NUEVO LEON BUSINESS COMMUNITY PESSIMISTIC ABOUT NEW FISCAL

UNCLAS SECTION 01 OF 02 MONTERREY 000438

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON PGOV ECIN EFIN EINV MX
SUBJECT: NUEVO LEON BUSINESS COMMUNITY PESSIMISTIC ABOUT NEW FISCAL
PACKAGE

REF: A) Mexico 3205

MONTERREY 00000438 001.2 OF 002



1. (SBU) Summary. Reaction to the passage of the modified
2009 Fiscal Law in Nuevo Leon ranges from stoic to pessimistic.
Local business leaders and economists cite decreasing
competitiveness, growing uncertainty, uncontrolled spending, and
a failure to broaden the tax base among their strongest
criticisms. While Nuevo Leon's large maquiladora sector shares
much of this criticism, it expects to suffer fewer negative
consequences due to changes in the tax code. End Summary.




2. (SBU) The Chamber of Transformational Industry of Nuevo
Leon (CAINTRA) has been an early and credible critic of the
fiscal package. The President of CAINTRA, Andres Garza Herrera,
argued in interviews with local media before passage of the bill
that the best way to meet revenue shortfalls was to eliminate
exceptions to the corporate income Tax (ISR),expand the Value
Added Tax (IVA) to include food and medicine, and reduce
spending, concentrating particularly in public retirement
benefits. After passage of the bill, Guillermo Dillon Montana,
Director General of CAINTRA, expressed disappointment with the
fiscal package, noting that the legislature had made
insufficient efforts to reduce spending, which had increased
over 90% in the last 8 years and that no effort had been made to
expand the taxpayer base.




3. (SBU) In a private conversation with Econoff, Dillon
elaborated on his earlier public comments, noting that while
other governments were creating stimulus to deal with the
economic crisis, Mexico's fiscal policy was precisely the
opposite. He declared that not only would this package remove
capital from the most productive sector of Mexico's economy, but
that many of the taxes seemed almost designed to reduce Mexico's
competitiveness and punish those most in need of opportunity.
He cited the tax increase on telecommunications, as an example,
noting that Mexican internet and telephony were already less
efficient and more expensive than those in competing nations.




4. (SBU) John Castany, President of the Nuevo Leon Maquiladora
Association (AMNL),was more sanguine about the changes. He
explained that while maquiladoras, businesses dedicated to
assembly for export, represent a great portion of the industry
in Nuevo Leon, they operate under a special tax regime. They
use a transfer pricing scheme to determine their tax burden when
selling product to their US holding companies, and so are
minimally impacted by the new fiscal package. He noted that
maquiladoras were profitable years ago when the ISR was 34%, and
so those that pay the ISR now (vice the IETU, a flat rate
business tax) can handle an increase from 28% to 30%. Because
maquiladoras don't sell their product in Mexico, they are
largely unaffected by the IVA.




5. (SBU) The one area where Castany felt maquiladoras might
suffer was in the proposal to roll back "consolidation," a tax
avoidance strategy whereby a holding company writes the losses
of one subsidiary off against the profits of another. Changes
made to current law are retroactive, meaning that companies not
only will have to change their tax strategies going forward, but
will have to recalculate their obligations going back as far as
six years. Castany felt that this was not only burdensome, but
contributed to an environment of greater uncertainty for
potential investors.




6. (SBU) In Castany's opinion, this greater uncertainty is
significant for both Mexico and the US. He notes that when a US
corporation relocates operations to Mexico, its supply chains
are largely left intact. However, when corporations move
operations to Asia or elsewhere overseas, they take their supply
chains with them, resulting in an even greater loss of jobs
within the NAFTA community. Thus, he sees the issue of sound
fiscal policy and tax policy in Mexico as contributing not only
to the economic health of the country, but to the competitive
power of North American trade relative to Asia and the European
Union.




7. (SBU) Robert Chandler of the Monterrey chapter of the
American Chamber of Commerce (AMCHAM) echoed Castany's
conclusion that maquiladoras wouldn't be as adversely affected

MONTERREY 00000438 002.2 OF 002


by changes to the tax code as other sectors of Mexican industry.
However, he noted that the nation as a whole was growing less
competitive on an international scale; he felt that the current
package failed to address this completely, and would, in fact,
worsen the situation in several respects. He suggested that the
effective collection rate for the IVA - generally regarded as
the most efficient tax collected by the GOM - was only about
48%, and that other taxes were even less effectively enforced.
Noting that entrenched patterns of tax evasion and poor rates of
collection summed with uncontrolled government spending resulted
in an inability to balance the budget, Chandler stated that the
GOM ran a serious risk of a decline in its sovereign credit
rating.




8. (SBU) Chandler further emphasized that such a loss of
confidence in Mexico's fiscal policy, combined with factors such
as overpriced energy and telecommunications which contribute to
the country's lack of competitiveness, would drive away even
more foreign direct investment. He noted multinationals such as
Caterpillar and Nestle had already chosen to invest in their
operations in Brazil instead of Mexico, and he expected that
others would follow suit.




9. (SBU) Comment. All the individuals with whom Econoff spoke
recognize Mexico's need to manage its debt in order to maintain
its sovereign credit rating, attract foreign investment, and
foment economic growth. Yet all see the tax increases levied
upon the formal sector in an attempt to do this - in particular
the portion retroactively altering the rules of consolidation -
as even more discouraging to foreign direct investment and
economic growth than increasing the national debt. Guillermo
Dillon Montana of CAINTRA, in commenting on this dilemma, noted
that controlling spending is the only real solution, but that
this has proven politically impossible. Accordingly, his
organization feels that political reform is necessary before
Mexico can even attempt real economic reforms. CAINTRA is
drafting a national reform proposal which will call for such
dramatic changes as a reduction in the number of elected
representatives and allowing for their reelection in hopes of
increasing continuity and technical knowledge among the
governing class. CAINTRA hopes to disseminate this proposal
through Mexico's largest business associations, including the
Owners Confederation of the Republic of Mexico (COPARMEX),the
Confederation of Chambers of Industries of Mexico (CONCAMIN),
the Confederation of National Chambers of Commerce, and the
Business Coordinating Council (CCE). Dillon acknowledges the
magnitude of the challenge involved in affecting such reform,
but feels that it is the only way forward.
WILLIAMSON