On December 11 2013, the proposed bill for the IEPS (Impuesto Especial de Productos y Servicios, or Special Tax on Production and Services) Law was published and was enacted from January 1 2014.
As part of the controversial 2014 tax reform, the Mexican government has approved new taxes on certain types of foods and beverages to discourage, theoretically, the excessive consumption of high caloric content products.
The drivers for this reform are the fulfillment of two important necessities for the Mexican government: i) to increase the collection of taxes as part of government strategies and reforms and ii) the social problem that represents obesity in Mexico.
These taxes may resemble highly publicised so-called Bloomberg taxes (1) or commonly known as taxes to junk food and sugary drinks.
Why is the Mexican government taxing these products?
As can be found in the president’s proposal, the result of many studies disclose that Mexico has an increasing overweight and obesity problem among its population. These conditions are related to the likelihood of suffering chronic diseases, such as diabetes, hypertension, vascular conditions, osteoarthritis and different types of cancer, among others.
Statistics from the OECD state that Mexico is the member state with the second-highest grade of obesity in its adult population, while overweight and obesity can be found in 34.4% of its children.
On the other hand, according to a national health poll in 2012, dealing with obesity costs the government around 7% of the total federal budget.
The government is worried about the economic impact this has, along with the reduction in labour productivity and the difficulties for a family’s finances derived from the expenses for diseases treatment and the social consequences that this problem may cause.
The federal government decided to focus its tax strategy on increasing the amount of the income tax from individuals and corporations and getting away from the possibility of levying VAT on medicine and food. Consequently, the alternative of enlarging the scope of the excise tax, which was long discussed in recent years, was finally supported and approved by the Mexican Congress.
What is the Special Tax on Production and Services?
In general terms, the IEPS seeks to tax those products and services that may be harmful in some way to the population and/or the environment, such as beer, liquor, energy drinks, cigarettes, cigars, gasoline and diesel, including now sugary drinks and so-called junk food.
The rates or fixed quotes are different for each kind of product and service and determined upon their commercial value.
Taxpayers that sell, import or provide any of the mentioned products or services are obliged to levy IEPS on the products. The tax must be paid to the tax authorities every month once it is collected from the client (cash-flow based). The amount to be paid is computed by reducing the collected IEPS with the IEPS paid upon importation, as well as the creditable IEPS paid to suppliers.
At the end of the day, in general terms, the final customer will mostly carry the burden of this tax.
New excise taxes
Tax on flavoured drinks
From 2014, all flavoured drinks carbonated or non-carbonated, as well as concentrated juices, powders (soluble in water only), essences, extracts or syrups, that may allow the preparation of flavoured drinks, with or without fruit or vegetable juices, as long as such are added with any type of sugars, will be subject to IEPS equivalent to MX$1 a litre.
It is important to mention that medicine authorised by the sanitary authorities, milk in any presentation and oral rehydration drinks are not subject to this tax.
This tax will only apply to those taxpayers that manufacture or import these products at the moment of the sale to a third party. In other words, it will not affect distributors directly; nonetheless, the final consumer will pay that extra $1 implicit in the price of the product.
Tax on high-calorie-density food
On the other hand, all non-basic food with a calorie density larger than 275 kilocalories per every 100 grams will be subject to an 8% IEPS. The IEPS Law provides a list of products that are considered as non-basic food that includes:
|Ice cream and ice popsicles.||Flans and puddings|
|Sweets made from fruits and vegetables||Chocolate and other products derived from cocoa|
|Milk candies||Cereal-based food and treats|
|Peanut and hazelnut creams|
In addition to these, since plenty of typical Mexican products which are part of the basic nutrition basket of the ordinary citizens, may qualify as having high-calorie density, the Mexican tax authorities have issued a rule excluding several ingredients and food from this IEPS, which are described below:
Products derived from wheat such as flour tortillas; non-seasoned pastas; non-sweet bread such as baguettes and regular box bread; wheat flour; non-sugared wheat cereals.
Products derived from corn such as corn tortillas; corn flour; corn dough, which is commonly used in making tamales.
Products derived from cereals such as cereal-based food for toddlers; sugar-less cereal-based food; non-sweet bread made of cereals.
Will this tax work?
As was previously mentioned, the final consumer will be the real IEPS payer. This new tax will affect mostly the population on low incomes, since in that economic sector the consumption of these products (most of all sodas) as part of its diary diet, is a basic necessity.
On the one hand, the affected sector have accepted that these kind of measures are efficient as part of an integral nutrition strategy and social policies are focused on enhancing the economic level of the population and therefore the capacity to acquire all foods and beverages required for a balanced diet.
On the other, the sector has also pointed out that is pretty controversial that the food and beverages affected by this reform are actually harmful to the population and finally, that it is expected that informal economy will benefit from the reform since beverages and food, for example, juices and homemade fried potatoes may see an increase in sales since their price will not be affected.
The 2014 tax reform has been largely criticised for its collection approach and its potential to inhibit foreign investment. Against that, the strategy of President Peña and his team is based on the capability of the structural reforms in sectors such as energy, finance and education) to activate the economy that is actually at a huge risk of recession.
GDP growth in Mexico for 2013 has been lowered to 1%. In the next few months it is expected that the first positive and negative consequences of the tax reforms will appear in a transcendent year for the economic development of the country.
Gustavo Gómez (email@example.com), tax partner
Sara Romero (firstname.lastname@example.org), tax consultant
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