Waiving Taxes Not a Viable Solution to Face Crisis: ICRICT

In the face of the economic crisis caused by the COVID-19 pandemic, some actors in the business sector have suggested tax cuts as a way to mitigate the economic impact. However, the Independent Commission for the Reform of International Corporate Taxation (ICRICT) considers that the economic crisis will hardly be solved with a cut in corporate ISR, according to a note by El Economista.

Latin America's average tax collection as a percentage of the GDP is approximately 22.8 percent, below the average for OECD countries which is at 34.2 percent. In Mexico, tax collection is half of the OECD’s average. Derived from this, the ICRICT explained that "bailouts represent a great threat to the already fragile world trade regime based on rules and consensus, which proscribes public aid.” 

The reason why this type of tax benefits are considered detrimental lies in the fact that the income derived from the collection of taxes is essential to fulfill the government’s functions, especially in Latin America and the Caribbean where taxes are key to the survival of the state.

“This state aid not only destroys the principle of a level playing field when operating in the market, but has a particularly adverse effect on developing countries that lack the resources to provide similar support on a scale to that provided by developed countries,” explains the ICRICT. 

For some experts, the solution to mitigate the impacts of COVID-19 lies in the coordination between fiscal and monetary authorities. Enrique Covarrubias, Chief Economist at Grupo Financiero Actinver, in an interview with MBN, explained that fiscal and monetary authorities need to coordinate their efforts to soften the economic blow of the health emergency. Mexico, for the first time, is being witness of “a coordination between the implementation of a prudent fiscal policy and a lax monetary policy. More importantly, both fiscal and monetary authorities have shown their commitment to take any measure to calm the markets,” said Covarrubias.

For others, the possible solution is to expand the taxpayer base and reduce informality. Hugo Cuesta, Managing Partner at CCA, believes the “tax burden falls on a very small percentage of people and the extension of the taxpayer base can generate greater fiscal efficiency. A problem for our government is that it cannot compete with the tax rates offered by the US because Mexico does not have a similarly large taxpayer base.”

The panorama of fiscal benefits varies throughout the Mexican territory. Claudia Sheinbaum, Head of Government of Mexico City, estimates the state will lose more than MX$20 billion (US$901.5 million) in tax collection derived from tax cuts, which will force the government to define its priorities regarding public works, social programs and mobility.

Other states, such as Aguascalientes, announced payroll tax (ISN) discounts, as well as in some procedures regarding maintenance in industrial parks. Baja California Sur deferred the ISN for March, April and May, as well as the vehicle control tax and debt payments to the State Housing Institute. Other states like Durango stood out for offering greater tax benefits such as a 50 percent waiver in the ISN, with a special waiver of up to 75 percent for SMEs. The State of Mexico offered a 50 percent discount on the ISN during April for companies with up to 50 workers. In addition, Oaxaca announced that in March and April it would grant a 50 percent fiscal stimulus in the ISN and that it would also provide 100 percent financial support regarding taxes on the provision of lodging services.