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UPDATE 2-Mexico Senate broadly approves tax plan, hits snag on details

Dave Graham and Miguel Gutierrez
Wednesday, 30 Oct 2013 | 7:36 AM ET

MEXICO CITY, Oct 30 (Reuters) - Mexico's Senate gave general approval to the government's plan to boost tax revenues before the main opposition party walked out early on Wednesday, halting voting on divisive details of the reform.

The tax bill is a cornerstone of President Enrique Pena Nieto's reform agenda, and early voting on Wednesday suggested his Institutional Revolutionary Party (PRI) would succeed in thwarting any major changes to the legislation.

The Senate approved the broad outline of the fiscal bill that is designed to improve Mexico's weak tax revenues late on Tuesday, then began a debate through the night over sections that lawmakers had sought to repeal or change.

But discussions in the Senate broke down shortly after the PRI defeated amendments that would have overturned a plan to increase the rate of value-added tax in border states to the standard level of 16 percent from a reduced rate of 11 percent.

The opposition conservative National Action Party (PAN) abandoned the session, with PAN Senate leader Jorge Luis Preciado arguing that his party's efforts to amend the bill were pointless because voting had been pre-arranged.

A recess was ordered and the Senate later agreed to reconvene the session at midday on Wednesday.

Before the PAN is willing to rejoin debate on the remaining reservations, the PRI will have to rethink its hard-line stance against considering changes to the legislation, a senior PAN lawmaker said, speaking on condition of anonymity.

The PRI could push through the tax bill without heeding the complaints, but Pena Nieto's party is counting on PAN support for a major energy bill and is reluctant to foment discord.

PRI Senate leader Emilio Gamboa said he would meet the heads of the other parties to restore "normality" in the upper chamber of Congress, and that he was open to negotiation.

The PRI is keen to avoid major changes to the tax bill because amendments made in the Senate would mean sending it back to the lower house of Congress.

HIGHER TAXES ON THE RICH

The bill, which increases income tax rates for the wealthy and slaps levies on sugary drinks and junk food as well as a charge on stock market gains, seeks to raise total tax revenues by nearly 3 percent of economic output by 2018.

In general terms, the Senate approved the fiscal package with 73 votes in favor and 50 against before the chamber began going through it in more detail.

The tax overhaul is a part of a series of reforms also taking in the telecoms and energy sectors that Pena Nieto hopes will strengthen the economy and help boost a growth rate that has lagged that of other major emerging markets.

Earlier this month, the lower house watered down the tax bill, throwing out some measures including plans to apply sales tax to rents, mortgages, property transactions and school fees.

But at the same time, the PRI, supported by the leftist Party of the Democratic Revolution (PRD), modified the fiscal reform to lift top income tax rates, pushing more of the burden onto the richest section of society.

Roughly half of Mexico lives in poverty, while much of its wealth is concentrated in the hands of a few powerful families like that of billionaire telecoms mogul Carlos Slim.

The top rate of income tax in Latin America's no. 2 economy is currently 30 percent, but the reform sets out a sliding scale of higher rates capped at 35 percent for those earning more than 3 million pesos ($233,000) a year.

The higher tax rates have strong PRI and PRD support.

SHORTFALL

Senate lawmakers are still considering a proposal to raise a planned levy on junk food from 5 percent to 8 percent.

Under the reform, junk food is defined as products that contain more than 275 calories per 100 grams which, in the land that gave it its name, would apply to chocolate.

Changes to the tax bill in the lower house in mid-October created a shortfall in the budget plan for next year.

That prompted lawmakers to raise the government's oil revenue estimate and make other changes to close the gap. These had been due to be voted by the Senate later on Wednesday.

The tax bill is tied to the 2014 budget, which must be approved by mid-November.

The last major reform pending in Congress is the president's planned overhaul of the state-controlled energy sector, which the government hopes will attract investment, help stem a slide in oil output, and power economic growth.

Pena Nieto proposed an energy revamp in August that would loosen the grip on the sector of state oil monopoly Pemex and offer private companies profit-sharing contracts.

If approved as presented, this would mark the largest opening of the energy sector to the private sector in decades.

However, the reform has stopped short of offering production-sharing contracts or concessions that oil majors had been hoping for, and many viewed it as cautious.

Some lawmakers believe the energy plan could still be amended to attract more investment.