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UPDATE 3-Mexican tax reform nears final Senate approval after spat

Michael O'Boyle and Dave Graham
Wednesday, 30 Oct 2013 | 5:29 PM ET

MEXICO CITY, Oct 30 (Reuters) - The Mexican government's tax reform looked likely to pass the Senate without major changes after the main opposition party refused to continue debating the bill on Wednesday, arguing its concerns were being ignored.

The conservative National Action Party's (PAN) decision to abandon the debate should pave the way for many proposed amendments to the bill to be voted down, but also risks creating trouble for the government over energy reform.

Late on Tuesday, the Senate gave general approval to the fiscal bill, a cornerstone of President Enrique Pena Nieto's reform agenda, setting aside scores of divisive sections to be processed later by lawmakers.

As the Senate began to work through the reservations, voting suggested Pena Nieto's Institutional Revolutionary Party (PRI) had persuaded enough opposition lawmakers to join its side to enable it to defeat major changes to the legislation.

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

The PAN had lobbied hard to quash the VAT change. After that failed, PAN Senate leader Jorge Luis Preciado called his party out of the chamber arguing its efforts to amend the bill were pointless because voting had been pre-arranged.

After party talks later on Wednesday, Preciado said the PAN would not return to the Senate to debate the bill, leaving it to the PRI and the leftist Party of the Democratic Revolution (PRD) to pass the legislation.

The PRI and other parties are expected to return to the Senate to vote the on remaining reservations later on Wednesday.

The PRI is eager to prevent clashes with the conservative PAN because Pena Nieto's party is counting on PAN support for his plans to open up the state-run oil industry in coming weeks.

But the PRI also wants 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.

To placate the PAN, the PRI may have to agree to a more liberal oil industry reform than the government has envisaged.

Pena Nieto wants to attract oil majors to Mexico via profit-sharing contracts, but the PAN is likely to push for at least production-sharing schemes or even concessions.

That could put Pena Nieto under attack from leftists who accuse the government of wanting to sell out Mexico's oil wealth to foreigners and could mobilize large protests.

The PAN may also push the PRI for a more radical electoral reform aimed at weakening the PRI's hold on power in Mexico.

HIGHER TAXES ON THE RICH

The tax 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.

The tax overhaul is a part of a series of reforms 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.

At the same time, the PRI, supported by the 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.

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

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 are due to be voted by the Senate by Oct. 31. The tax bill is tied to the budget, which must be approved by mid-November.