Incoming Economic Recovery; Tax Revenue Recommendations

Signs of an economic recovery begin to show with unemployment figures going down. However, Mexico still has challenges to face to ensure a fair and effective economic reactivation, battling large corporation’s tax evasion and growing inflation.

Here is the Week in Finance!

Outsourcing Resolutions

-The outsourcing reform seeks to prohibit subcontracting of collaborators but allows the subcontracting of specialized services or the execution of specialized works that are not part of a company’s core or predominant economic activity. The latter will be allowed as long as the contracting companies are registered in the public registry managed by the Ministry of Labor and Social Welfare.

There will be severe penalties for illegal outsourcing, which will be equal to tax fraud. Fines of MX$173,000 (US$ 8,700) to MX$4 million (US$200,600) were set for those who fail to comply with the new provisions. Tax deduction through outsourcing is also prohibited.

Tax Evasion, Collection Proposals

-Last year, ECLAC countries had a significant drop in tax revenues. While Mexico had one of the most successful tax collection numbers last year, the commission is proposing a general new tax collection regime which includes:

• Measures to strengthen the allocation of public revenue and the redistributive capacity of tax policy.
• The elimination of tax evasion, which costs US$325 billion annually to the treasury or 6.1 percent of the national GDP, through multilateral agreements.
• The temporary creation of a "solidarity" wealth tax on businesses that kept operating in the midst of the pandemic.
• Consolidation of the income tax for individuals and corporations and an extension to the scope of taxes on wealth and property.
• Taxes to the digital economy and the revision and update of royalties from extractive industries.

-OECD, ECLAC and IDB estimated that in Mexico, the evasion rate of personal income tax is of 18.7 percent, which represents a loss of 0.8 percent of the GDP. Moreover, the 2021 Tax Income Statistics show that the evasion rate relative to company tax in Mexico is at 19.9 percent, which represents a loss of tax income greater than 4 percent of the country’s GDP.

Inflation at Its Highest Since 2017

-Inflation is at 6.05 percent, its highest since 2017. This was registered in the first half of April after an increase in energy prices due to the liberation of gasoline prices. The depreciation of the peso against the dollar and the increases in the price of fruits and vegetables had a significant impact.

Unemployment Figures Drop

-Unemployment in Mexico went down in March. The 3.89 percent rate was announced by INEGI, which meant an improvement against February’s 4.37 percent. In total, 515,731 people were added to the Economically Active Population (EAP), which rose to about 56 million. From the 12 million people who left the PEA in April, the worst moment of the pandemic crisis, about 10.6 million people have now been employed.

Economic Recovery Begins

-The pre-crisis income in Latin America will not be recovered in several years, reported the Secretary General of the OECD, José Ángel Gurría. He also assured that the impact on companies and jobs has been "devastating."

-According to Daniel Becker, President of the Association of Banks of Mexico, Mexico’s economic recovery has just begun. The association expects greater reactivation of credit (of around 4 percent or over), as well as a break on the high levels of delinquency that currently exist