What changes will the US Tax Reform bring and how does it affect Mexico?

By Elliot Bullman

The US tax reform, which reduces the corporate tax from 35 to 20 percent, seeks to attract more investment and prevent the flight of jobs to other countries.

With 51 votes in favour and 49 against, the US Senate approved in the early hours of Saturday the biggest tax reform in 30 years. One of Donald Trump's main proposals in the campaign is about to become a reality.

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Among Trump's plans to improve its tax appeal to investors is to reduce the corporate tax from 35 to 20 percent.

The approval of this change would generate a problem for Mexico, where the rate of ISR is 30 percent, and would therefore make the United States more attractive than Mexico for investment.

Another of the most controversial proposals in the fiscal plan consists in the creation of a tax of up to 12 percent on the offshore profits accumulated by the North American entities. With this measure, Trump seeks to retain production output of multinationals such as Ford in the US.

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On income tax, early analysis shows reform would benefit the wealthiest Americans by slashing the top tax rate, while increasing the rate on the lowest-income taxpayers.

The lowest income bracket today pays a 10 percent tax rate, under the Trump/Republican plan, the lowest rate will now be 12 percent — which amounts to a 20 percent hike before deductions and other adjustments are figured in.

The plan has come under fire from economists and political analysts for failing to include any details on how the cost of the new tax cuts and changes will be paid for and for vagaries on the new income levels that will fall into the revised tax brackets. The costs are estimated to tally well into the multiple-trillion dollar range according toan analysis byPolitico.

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The Secretary of Economy, Ildefonso Guajardo, has declared on several occasions that Mexico was following very closely the process of reform in the United States. If it is achieved, the Mexican government hopes that it will allow Trump to focus on other issues, alien to NAFTA.

If the United States improves its tax conditions to investors and becomes more attractive, it could trigger an investment war that would force countries to adapt their offers to stay competitive. The question now is: What will be Mexico’s counterstrategy?

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