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IVA Rises to 16% in Baja California and Baja California Sur

Iva PricesPrices (in pesos) will be 5% more with the tax increase

One of the last vestiges of Baja's territorial status has disappeared at midnight, as both Baja California and Baja California Sur will have the federal value added tax rise from 11% to 16%, on par with the rest of Mexico.

The 2014 Federal Budget changed many things in Mexico. It is the first Federal budget not to include a subsidy for fuels, as gasoline and diesel prices rose slowly through 2013 at the rate of 11 centavos per month. This equated to about a $0.60 USD rise in the price of regular gasoline per gallon.

The 5% difference was slowly eroded from Baja's days as a territory of Mexico, short of statehood. Baja, and particularly La Paz were once shopper's havens with imports from the orient enjoying a more favorable duty status than imports from Japan and China to the Mainland. El Centro La Paz was a booming market for electronics and a shopping destination. But that ended in the early 1980's.

More recently we have enjoyed a lower IVA (Value added tax) in Baja, which made border shopping areas more competitive with stores on the US side. IVA bumped up a percentage point for us here in Baja about 5 years ago, but it is going to provide a definite hit to stores in the border areas that will see their out-the-door price rise 5% January 1.

President Peña NietoThe good news in the tax reform is the proposed IVA on real estate and on loans was removed in committee. With the benefit of hinde sight, the real estate taxes may have been a sacrificial lamb in the overall budget. Despite the fact the President Nieto's party held sway in the House of Deputies, nearly every unseated political party opposed the tax and budget proposal, some out of just plain spite, just like the States.

It doesn't take more than a semester of economics classes to imagine the devastating affect of raising the price of Mexican real estate across the board 16% and the price of financing that home by 30-45% would have on a very competitive international real estate market, just now crawling back to life.

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The 16% sales tax applies to nearly everything except food and medicines. That may seem steep, even to Californians who pay about 1/2 that in state sales tax. But the IVA is a significant portion of the Federal Revenue, as income taxes are much lower in Mexico for the average tax payer. Based on my own personal experience I calculated out my assorted income and property taxes, sale tax on say 60% of my annual buying dollars and based on a constant standard of living; I pay about 31% of my gross income in total taxes in Mexico, versus 51% of my gross income, my last year in San Diego. As an added benefit as a permanent resident, my annual health care plan, equivalent to the average employer provided health care I had in the States, costs me $248USD for two, for two years.

The tax bill faced heavy lobbying from representatives of the Baja California states and other border states affected by the tax increase There was a lot of local name calling and posting of the names of the representatives that failed to oppose the tax increase. It will undoubtedly have an affect on the state elections coming in 2014.

Unfortunately, the local voices crying out to maintain the tax difference proved infinitesimal as the voices were too small to matter in the national forum. Of the 32 Mexican states, Baja California is 14th in Gross Domestic Product and Baja California Sur is 31 of 32, with the second lowest Gross Domestic Product of the Mexican states. Our special tax status was thrown under the bus without a second thought.

Retailers, particularly those close to the border where cross-border shopping provides greater competition, have bemoaned the tax increase as their ruination. It has been my experience that large Mexican businesses are not satisfied with the margins that US Companies find acceptable. Along with higher Federal import duties on Chinese manufactured goods and a desire for fat profit margins many North Americans have found ordering stateside, in a more competitive market provides lower prices even after paying importation and transportation from say To stay competitive retailers will have to adjust profit expectations or be gone with the wind.

One Fat Sidenote:

In 2012 Mexico surpassed the United States as the country with the most obese people per capita.

Unfortunately for Baja Sur, they also garnered the national titles for THE fattest women and the 3rd fattest men. It's those flour tortillas folks! Baja Sur – The fattest of the PHAT!

The new tax bill also brings a tax to junk food. In a 2012 world wide survey, Mexico surpassed the United States as the #1 most obese country on the planet. Mexicans consume more soft drinks per capita than even the US! For the lovers of pure sugar Mexican Coca Cola this is bad news. To maintain price points it is likely that the remaining bottlers of sugarcane Coke will switch to corn syrup. The tax will be 1 peso per liter of softdrinks and 8% on other junk foods.

The tax reform also revised how taxes are collected. An across the board minimum corporate tax was eliminated, but as usual it was the middle class that will take the largest hit from the various tax increases.

Facturas are the official tax deductible receipt that must be issued by the seller and maintained by the buyer or accountant and filed with the federal government. Paper tape from Dunkin Donuts won't get you a tax write off in Mexico.

All Baja business owners must reprint new facturas to issue invoices after January 1, there is already a significant backlog at state authorized printers. Businesses billing more than $200,000 pesos per year (just over $15K USD per year) must file facturas electronically, along with programs for smaller businesses move to the more accountable electronic filing as well. Hacienda (The Mexican IRS) will then be able to compare incoming purchases and outbound sales, making the seller's ability to sell "off the books" and avoid tax, offering the buyer 16% discount will soon dry up or get fined.

North of the border retirees and visitors, who don't benefit from the low income tax rates here will suffer the rise in nearly everything from 5% and more. Even though food is exempt from IVA the production costs, including fuel, hard goods, contract labor and more will rise by 5%, eventually trickling down to the produce department at the local grocery. After enduring the slow demise of the fuel subsidies in 2012, an additional 5% tax on petrol products including propane will be a tough pill to swallow for businesses and consumers. Some warn it may lead to an inflationary spiral on the peninsula, but again, how much weight does the peninsula carry economically?.

With the economic downturn of the last few years, Mexico is scrambling like every other government to raise funds. The good news is here in Mexico the new funding bill allots the collected money to start the first unemployment insurance, increase funding to schools and health programs and initiate an old age pension program for the first time in Mexico. The increase in fuel prices were excused as a means to direct more economy of use while the junk food tax is aimed directly at the gut of Mexico.

Yet not one thin dime of the Mexican tax increase will be used to blow up a wedding party on the far side of the planet.

Happy New Year to all!

Peace out