Mexico's Ruling Party Opens Door To Tax, Energy Changes

Mexico's ruling Institutional Revolutionary Party on Saturday paved the way for possible tax hikes and an overhaul of state oil giant Pemex as it seeks to spur growth in Latin America's second-biggest economy.

PRI delegates from across Mexico voted to change the party's platform during a congress in Mexico City, lifting a ban on imposing value-added tax (VAT) on food and medicines and giving it scope to open up Pemex to more private capital.

President Enrique Pena Nieto wanted the changes so he has more room to maneuver on boosting Mexico's low tax take and revamping its flagging oil industry.

PRI Congressman Javier Trevino said the changes would allow Mexico to modernize its tax system and energy sector, and give it a chance to devote more resources to helping the poor.

"This is a good signal," he said.

The centrist PRI lacks a majority in Congress, and is likely to face months of tough negotiation before it can lay out detailed plans on tax and energy reform. Those measures are expected to be presented in the second half of this year.

No party has had a majority in Congress since 1997, hindering efforts to enact major change on tax and energy law.

But Pena Nieto surprised many critics when he unveiled a broad pact with the main opposition parties to work together on economic reform shortly after he took office in December.

PRI financial experts are looking at ways of raising the Mexican tax take - currently the lowest in the Organisation for Economic Co-operation and Development as a proportion of gross domestic product - by up to six points of GDP.

Applying VAT to food and medicine is controversial because the burden would fall most heavily on the poor, about half the country's population. PRI lawmakers say a large chunk of any additional revenue generated must go towards helping the poor.

One option under discussion is applying a reduced rate of VAT on food and medicines. But even if the full rate of 16 percent were levied, it would only boost the tax take by around 1 percentage point of GDP.

OIL SHAKE-UP

In its revised platform, the PRI agreed the state would remain in control of Mexico's energy resources. However, it added a section saying it would "design mechanisms to generate greater private-sector participation in energy production."

"But this isn't giving oil to foreigners," said Eduardo Bernal, a PRI delegate at the congress.

Cutting fiscal loopholes, getting the millions of workers in the underground economy - nearly a third of the labor force - to pay taxes and improving states' tax-raising ability are among the measures the government is weighing to increase revenues.

The PRI, which ruled Mexico 1929-2000 before regaining power last year, blocked efforts by the conservative National Action Party (PAN) to raise more VAT during the past 12 years.

Since recapturing the presidency, the PRI leadership has made the case for sweeping change to bolster the economy, which underperformed its main regional peers under the PAN, growing about 2 percent annually for most of the past decade.

The changes sought by Pena Nieto run contrary to many old tenets of the PRI, a party which started on the left and drifted toward the right during its long rule.

Overhauling Pemex, a symbol of Mexican self-reliance that provides a third of the federal tax take, is particularly sensitive for the PRI, which created the company when President Lazaro Cardenas nationalized the oil industry in 1938.

Output of crude has slumped to less than 2.6 million barrels per day from 3.4 million in 2004, and lawmakers worry the oil industry will be left behind unless it can improve performance.

"We plan an energy reform that mulls an opening in areas where we don't have the capacity to do it, so Pemex can make alliances with private capital," said Marco Bernal of the PRI, head of the energy committee in the lower house of Congress.

Pena Nieto aims to make the monopoly more efficient and more independent. He has taken inspiration from Brazil's state-controlled oil firm Petrobras, part of which has been publicly listed, and said in January the two might pursue joint projects.

But he is having to defend his administration from accusations that he plans to privatize the oil industry.