TAX NEWS - 2010

Mexico Tax: Mexico to Scrap Ownership Tax to Boost Auto Industry

MEXICO CITY – President Felipe Calderon announced a program Thursday to effectively suspend and then eliminate a tax on vehicle ownership by individuals as a way of boosting sales for Mexico's automotive industry.

The measure, which will go into effect as soon as the decree is published in the official gazette, exempts individual car owners from paying the tax through the end of 2011, when the levy will be completely eliminated for most vehicle purchases.

Mexico's automotive industry "has been one of the (industries) most affected by last year's global recession," and therefore aiding this sector is "of pressing importance," Calderon said in a statement.

The president recalled that "many Mexican families have a relative working" in the auto industry, which accounts for 11 percent of employment in manufacturing and is one of the main recipients of foreign direct investment.

Indeed, the automotive industry received more than $10 billion in FDI between 2003 and 2008, Calderon said, although he noted that in 2009 sales of new automobiles in Mexico fell 27 percent.

The new measure announced by Calderon will make the car dealer and not the purchaser of the automobile responsible for the ownership tax, which is payable annually.

The levy will then be tax-deductible for the auto dealer, so technically the government picks up the tab.

Traditionally, the tax on vehicle ownership, a federal levy, has been collected by the local governments of Mexico's 31 states and the Federal District, and is an important source of revenue in many of those administrative divisions.

But Calderon said in his announcement that "there will be no impact at all" on the states through the end of 2011 because "in each case they will receive the entire amount of the tax that corresponds to them."

"The federal tax on vehicle ownership will be permanently repealed" on Dec. 31, 2011, Calderon said, although he noted that the states will be free to impose their own levies after that time.

The president said that corporations that buy vehicles valued at up to 250,000 pesos ($20,000) also will be able to deduct the ownership tax "through fiscal-stimulus measures to be put in place by the Finance Secretariat."

The government also plans to enact a plan to stimulate bank loans for auto purchases, since at present less than 50 percent of new vehicles in Mexico are purchased on credit.

To that end, the government will provide credit guarantees through the Nafin state-development bank to automakers' finance arms and banks that have increased auto loans by 5 percent relative to last year.

The idea is to provide a catalyst for the issuance of 2.5 billion pesos ($200 million) in new loans over the next six months, Calderon said.