so you can expect to be hearing more in the coming month about this issue.

As part of the tax package considerations, Congress raised the minimum wage. There are three levels of the minimum wage in Mexico, and effective January 1, 2002, the wage for the Federal District (Mexico City) is 42.15 pesos (I think that this rate is also applicable to Guadalajara and Monterrey), the middle rate is 40.10, and the lowest rate is now 38.30.

I might have overlooked a thing or two in the description of items covered by new taxes, but you now have a better picture of what has happened.