Businesses on Mexican border prep suit against tax hike

Businesses on Mexican border prep suit against tax hike

Mexico US Economy & Policy Corporate & Sovereign Strategy

By Lucy Conger

Two powerful Mexican business associations are poised to mount a challenge to President Enrique Peña Nieto’s landmark fiscal reform through a class-action lawsuit against heavier taxes in the border states, a move they claim will undermine competitiveness in a region responsible for a quarter of the economy’s annual output.

State chapters of the leading national business associations – the Mexican Employers’ Confederation (Coparmex) and the Business Coordinating Council (CCE) – have joined forces to file a class action suit against a proposed January 1 rise in value-added tax to 16% from 11%.

“We are seeking thousands of signatures, we allege inequity,” said Juan Manuel Hernández, president of CCE in Tijuana. Coparmex is rallying its chapters in large border state cities including Ciudad Juárez, Nogales and Los Cabos, along with Caribbean cities, Hernández said.

The petition calls for an injunction against the hike in the 20-kilometer wide strip along the US-Mexico border and in border areas of Pacific and Gulf Coast states. The organizers seek endorsements from employees of border businesses, shopkeepers and other merchants and residents – all of whom, they argue, could stand to lose with the tax hike.

The groups will presented the petition in court in February in hopes that a judge will issue an order that blocks application of the tax. The move to raise the VAT, part of the fiscal reform passed by Congress for 2014, would equalize the 16% VAT charged in the interior of Mexico. It would end the special tax rate assessed in the border strip for more than 15 years, a measure that was upheld by the Supreme Court in 1997.

“Businesses on the border compete with states in the southern United States, this affects all of our members,” Jorge Escalante, president of Coparmex Tijuana, told LatinFinance. His chamber includes small, medium and large-sized service businesses and industrial firms

Costswill be passed on to consumers, and is expected to cut traffic and purchases by Americans who cross into Mexico in search of better prices. “This will make commerce shrink, and will make informal commerce grow because it will be cheaper to bring components and goods across the border from the US and sell them here,” said Guadalupe de la Vega, president of Coparmex Ciudad Juárez.

The economy of the state of Baja California, south of California, could take a severe hit with the new VAT, academic studies predict. The 5-point hike could reduce consumption in Tijuana and the rest of the state by 19%, could wipe out more than 29,000 jobs and could cause the state’s GDP to fall by 3.2 percent points in 2014, according to recent projections by the Colegio de México de la Frontera Norte.

President Enrique Peña Nieto announced on November 28 a federal program of support to the border region that includes about $240 million in investments, an amount said to offset the impact of equalizing the VAT rate. The program is to channel some $200 million to food subsidies for the poor and $40 million to lending for small and medium businesses.

The announced program did not assuage the concerns of business people. “It’s temporary relief, we want a stimulus program that creates employment, the border has enormous potential,” says de la Vega. LF