New US Tax Bill Takes Mexico by Surprise

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Mexican finance authorities got caught off guard by the new tax reform bill voted in by the Republican majority in the U.S. Congress late Tuesday night. The immediate reaction Wednesday by new central bank Banco de México Director Alejandro Díaz de León was that Banxico officials would be taking a closer look at Donald Trump’s bill as to how it will affect Mexico in more ways than one.

But the bill might hit U.S. expats living in Mexico as well because, for the most part, these Americans represent a hefty source of income for Mexican charities and nongovernmental organizations (NGOs.)

“Hiding beneath the headlines in this year-end U.S. tax debate … is one proposed change that jumped out the loudest: the proposed doubling of the standard deduction. Whoa … We thought we had better look into this if we still want our charitable donations to remain tax deductible,” says Jóvenes Adelante (Young People Forward) president Robin Loving in San Miguel de Allende. She leads a nonprofit organization that grants scholarships to high-performing high school graduates who want to go on to university.

“A quick phone call to our accountant confirmed our thoughts,” she said.

“We can take advantage of the current tax law by accelerating our 2018 donations in 2017. We know we always give X number of dollars a year. So to the extent we can afford it, we’re going to make our 2018 donations early, by Dec. 31, 2017.”

All donors are advised to check with their accountants since there may be a radical surprise in the near future, starting on Jan. 1. I’ll be writing on this issue as soon as I can gather more info.

But in Mexico, definitely, the government has to revise its tax system. Here are some of the revisions now underway, which will surely give heartburn to financial officials over New Year’s Eve dinner.

First of all, the corporate tax reduction from 35 to 21 percent will definitely have an impact on Mexico, which has a corporate business tax of 30 percent. To reduce it or not reduce it is the question.

Certainly, for thousands of American companies now operating in Mexico, the tax decrease is a lure to move back to the United States (if not physically, at least in address). This will  definitely have an impact on investment here.

Mexican Employers’ Confederation president Gustavo de Hoyos immediately on Wednesday called upon President Enrique Peña Nieto to issue a decree or executive order revamping the following points:

  • Make all labor benefits 100 percent deductible.
  • Make all monies going to workers’ pension funds 100 percent deductible.
  • Eliminate the 10 percent income tax from profits payments to workers. Investors can take credit for this retention in their tax reports.
  • Immediately eliminate all deductible investments  in order to foster investment by moderating its taxing effect.
  • Limit discretionary faculties from tax authorities in order to strengthen objective behavior while applying new tax mandates.
  • Entice further capital repatriation,which has already brought back 330 billion pesos from abroad. Continuity of this program will serve a double purpose: stimulate investment in Mexico and increase tax revenue for the government.

It is too early to predict how else the new U.S. tax bill will affect Mexico, but some people are claiming that one immediate consequence will be to soften the U.S. trade representative’s position on the ongoing North American Free Trade Agreement (NAFTA) negotiations.

There are many more calls for knee-jerk reactions being brandished for now, but one thing is for sure, the Mexican government, as well as industrialists, were side swiped by the new U.S. tax bill.


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