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Tax reforms likely as Lopez Obrador wins Mexican elections

09 July 2018

ITR Correspondent

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Mexico’s transition into a new government is set to begin in December, and a series of reforms are expected to commence based on Lopez Obrador’s campaign commitments.


Andres Manuel Lopez Obrador achieved an overwhelming win at the July 1 Mexican elections. The left wing President-Elect, despite two previous failed attempts on the presidential seat, cleared out any disbeliefs on what the majority of pollsters in Mexico predicted to be a landslide victory, obtaining around 53% of the votes according to preliminary returns. This is the largest majority win in Mexico’s democratic history.

Nevertheless, his victory on the presidential seat is only the tip of the iceberg. Lopez Obrador and his coalition, formed by his party, called MORENA, and allied parties Encuentro Social and Partido del Trabajo, managed to obtain an absolute majority in both chambers of the Federal Congress. They have more than a 60% representation in the House of Representatives and above 50% in the Senate, which will give them enough leverage to pass new federal legislation or amendments thereto.

So far, the transition process has developed swiftly and the President-Elect’s message has been generally perceived as a positive one. First thing in the morning following election day, Lopez Obrador held a conversation with US President Donald Trump in which they discussed a potential joint agreement to develop projects that will enable job creation and economic growth in both countries. Since then, Lopez Obrador has also held meetings with different business organisations such as the Consejo Coordinador Empresarial, which favourably vouched for his economic projects, anticipating a positive change going forward since there is a clear message that Mexico’s economic stability and growth is a first priority.

Some of the initial measures will be disclosed through the economic plan to be submitted by the Ministry of Treasury by December 15 2018. However, as it relates to tax reforms, Lopez Obrador’s campaign commitments state that no substantial tax reforms will be proposed or enacted, and that his Presidency will continue strengthening the tax administration’s electronic systems and tax data analytics policies.

As an exception, the VAT rate applicable in Mexican borders is expected to be lowered from 16% to 8%. This policy has historically been criticised because many believe it enables aggressive tax planning to reduce VAT costs. As such, a rate cut will need to be paired with measures on vigilance and scrutiny if enacted.

A highly controversial policy throughout the tenure of the current administration has been controlling gasoline prices. Following the campaign, Lopez Obrador’s closest economic advisers have established that adopting the proper measures to avoid abrupt fluctuations in gasoline prices will be a priority. Similar to the current administration, this is expected to be achieved partly by adjusting the applicable excise taxes to raise or lower gasoline prices as necessary to maintain a steady value.

Many questions have been raised around Lopez Obrador’s take on the energy reform and how his positions could affect current exploration and extraction contracts assigned to private companies during the current administration. Similar to what he proposed during the campaign, the incoming government is expected to honour the general framework and economic conditions under which these contracts were assigned, focusing mainly in scrutinising the processes under which they were assigned to evaluate their legitimacy. As per any amendments to laws governing these contracts and their economic conditions, it is important to mention that they do carry a tax stability clause, the reaches of which vary depending on the specific contract. In general, a tax stability clause would prevent economic setbacks for contractors derived from amendments made to applicable tax laws that worsen their economic position following the enactment of such modifications, but a case-by-case analysis would have to be made considering that this clause is different in each contract.

Finally, it is reasonable to expect some sort of tax amnesty for any taxes due in prior years, as well as to repatriate capital held offshore once the new administration comes into office, since this has been a common practice that could provide a much-needed economic boost to start Lopez Obrador’s administration.

Lopez Obrador’s victory and the messages that have followed have been perceived positively in most cases. While there is still a long way to go before the new government comes into office, we expect this positive trend to continue throughout the coming months.

Oscar A. López Velarde (olopezvelarde@ritch.com.mx)

Juan Jose Paullada Eguirao (jpaullada@ritch.com.mx)

Ritch, Mueller, Heather y Nicolau, S.C.

www.ritch.com.mx






International Correspondents