Why you should care
Latin America's second-largest economy is slowly killing its businesses.
Like many Mexican businesspeople, Armando Santacruz, CEO of chemicals company Grupo Pochteca, has faced numerous tax audits during the past decade.
If new legislation designed to punish people accused of tax dodging as harshly as drug traffickers had been law back then, “I reckon I’d have spent nine out of the last 10 years in jail,” Santacruz fumes.
The new initiatives, including mandatory pretrial detention and the potential confiscation and sale of assets even before a conviction, are part of President Andrés Manuel López Obrador’s crusade to eradicate ingrained corruption in Latin America’s second-biggest economy.
This government thinks all businesspeople are gangsters. That’s how they treat us.
ARMANDO SANTACRUZ, CEO, GRUPO POCHTECA
The initiatives target the rampant illicit practice of using fake invoices, often registered to phantom companies, to dodge taxes — something the president says costs the treasury $25 billion a year in lost revenue, although the estimate is hard to verify.
Anyone accused of serious tax irregularities in Mexico could face prison without bail under provisions allied to the 2020 budget, currently before Congress, and an asset confiscation law that was passed in July.
Luis Niño de Rivera, head of the Mexican Banking Association, says: “They are eliminating … the right to freedom, to property, to a hearing, a fair trial and the presumption of innocence and replacing it with mandatory pretrial detention based only on suggestions and not real facts.”
De Rivera says the policy could lead to arbitrary asset seizures, the freezing of bank accounts based on suppositions rather than facts and business owners losing control of their companies even before being found guilty.
“This is a very negative signal for the national and foreign investors … whom we need so much to get the economy growing,” de Rivera adds. “It’s not the right message.”
Gustavo de Hoyos, head of the Coparmex employers’ federation, says it would be “very easy to criminalize a company that made a mistake” and lock up executives in top-security jails “as if they belonged to a [drug] cartel.” Businesspeople have little faith that even if found not guilty they would be properly compensated for lost assets.
Alejandro Armenta, president of the Senate’s finance commission and a member of the ruling Morena party, says criminal charges would only be automatic for large-scale fraudsters. But tough legislation was needed to crack down on companies selling tax invoices to clients who used them to duck taxes, he argues.
“It’s not fiscal terrorism because from 2014 to 2019, more than 8,000 companies selling invoices were created and they issued 9 million fake invoices, defrauding more than 350 billion pesos [in taxes],” Armenta says. That was enough to pay for 220 hospitals, he adds.
“This is criminal in a country where half the people live in poverty. It’s not [a measure] against businesspeople,” he says.
Mexico has the lowest level of tax collection in the Organization for Economic Cooperation and Development. But critics say that rather than raising that level, the measures will encourage people to stay in the informal sector — the more than half of the economy that pays no tax — simply to stay under the tax agency’s radar.
Mexico’s tax revenue is just 13 percent of gross domestic product, worse than that of poorer neighbors such as Honduras and El Salvador, according to the World Bank. A slowing economy is also making tax collection harder: Income tax revenue fell almost 4 percent in August compared with August 2018, while value-added tax proceeds plunged nearly 12 percent.
“This will completely discourage investment,” says Valeria Moy, head of México ¿cómo vamos?, a think tank. “What’s the incentive to become formal if you’re going to become public enemy No. 1?”
“In Mexico, fake invoicing was a national sport,” admits Carlos Salazar, head of the country’s biggest business lobby, the CCE, who agrees a crackdown is needed but said there are “things in the asset confiscation law that we don’t like.”
Some experts predict dire consequences. “One CEO of a major corporation told me it’s the beginning of the end of private property in Mexico,” says a former senior government official. “And imagine in a country like Mexico how such sweeping powers could be abused for extortion. The price of extortion demands will soar.”
Santacruz, who is also co-founder of Mexicans United Against Crime, a nongovernmental organization, says he has been targeted for tax audits under the previous administration as a means of harassment after exposing graft scandals.
Santacruz says he has won all his cases in court — but things would have been very different had the proposed new framework been in place.
“I’ve had 100 audits and in 99 of them, I raised objections,” says Santacruz. “With these new criteria, it would be jail and asset confiscation even before conviction … This government thinks all businesspeople are gangsters. That’s how they treat us.”
AMLO faces embarrassing allegations of double standards after this month playing down revelations by the tax agency that the head of his Morena party, Yeidckol Polevnsky, was let off $800,000 in taxes in 2013.
Polvensky was among almost 8,000 taxpayers who benefited from waivers totaling $14 billion at today’s rates — a practice AMLO has now ended. Polevnsky blamed it on an accountant’s mistake.
But the new rules would provide no such margin for error. Santacruz notes that if the budget plans were passed, liability would go all the way up to the CEO.
Santacruz says that as a result some companies — including his own — are setting up corporate structures in the United States so as not to be the direct owners of companies in Mexico.
“Imagine you’re offered the job of CEO of Audi in Mexico — but then you’re told you will be responsible for Audi’s taxes in Mexico,” Santacruz says. “I’d say, ‘Send me to Brazil instead.’”
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