Mexico eyes tax squeeze on banks to raise revenue

Mexico is eyeing ways to squeeze the country’s banks for more tax revenue as it turns to a sector dominated by big Spanish and US lenders to help plug a hole in the public finances.

Officials have discussed a range of revenue-raising measures across sectors to reduce the fiscal deficit projected to be left by the outgoing president, Andrés Manuel López Obrador, this year.

The options discussed for banks include restricting tax deductions, and even imposing a windfall tax on profits, though efforts like the latter that require a change in the law are unlikely for now, said three people familiar with the discussions.

“There is room to charge more taxes on banks,” one of the people said.

If Claudia Sheinbaum, a longtime ally of López Obrador and the frontrunner in June’s presidential election, wins the vote she will face intense pressure to tame the country’s highest fiscal deficit since the 1980s and put finances on a sustainable path.

In an interview with the Financial Times this month, she did not rule out raising taxes but said any changes should wait until her team had taken power and looked at the books more closely.

Mexico’s next government could raise revenue without cumbersome changes to the law by limiting some tax deductions. One person familiar with the discussions noted that an example could be limiting banks’ ability to offset contributions to Mexico’s deposit insurance scheme against tax.

Another of the sector’s most important deductions is for inflation-related losses from holding cash positions, though experts said that would likely require more politically difficult legal changes.

Mexico’s finance ministry and Sheinbaum’s campaign declined to comment.

Higher interest rates helped Mexico’s banks to deliver record profits of 273bn pesos ($16.2bn) last year, with an average return on equity of 18.5 per cent, according to data from the banking regulator CNBV.

Mexico’s banking sector is foreign-dominated. Spain’s BBVA, the country’s biggest lender, made nearly half of its profits in Mexico last year, while Santander, another Spanish bank, earned 13 per cent of its global income there.

Francisco Riquel, analyst at Alantra Equities, said any increase in BBVA’s tax burden would “complicate” its hostile all-share bid to buy Spanish rival Banco Sabadell by lowering its profits and in turn its share price.

BBVA and Santander are paying a windfall tax imposed on their operations in Spain by the country’s Socialist-led government, but they are seeking to have the levy struck down in court. Riquel estimated Spain’s tax has cost each bank about 3 per cent of group profits.

Other lenders with big Mexican operations include Banorte and US group Citi’s Banamex.

López Obrador, a leftist nationalist whose six-year term ends in September, has been consistently critical of the role of former colonial power Spain in Mexico’s economy but has largely left the financial sector untouched during his term, seeing it as important for the broader economy.

Many banks in turn have been careful not to confront him. At an annual banking convention last month, he said: “You’ve treated me very well, with respect, and I think it’s been mutual.”

But at the end of his presentation he put up a finance ministry slide of each bank’s individual profits before joking “we’re not going to expose anyone . . . take it down, quickly” to a laughing audience.

The move pointed to the sector’s vulnerability as Mexico makes a broader push to repair its public finances. The country’s tax take is the lowest in the OECD at just 16.9 per cent of GDP in 2022, compared to the average 34 per cent.

Without raising taxes, López Obrador’s tax authority took a more aggressive approach to enforcement, particularly with large companies, prompting private complaints of extortion tactics.

The tax authority is locked in a tense dispute with the insurance industry after it said insurers could no longer deduct VAT on payouts and retroactively had to pay billions.

The country’s existing banking regulation was shaped in the wake of a massive financial crisis in 1994, and sought to prioritise strong capitalisation over encouraging lending or competition.

Several European countries have levied bank windfall taxes in recent years, arguing high interest rates have led to extraordinary profits for banks while consumers have suffered from a higher cost of living. Industry leaders argue such one-off levies harm the broader economy.

Ángel Escalante-Carpio, lead tax partner at law firm CMS WLL, said any changes should be carried out through legal reforms rather than unilateral reinterpretations of the rules, in order to be consistent across sectors and offer companies certainty.

But he added the current rules around bank deductions were outdated, and the sector’s high profits had created a lot of “noise” around the issue.

“The next government . . . will have to look for new sources of income,” he said. “A change in the banking sector seems like it could be one of the main ones.”