Mexico COVID-19 VAT cut to 10% proposal
- Jun 9, 2020 | Richard Asquith
The Mexican senate is to consider a bill to reduce the Value Added Tax rate from 16% to 10% for six months untill the end of 2020. The measure is in recognition of the financial difficulties businesses are experiencing with the coronavirus epidemic. The measure will be considered by Permanent Commission of the Congress of the Union on 10 June.
The Mexico border region adjoining the U.S. already benefits from a reduced VAT rate of 8%. Under this proposal, a second border region, also with 8% VAT rate, would be created to be termed the 'Southern'
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Do temporary VAT rate cuts work for economic crisis? Certainly, they can provide subsidies to retailers or consumers – depending on whether the retailer choses to pass on the cut through price cuts. Crucially, such a tax subsidy can be introduced within a few weeks and so deliver an immediate economic boost. There is conflicting evidence on the effects on prices, and whether retailers pass on the cut to retain it to prop-up profits. Some studies on VAT rate changes have shown asymmetric movements on prices: cuts are retained by the vendor; rises are passed onto the consumer. But the COVID slump is not like previous recessions: supply chains on many goods have been devasted and so pricing changes do not have the same important economic signalling effect.