THE International Monetary Fund (IMF) staff urged the Government of Mexico to give top priority to enhancing non-tax revenue and to make tax system more progressive. In a statement issued at conclusion of annual discussions with Mexican authorities held under Article IV of IMF's Articles of Agreement, it was observed that Mexico’s revenue performance significantly lags that of regional and international peers, with a strikingly weak VAT collection. The mission thus urges the authorities to undertake a comprehensive review of the tax system with a view to bringing forward plans for rationalizing tax expenditures and broadening the tax base.

According to IMF release, consideration should be given to: leaving non-export related value added tax (VAT) on food items at the standard 16 percent rate alone. This step would boost revenues by about 1% of GDP, while targeted benefits could offset the impact on the poor (an initially reduced rate could smooth the transition to the standard rate). As for income tax, the Staff opined that rationalizing inefficient and regressive tax expenditures and widening the PIT (personal income tax) top bracket could boost revenues and increase progressivity. Referring to Excise duty, the release stated that guaranteeing retail fuel price growth below inflation by reducing the excise rate subject to a zero floor disproportionately benefits the rich and should be abolished.

IMF Staff noted reform of both the property and vehicle registration taxes would allow for a reduction in central government transfers to states and municipalities and thus encourage fiscal responsibility. As regards Border tax regime, it noted this temporary (for 2019 and 2020) special policy regime creates distortions. It is likely to erode the tax base. It should thus be abolished immediately or at least not be extended.

The Staff welcomed Mexico’s recent steps to improve tax administration, namely: (i) the abolition of the right to offset excess VAT credits against other taxes; and (ii) strengthening sanction for tax evasion and closing loopholes. To further reduce fraud and improve compliance, the Staff has recommended adoption of a comprehensive strategy to tackle VAT non-compliance in line with the recommendations of the recent Fund technical assistance, while addressing the lack of a high-coverage audit process for VAT returns. According to release, integrating the income tax and social security administrations could reduce tax evasion over the medium-term.