THE MEXICAN VALUE-ADDED TAX (VAT): METHODOLOGY FORCALCULATING THE BASE**

CARLOS A. AGUIRRE AND PARTHASARATHI SHOME*

ABSTRACT consumption data that can be incorpo-

The value-added tax (VAT) is often a rated into the framework of the law may

major component of national fiscal struc-not be available. The existence in VAT

tures. While its effects on allocative effi-laws of various tax rates and exemptions

ciency, inflation, income distribution, andcomplicates matters further. One solution

tax administration have been addressed,to addressing this problem is to start with

little work exists on the theoretical base ofproduction data and modify them by ad-

a VAT, given its structure. This is essen-justing for exports, imports, capital trans-

tial for knowing how tnuch of the base isactions, changes in stocks, exemptions, andall intermediate uses (with the help of an

actually taxed. Using Mexican national input-output table) in order to arrive ataccounts and input-output tables, this pa- taxable consumption. The possibilities forper develops a methodology for calculating making such an attempt have been in-the theoretical base of the Mexican VAT creasing, as more developing countriesfor 1980 and 1983 (two years whose in- have begun to prepare their national ac-dividual VAT structures were consider- counts data in line with U.N. guidelines,ably different). The method is applicable

and provided a recent input-output tableto other VAT systems as well. of the economy concerned is available.

Such a methodology is developed in this

1. Introduction paper, with specific reference to Mexico.'The exercise is attempted for two years,

SEVERAL papers have been written on 1980 (the year the VAT was introduced),the feasibility of introducing and op and 1983 (the year for which the latest

erating a value-added tax (VAT) in de- data are available). Since there were con-veloping countries, recently at an April siderable changes in the VAT laws be-1986 conference organized by the World tween the two years, applying the meth-Bank.' A wide range of issues has been odology to the two different VAT structuresaddressed in the literature; for example, demonstrates the differential impacts ofthe VAT's effects on efficiency, inflation, the changes in the law on the VAT base.distribution, and tax administration.' One The simplicity of the methodology shouldgap which applied to studies on both de- make it applicable to other developingveloping and developed countries re- countries in which comparable data aremains, however. There is as yet no de- available.tailed calculation of the base of a VAT, In Section II, characteristics of theeven though a few attempts have been Mexican VAT that are salient for the cal-made to obtain broad estimates, for ex- culation of the VAT base are noted. Sec-ample, by McLure (1972) for the United tion III describes the methodology of theStates, Cnossen (1981) for the Nether- calculation of the VAT base. Section IVlands, and Pedone (1981) for Italy. Yet, summarizes the results of the exercise andwithout a calculation of the base of a VAT, offers some concluding remarks.it is difficult to realize its proper revenuepotential.

Often, the laws pertaining to a VAT are 11. Characteristics of the VATso complicated that tax experts consider The main characteristics of the 1980a calculation of its base too unwieldy, if VAT law were (1) a single general rate atnot impossible. This is because detailed an adequate level (10 percent); (2) few ex-

*International Monetary Fund, Washington, Dc emptions; (3) use of the zero rate almost20431. exclusively for exports; (4) a special re-

543

544 NATIONAL TAX JOURNAL [Vol. XLI

gime devised for taxpayers defined as the corresponding VAT represents about11minor taxpayers" for ease of administra- 10 percent of the sum of the total tax basetion; and (5) exemption of agricultural and the VAT for the whole country.'products, to eliminate the need for ad- The general 15 percent rate affects mostministrative controls in a sector where sales of manufactured and mining prod-they would be difficult to apply. ucts, nonhousing construction, and the

In early 1983, in the wake of serious provision of services such as electricity,economic disturbances, Mexico imple- commerce, restaurants and hotels, trans-mented a major adjustment effort. The port and communication, and repairs. Allneed to increase tax revenue prompted the these activities together make up the bulkMexican authorities to raise the general of the VAT base. Finally, a virtually sym-VAT rate from 10 percent to 15 percent bolic 20 percent rate applies to a few ar-and to introduce special rates of 6 percent ticles such as caviar, champagne, and caand 20 percent. The 6 percent rate arose ble television, which are of negligiblefrom the need to restrict the use of the importance in terms of the tax revenuezero-rate scheme, but without making they generate.products excluded from the zero rate tax- In addition to these characteristics ofable at the general 15 percent rate. the VAT, other structural features must

In 1983, therefore, the rate structure of be taken into account in the calculationthe VAT is seen to include rates of 0, 6, of the base. First of all, the tax is levied15, and 20 percent as well as exemptions.' on sales, temporary use and enjoyment ofAgricultural items exempted in 1980 are property, provision of services, and im-now zero-rated. For example, sales of un- ports of goods and services. Second, theprocessed food products from the agricul- tax is applied at all stages in the produc-tural sector and primary food items such tion and marketing process, where it isas meat, milk, eggs, edible oil, salt, bread, calculated by the difference between theand sugar are all taxed at the zero rate. tax added to sales and that charged onSales of fertilizers, pesticides, and agri- purchases. Third, it is a consumption tax,cultural machinery and tools and the pro- allowing for the immediate deduction ofvision of services relating to irrigation, the total tax included in purchases of cap-fisheries, and related activities are also ital goods.taxed at the zero rate, which means thatthe tax paid on inputs is recoverable in 111. Estimation of the VAT Baseall these activities.' Exports continue to Based on information for the nine ma-be taxed at the zero rate as in 1980.

jor economic sectors derived from the na-A wide range of activities, that accounttional accounts and the input-output ta-for an important segment of GDP, is nowbles, the VAT base is estimated in thisexempt from the VAT. These activities in-section. The section is divided into threeclude, among others, sales by so-called parts. The first part presents, in some deunion stores, housing construction and tail, the methodology for the derivation ofrentals, the national lottery, most passen-

ger transport, book sales, life and agri- the VAT base and the resultant potential

cultural insurance, a large part of medi- VAT revenue. The second part presents

cal services, some entertainment services, step-by-step calculations from the 1983

education, and public administration. data in reference to Table 1. The third part

While these activities comprise a signif- summarizes the calculations for 1980 pre

icant exclusion from the VAT base, their sented in Table 4. The main source of data

inputs at least are sub ect to tax. is the Mexican national accounts entitled,i Sistema de Cuentas Nacionales. OtherMost sales of processed agricultural

sources of data are cited in the text be-products and medicines are taxed at the low.6 percent rate. The 6 percent rate also ap-plies to taxable activities in the border

1. Description of Methodologyzone, geographically a 20-kilometer bandalong the land borders.' There are indi- The methodology is best describedcations that the tax base in that area plus through an explanation of the four parts

No. 41 MEXICAN VALUE-ADDED TAX 545

into which both Tables 1 and 5 are di- moved from the tax creditable on inter-vided. mediate goods.

a. Sales (for the calculation of VAT to d. Gross capital formation (to be cred-be debited by sector): The value of sup- ited): Capital formation in each sector isply-gross product plus imports minus calculated, after deducting the exemptedexports -by sector is calculated. This fig- portions. This is divided up into parts toure is then modified by the various exclu- which different VAT rates apply. The ap-sions and then divided into parts affected proximate tax rates are then applied toby different VAT rates. Therefore, first, the respective parts, and the total is cred-the supply figure is reduced by the sales ited against the potential VAT revenue.of exempted and domestic zero-rated Potential VAT revenue can then be de-components as well as the change in stocks rived as:in each sector. Second, the resultant tax- a (tax debit on sales) - b (tax creditableable supply figure is divided up into parts on purchases) + c (tax on exemptionsto which different VAT rates apply. The within tax creditable) - d (tax payable ondifferent VAT rates are applied to these capital goods).different parts in order to obtain a grossVAT revenue potential. For the 1983 cal- 2. Calculations for 1983culations below (Section 2), the deriva-tion is, therefore, presented in five sub- All references to column numbers in thissections: (1) exemptions; (2) zero rate; (3) section are with respect to Table 1. Allchange in stocks; (4) 6 percent rate; and references to Tomo (T) and Cuadro (C) are(5) 15 percent rate. with respect to the Mexican national ac-

b. Purchases (for the calculation of VAT counts.to be credited by sector): Against the grosstaxable supply figure (and associated VAT) a. Sales side (for tax to be debited)calculated in the first step, the use of in-termediate goods in each sector needs to Total supply (column 4) is gross productbe credited in the second step. Thus, the plus imports minus exports. Gross prod-use of intermediate goods is calculated by uct figures (column 1) are from Tomo (T)sector. Each sector's use of intermediate 1, Cuadro (C) 17. Import figures (columngoods is then divided according to sectoral 2) are from T 1, C 30. Figures for exportsorigin using the input/output table for (column 3) are obtained from T 111, C 85,1980-the latest available. Once this use (except for commerce, for which the de-is obtained, a further division is made ac- rivation presented in Table 2 (columns 3cording to the different tax rates as they and 6) is used"), yielding Mex$263.3 bil-affect the different parts of the base. For lion. The export figures for agriculture,this division, the different rates of VAT mining, and manufacturing obtained fromattributable to intermediate products em- T 111, C 85 are, accordingly, reduced byanating from different sectors are classi- the commercial markups in the exports offied according to the VAT legislation. From these sectors.this, the VAT revenue which should becredited against the use of intermediate (1) Exemptionsgoods is obtained.

C. Purchases of exempted items (ex- Under exemptions (column 4), each sec-empted products within intermediate con- tor has been treated separately accordingsumption to be debited): All exempted to the VAT legislation of the specific year.items on the tax debit side are removed In 1983:from the tax base. Similarly, it is neces- (a) Agriculture: Nothing is exempted.sary to remove all exempted items from (b) Mining: Nothing is exempted.the tax credit side. For this purpose, the (c) Manufacturing: Books, newspapers,use of exempt intermediate goods is cal- and magazines are exempted. Their grossculated in the third step. Then all tax on production was Mex$83 billion (T 11, Cexempt intermediate goods -calculated 414).at different applicable tax rates-is re- (d) Construction: The gross production

Table 1. Y&xiw: CLlcdati@ for the L@ of the Val@Added T@, 1983

(In bil]i@ of p@,

G@- Zem Ram Ze- R.@. ChwW T-bl@ 6% @- 6% T-Prodwc imports EKpons &apply EwWti@ iterior in Stockz Spply Bor& r Z@ @e@ I/

(1) (2) (3) (4) (5) (6) (7) (a) (9) (10)

S,I.. (@bi@) 562 1 1,617.4 2,736.9 25,442.7 5,181.9 4, = .6 353.2 15.7L8.8 1.571.9 @L-9-A,@I.A@- 1,919 6 205.6 56.1 2,072.1 2,072 1

Anirg 2 5,j2 L5.0 1,867.4 650.2 io.9 3.2 636.0 63 6 3.6

Mamf@t@irg B,gw 9 7a8.5 402.1 9,347.3 83.0 1,309 5 350.0 7,604.8 7bo.4 43.0

C-,-@i- 1,835.6 1,835.6 785.6 1.050.0 1050 5 9

EleCLricity 2,19.8 219.8 219.8 22.0 1 2

C@@ ard 4,405.3 263.3 4,142.0 27 3 7%.1 3,318.5 331.9 8.8

T'r@pon wWcc..@.i-@- 1.736 6 132.1 LIO.8 1.757.9 696.9 1,061.0 " 1 6 0

FirAreial @rvicu and

-t.1 f i--ile. 1.391.4 179.1 35.5 1,525.0 1,039.4 485.6 48.6 2.8

Cmmnity, WA21. arA

p.-,.l @r@i- 3,600.4 1 1 1.7 3,599.8 2,2%.7 1,343.1 L34.3 7.6

-@ P.6- k-dby -i4let. 293.0 293.0 293.0

R..h- <@r@di@) 9 420*5 21 1,3.49.5 1.731.7 6,339.8 ,7 3 2@-4

Agricalt@e %0 7 29.2 362.2 169.3 L2 . o.7

Amirg 455.2 78.7 9.3 367.2 3. 2 2.0

5

,

09C).3

350.

1 1,299.9 3,440.3 325 4 IS.4

C@t Lim 957 4 97 7 12 9 Mb .8 84 0 4.8

El-@@i.ity 64:5 4:2 1.2 59.1 5 9 o 3

C-- w 553.5 7.33 .0

7.4 343 1 33 9 1.9

T@-p.@ .d5%.o xe I L2.2 477.7 47 1 2.7

Fi-W -r@i- ,.d

r@.C.1

f

I.-bl- 155.7 82.4 1.5 IC)1.8 10.1 0.6

Gam,ilcy, ocial, ad

p,mnLI mmi@s 780.6 221 0 25.1 534.5 52 3 3.0

IW@@.d barkig 144.7 144.7

p@d- f -P@.d

a- (debit) IW 3?iRmf-L.ril$ 33 3 3.2 o.2

C@t tion 389 9 38 7 2 2

C-- .d 2.3 0 2

Tr@pDrt aM

1-

191.6 18.9 1.1

FlrawAalorrvi@ and

i@@bL@ 70.5 7 o 04

r@dpersoml ser@i@ 351.0 34.3 2.0

G,-2,172 2 1,654.7 M.4 @.-5i.mo @ 863.9 b6 4 4.9

fr 2,91.8 160.3 16.0 o.9

mou-@y ,d "Uip@ " .3 660.5 66.0 3.7

o.5

5,732.9

Ll f@@df@t f the VAT is rol@d f@ If che @ bef,ce IpPlyilg E@ Mte, t@M Ut@m the t@ @te t@ 6 p@r@-@. -

21 C,@@PLI@ Of imer@diate pxd,

No. 41 MEXICAN VALUE-ADDED TAX 547

Table 2. Mexico: Calculation of Zero Rated and ExemptedSegments in Commerce, 1983

Markups Distributed: BasedPercentage of on Percentages of (CP+M)

Commercial (Gross Production (CP) + Imports(M)) I/ (billions of pesos)Markups Zero Zero Zero Zero

(billions rate rate rate rateof pesos) Exempt exports interior Exempt exports interior

(1) (2) (3) (4) (5) (6) (7)

Agriculture 402.3 3.3 96.7 13.3 389.0

Mining 88.2 -- 76.9 -- -- 67.8 --

Manufac-turing 3,038.3 0.9 6.0 13.4 1/ 27.3 182.2 407.1

Total 3,528.8 27.3 263.3 796.1

Source: Statistical publications on Mexico (see references).

I/ Derived from Table 1. For example, the figure 13.4 in the third row (Manufacturing) isde@ived as 1,309.5 (Table 1, column 6), divided by 9,749.4 (Table 1, columns 1+2).

of housing is exempt; the proportion of Mex$696.9 billion (Tll, C856/C866).gross capital formation in housing in to- (g) Financial services and rental of im-tal gross capital formation in construc- movables: Public and private institutions,tion at 1970 prices (T 1, C 64) was found selected categories of insurance,lo andto be 42.8 percent. Application of this per- housing rentals are exempted, accountingcentage to the gross production of con- for Mex$1,039.4 billion in gross produc-struction (T 11, C 772) yields Mex$785.6 tion (Tll, C892/C902).billion in exemptions. (h) Community, social, and personal

(e) Commerce and hotels: The gross services: Education, public and privateproduction of hotels, Mex$876.5 billion (T medicine," public entertainment, domes-1, C 30), is not exempt. In order to derive tic services and public administration arethe exempted part of commerce, it is as- exempted, accounting for Mex$2,256.7sumed that commerce essentially com- billion in gross production (Tll, C938/prises the commercial markups in agri- C948/C958/C968/C978).cultural, mining, and manufacturingactivities. Its product (Mex$3,528.8 bil-

(2) Zero ratelion) is, therefore, divided according to therelative sizes of these activities (column For the zero-rated internal base (col-1 of Table 2). The exemptions in agricul- umn 6), each sector is shown below. How-ture, mining, and manufacturing (col- ever, the detailed references to the sameumns 2, 3, and 4 of Table 2) are then ap- tables from the national accounts are notplied to derive the exemptions in repeated here in order to conserve space.commerce. As shown in Table 2, this pro- (a) Agriculture: Total supply, i.e.,cedure yields both exemptions and the Mex$2,072.1 billion, is zero rated.zero-rated segments of commerce (col- (b) Mining: Only salt (gross productionumns 5, 6, and 7 of Table 2). of Mex$10.9 billion) is zero rated.

(f) Transport and communication: (c) Manufacturing: The gross produc-Passenger transport, international tion of zero-rated manufacturing istransport,9 post and telegraph are ex- Mex$1,400.5 billion), including meat, 12

empted. Their gross production was milk, wheat and corn, coffee, sugar, oils,

548 NATIONAL TAX JOURNAL [Vol. XLI

chemicals (fertilizers, etc.), agricultural billion. Exemption plus zero rate with re-machinery and utensils, tractors,13 and spect to commerce is Mex$1,059.5 billion.commercial fishing boats. Since part of the Thus, taxable gross production in thetotal of Mex$1,400.5 billion is already ac- interior is Mex$3,038.3 billion minuscounted for in column 3 for exports, the Mex$1,059.5 billion, i.e., Mex$1,978.8proportion of exports in gross production, billion. Of this, taxable gross production6.5 percent, is subtracted, yielding a total in the interior is 90 percent of Mex$1,978.8of Mex$1,309.5 billion. billion, i.e., Mex$1,780.9 billion.

(d) Commerce: Mex$796.1 billion, from The 6 percent VAT share of manufac-Table 2. turing in its gross production is Mex$722.8

billion divided by Mex$9,749.4 billion, i.e.,7.4 percent.

(3) Change in stocks Thus, the 6 percent VAT share of the

Changes in stocks as a percent of ag- gross product of commerce is 7.4 percent

ricultural, mining, and manufacturing of Mex$1,780.9 billion, i.e., Mex$131.7

activities are first calculated. These per- billion.

centages are then applied to the sectors'taxable bases (calculated up to this point), (5) 15 percent rateas is demonstrated below.

The base for the 15 percent rate (col-Changein Taxable Stocks umn 13) equals taxable supply (column 8)Stocks as Base Outside minus the sum of the 6 percent bases forPercent of [Column VAT(GP + M) 4-(5 + 6)] Base (i). the border zone (column 9) and the inte-

(i) (ii) (ii) rior (column 11).

Agriculture 2.5Mining 0.5 639.3 3.2Manufacturing 4.4 7,9548 3500

b. Purchases side (for tax to be credited)

In column 4, the use of intermediateTaxable supply (column 8) equals sup- goods is presented by sector (T 1, C 17).

ply (column 4), minus the sum of ex- Intermediate goods from every sector doempted items (colurrm 5), zero-rated items not, however, result in credit for the VATsold domestically (column 6), and change system. First, therefore, the credit attrib-in stocks (column 7). utable to the use of intermediate goods

from different sectors is listed below in line

(4) 6 percent ratewith the VAT law.

Second, each sector's use of intermedi-First, it is assumed that the border zone ate goods is divided according to sectoral

(column 9) accounts for 10 percent of tax- origin using the input/output table forable supply." The sectoral tax revenues 1980-the latest available.' Once this useassociated with the border zone are pre- is obtained, a further division is made ac-sented in column 10." For the interior cording to the different tax rates as they(column 11), the derivations are pre- affect the different parts of the base."sented below. The different rates of VAT paid by in

(a) Manufacturing: The gross produc- termediate products emanating from dif-tion is Mex$722.8 billion, and is ac- ferent sectors are presented below.

16counted for by meat products, milk (1) Agriculture: Intermediate productsproducts, prepared fruit, other food prod- from this sector do not resuult in any creditucts, prepared food for animals, and med- for the VAT system.icine. Removing 10 percent on account of (2) Mining: Intermediate products fromthe border zone leaves Mex$650.5 billion. this sector result in 15 percent tax credit.

(b) Commerce: The commercial markup (3) Manufacturing: The percentages ofassociated with the 6 percent VAT rate gross production for food products, drinks,applicable to manufacturing is derived and tobacco, subject to the various ratesher(,@. The commercial markup with re- are 44.8 percent for exemptions and thespect to manufacturing is Mex$3,038.3 zero rate (accounted for by oils, sugar, cof-

MMMOMENK

No. 41 MEXICAN VALUE-ADDED TAX 549

fee, corn, wheat, and milk products), 35.1 (9) Community services, etc.: 62.7 per-percent for the 6 percent rate (food, fruit, cent is exempted, and 37.3 percent ismeat, and animal products), and 20.1 per- credited at 15 percent.cent for the 15 percent rate (tobacco, Given the above classifications for thedrinks, beer, and alcohol) (T 11, C 140). application of credit for the use of inter-

Other manufacturing products are mediate goods, as well as the sectoral dis-credited at the 15 percent rate: textiles, tribution of intermediate goods used bywood products, paper and paper products, each sector, the intermediate goods basenonmetallic mineral products, metal can be divided into further componentsproducts, machinery and equipment, other according to the different tax rates pay-manufacturing products, and most chem- able. The derivations for the agriculturalical products. The exceptions are fertil- sector are presented in Table 3 for illus-izers and other chemicals purchased by the trative Purposes. An explanation of theagricultural sector at a zero percent tax presentation follows.rate. It is assumed here that 95 percent (i) The total use of intermediate goodsof fertilizers are used by agriculture. by agriculture is Mex$560.7 billion. This

(4) Construction: No intermediate goods, figure is divided into goods originating inthat could be credited against taxes paid, different sectors using the 1980 input/emanate from this sector. output table. Thus, Mex$182.2 billion of

(5) Electricity: The rate is 15 percent. agricultural goods is used by the agricul-(6) Commerce: Allocation is made ac- tural sector itself. Since this entire amount

cording to the sectoral distribution of the is creditable at a zero rate, it IS placed ingross production of commerce or the com- the zero rate column.mercial markup. They are 11.4 percent for (ii) The total for food products used asagriculture, which is zero rated; 2.5 per- intermediate goods is Mex$118.9 billion.cent for mining, which is subject to the 15 Of this amount Mex$53.3 billion (44.8percent rate; and 86.1 percent for manu- percent) is exempted; Mex$41.7 billionfacturing, which is subject to various rates (35.1 percent) is at the 6 percent rate; andand, therefore, needs further elaboration. Mex$23.9 billion (20.1 percent) is at the

The total supply of manufacturing net 15 percent rate.of change in stocks is Mex$8,997.3 billion (iii) The total intermediate use of(Table 1). This is divided into components chemicals amounts to Mex$102.6 billiontaxed at various rates and then a factor 95 percent of which is credited at the zer'@of 86.1 percent-overall gross product of rate, and 5 percent at the 15 percent rate.commerce accounted for by manufactur- (iv) The total intermediate use of conl-ing-is applied. This yields 13.1 percent merce in agriculture amounts to Mex$56.5as exempted, 6.1 percent taxed at 6 per- billion and is divided as follows: Mex$6.5cent, and 66.9 percent taxed at 15 percent billion (11.4 percent) is at the zero rate(adding up to 86.1 percent for the manu- for agriculture; Mex$1.4 billion (2.5 per-facturing component of the commerce sec- cent) is at the 15 percent rate for mining;tor). Mex$7.4 billion (13.1 percent) is ex-

The various components under each tax empted for manufacturing; Mex$3.4 bil-rate are then added up and distributed lion (6.1 percent) is at the 6 percent rateacross the commerce category. for manufacturing; and Mex$37.8 billion

(7) Transport and communication: The (66.9 percent) is at the 15 percent rate forexempted supply is derived from Section manufacturing.a (sales side). In terms of total production The other sectoral distributions are ob-(T 11, C 856 and T 11, C 866), 40.1 per- tained in the same manner.cent is exempted, and 59.9 percent iscredited at 15 percent. The same meth-

c. Exempted products withinodology is followed for the remaining sec-intermediate consumptiontors.

(8) Financial services, etc.: 75.2 percent In order to remove all tax on exempt in-is exempted, and 24.8 percent is credited termediate goods from the tax creditableat 15 percent. on intermediate goods, the proportion of

550 NATIONAL TAX JOURNAL [Vol. XLI

Table 3. Mexico: Intermediate Goods to be Credited:

Agriculture, 1983

(In billions of pesos)

Exemptions 0 Percent 6 Percent 15 Percent Total(1) (2) (3) (4) (5)

Total 29.2 362.2 45.1 124.2 1/ 560.7 2/

Agriculture 182.2 182.2Mining 1.7 1.7Manufacturing

Food products 53.3 41.7 23.9 118.9

Textiles 10.8 10.8

Wood 1.4 1.4

Paper 5.2 5.2

Chemicals 97.5 5.1 102.6Nonmetallic 2.3 2.3

Metallic 3.8 3.8Machines 22.7 22.7

Other 3.9 3.9Construction --

Electricity 9.9 9.9Commerce 7.4 6.5 3.4 37.8+1.4 56.5

Transport 7.5 11.1 18.6Financial services 9.7 3.2 12.9Community services 4.6 2.7 7.3

Sources: Mexican input-output table (Matrices de Insumo-ProducLo de Mexico,1980, 1-nstituto de Nacional de Estadistica, Ceografia y Informacion,Secretaria de Programacion y Presupuesto); and estimates.

I/ This figure is divided into 10 percent at a 6 percent rate in the borderzone and 90 percent at a 15 percent rate. This applies to all other sectors

as well.2/ This figure is first used to obtain a base for the breakdown among

sectors. It is divided by 0.270865, which is the total input coefficient inthe input/output coefficient matrix--not presented here to conserve space--toobtain 2070.0 as the base for distribution. Then the input/output

coefficients are used on this base to give the sectoral distribution in this

column.

the exempted portion in the net-of-tax creditable purchases in the manufactur-

sales'9 of each sector is removed from the ing sector-in order to obtain Mex$33.3

purchases (credit) side. billion (column 8), the purchases of ex-

Thus, in the case of the manufacturing empted items by the manufacturing sec-

sector, Mex$83.0 billion in exemptions tor.

(column 4) is taken as a proportion of The proportions obtained for the other

Mex$8,511.7 billion in sales.20 The resul- sectors are .4604 for construction, .0068

tant ratio of .0097 is then applied to for commerce, .4010 for transport and

Mex$3,340.3 billion (column 8)-the communication, .6926 for financial ser-

Table 4. C-1@-laEiOnS for the Base f the Value Add

(In billions of pesos)

Zero P@teE;xe.ption6 InCh, nZ, T,

,bl,

Product IRPOrts Exports Supply(7)

(1) (2

3)(4) (5) (6)

69_27577.8 400.1

.0 254_4.5 1!5m! 4,267.5674_9 3

--

529.2 529.2

,,l,, Idl499.o

46.3 16.1Ag r

373.3 9 4 246 7 36 o 2.2 L.o 132.8

mi2,335.2 394:2 65:3 2,6164:1 336.2 114.1 2,213.8

n,l,cl,":g 575 6375.9

@. t@o 575.6c n t c

54.6 o.1 1,154.795o49 77

""'r""Y46.4 14 o 2D4.3

Co..@r

c

.

a

nl restaurants 1,160.4

Tlansp rt and400.7 19.2 14.3 405.6 153.0 252.6

@=.ic@tt ...

Fin:n,i,, ,r,,,e 14 ioo.9a 383.1 11.4 10.7 383.8 252.9

-Y

. .... ,..and1.4 o.6 968.3 741.2 227.1

r..n.._i

. 967.5

Direct purchases abroad95.8 95.8 95 8

by residents

72.. - 16_*62 4'o43

.

7P,rc hases (credit) 98 1ASri@.l@.r@ ai-9 17.2 964 7

.@.@n.1,35o .2 429.8 20:4

K.n.l..@ur@n. 35.

426

.

o299.4

14

12*5

1.1

1.4

16o.9 7@.6 89.3

con- r,e and rescau...

Transport and 122.6 26.5 95-1

Financial ser,ices and 46.2 23.9 22.3

rental tCo_u"

I

y, nd 21o.5 70.8 139.7per

.... .......47.8 47

8

I.P.-d b--l@.g

Purcha:,(&,,,of exempted 133.8bl@l 42.4

r

i..@

tu

r@ 1

15.5m.,,facturins 97.

1

C 16.8

C' nd

r,,ti,rants

r

:.nepcret@.nd 36.6co@unlcaclons

F,","cl,l ... l@.. and L6.3.,

i@o,ables

Co@unicy c nd lo9.1P. .. ni so L*L.ser"ces

Gross capi@l formtion 553.2(@'edi )

I.o3l

rc'i"

5A@ 7@ T7Z-7

C""

I

M.

z@

f.@y I., tr ......

16 1

67.7

@chinery and @quLp.@n@ 327 4 213.8

Total 2.497.5

552 NATIONAL TAX JOURNAL [Vol. XLI

vices and rental of immovables, and .6567 3. Calculations for 1980for community, social, and personal ser-vices. As in the case of the manufacturing The derivation for 1980 is presented insector, the tax creditable purchases of each Table 4. The methodology is essentially

of the other sectors is reduced by their re- the same as that for 1983. However, dif-spective ratios in order to properly ac- ferences in the law between 1980 and 1983

count for the exempted intermediate pur- are accounted for through a modification

chases. of the numerical derivation. For example,the items that were taxable at 6, 15, and20 percent in 1983, were taxable at 10

d. Gross capital formation percent in 1980. However, in 1980, as in

The base of the VAT is reduced by the 1983, exports were zero-rated. Goods for

gross formation of capital in construction, the domestic market, which were zero

machinery and equipment (general and rated or exempted in 1983, were, by andlarge, all exempted in 1980. These differ-in transportation), and animal husban-ences, incorporated in the 1980 calcula-dry, after deducting the exempted por-tions, are observable from a comparisontions. The sources are T 1, C 43, and T 1of Tables I and 4.C 64 of the national accounts. For ex-

ample, in the case of construction, the ex-empted portions are accounted for by IV. Summary of Resultshousing, improvement of land and inter-mediate activities. Exemptions are also A summary of the results is presentedexcluded from the other categories of gross in Table 5. The ratio of taxable supply tocapital formation. supply gives an indication of the propor-

Table 5. Mexico: Base of the Value-Added Tax

(In billions of pesos)

1980 1983Theo@eticaf Theoretical

Taxable tax Taxable taxSupply supply revenue Supply supply revenue

1. Sales (debit) 6,927.0 4,267.5 373.3 25,442.7 15,718.8 1,876.5

2. Purchases (credit) 2,472.8 1,650.6 144.4 9,420.5 6,339.8 762.4

3. Purchases of exempteditems (debit) 433.8 38.0 1,038.6 126.8

4. Gross capital forma-tion (credit) 553.2 48.3 1,684.7 207.2

5. Supply (1 2] 4,454.2 16,022.2

6. Taxable supply(1-(2-3)-41 2,497.5 218.6 8,732.9 1,033.7

7. Base of VAT as percentof supply 1/[taxable supply:supply] 542 511

Source: Tables I and 4.

I/ Net of tax.

No. 41 MEXICAN VALUE-ADDED TAX 553

tion of consumption that is captured in the Passarelia (1984), Campo and Costa (1984), Con-

VAT base. As detailed in Table 5, this ra- trera.9 and Gonzalez (1985), Casanegra de Jantscher

tio decreased from 54 percent in 1980 to (1986), Chakraborty (1986), Giraldo (1986), Habibi(1986), and Jap (1986)

51 percent in 1983. In other words, the 3 Detailed consumption data on Mexico that couldbase of the VAT, as a percentage of total be fitted to the framework of the VAT law are not

supply, decreased by almost 10 percent available as might be expected for developing coun-tries.between the two years.

'Multiplicity of rates raises administrative compli

Focusing on the effect of capital for- cationssince, at the final marketing stage, transac-mation between 1980 and 1983, it is in- tions are taxed at different rates. it also increases the

teresting to note that creditable capital chances of evasion of the tax if a final product is taxed

formation as a percent of supply fell by at a much higher rate than its inputs, as is not unlikely to be the case. This is because the seller of the

about 2 percentage points from 12.4 per- final product will alone be responsible for paying thecent to 10.5 percent between 1980 and government a proportionately larger share of the tax.

1983. On the other hand, mainly because 51nputs are taxed at the zero rate so that farmers

of the changes in the VAT law betweenwho are unregistered for VAT purposes do not haveto bear the burden of the tax

the two years, net purchases creditable as 'Mexico had strong economic reasons for introduca percentage of taxable supply increased ing a lower VAT rate in the border zone. These are

from 48.7 percent in 1980 to 60.7 percent the proximity of easily accessible U.S. markets op-

in 1983. The contraction in the base at-erating with consumption tax rates lower than thegeneral VAT rate in Mexico and the difficulty of ap-

tributable to this increase was clearly plying tax to the consumer goods bought in the Unitedgreater than the positive impact caused States.

by the decline in creditable investment. 'Because of the credit method, transfer problems

ol ofbetween affiliated firms operating in and out of theExogenous factors beyond the contrborder zone should not occur. By the same token, the

policymakers and tax administrators must percentage of value added in the border zone appearshave exerted pressures, both negative and to be irrelevant, at least theoretically, under the credit

positive, on the base of VAT since its in- method. This leads to a complication that is difficult

ception and may have contributed to these to handle. That is, even if only I percent (99 percent)f value added occurs in the border zone, the entire

results." Among the factors within the Ovalue (none of the value) will benefit from the pref-control of policymakers and administra- erential rate, as long as all of the border zone output

tors, some have affected the VAT base ad- (none of it) is sold to consumers in the zone.

versely, for example, changes in the com- - 'Also see the explanation under (1)(e): Exemp-tions-commerce and hotels.

position of the base through legislation. 'Assumes half of air transport is exempt.These conclusions were arrived at by sub- 'oassumes 25 percent of insurance-life and agri

jecting Mexican data to a detailed meth- culture-is exempted."Assumes 50 percent of private medicine-consul-odology for calculating the VAT bases in

tation-is exempted.1980 and 1983; the straightforwardness "Of the gross production of meat, 35 percent is as-of the methodology should make it readily sumed to be at the zero percent tax rate. Source: Es-

applicable to other countries. tadistica Industrial Annual, Instituto Nacional de Es-tadistica, Geografia e InformAtica, Secretaria deProgramaci6n y Presupuesto (1982).

ENDNOTES "Calculated as 3.7 percent of gross production ofautomobiles and tractors. The source is Estadistica

**The authors are grateful to Mrs Milka Casane- Industrial Manual, op. cit.gra de Jantscher and Messrs. Mario Blejer and Fer- "Statistics processed by the Direction General denando Sanchez Ugarte of the Fiscal Affairs Depart- InformAtica de Ingresos for 1980 to 1982 show thatment (FAD), Mr Pedro Kondratiuk, member of the the states along the border with the United States ac-FAD panel of fiscal experts, Ms. Alma Rosa Moreno count for about 20 percent of the total VAT base forand Messrs. Ruben Aguirre and Mauricio Gonzales of each year. For our purposes, the State of Nuevo Le6nthe Mexican Secretana de Hacienda, and two anon- can be discounted since the border zone within thisymous referees of this Journal for valuable comments state does not contain a major city. Without Nuevoon earlier drafts The authors are solely responsible Le6n, the percentage drops to slightly above 10 perfor any remaining errors, however The views ex- cent This percentage (i.e , 10 percent) refers to thepressed are those of the authors and do not necessar- entire geographical area of the border states other thanily represent those of the Fund Nuevo Le6n, not just to the border zone areas within

'Conference on Value-Added Taxation in Develop- them. The attribution of 10 percent of the base to the

ing Countries, Economics and Research Staff, The border zone can, therefore, be considered an upper limit

World Bank, Washington, D.C., April 21 23, 1986 for the VAT base in the border zone areas, thus mak-

'See, for example, Lent (1974), Heller (1981), Tait ing any estimate of the theoretical VAT base lower

(1981, 1988), Choi (1983), Aguirre, Alejandro, and than the true value

554 NATIONAL TAX JOURNAL [Vol. XLI

"Note that the effect of the VAT is first removed Choi, K, "Value Added Taxation in the Republic offrom the base before the tax rate is applied. This pro Korea," Economic Bulletin forasw and the Pacific,cedure is followed for all derivations of tax revenue. No. 34 (December 1983), pp. 15 40

"Includes 30 percent of total. Cnossen, S., "The Netherlands," in The Value-Added"This is derived as an illustration only for the ag Tax: Lessons from Europe, ed by H. A. Aaron

ricultural sector in Table 3 (column 5) (Washington, D.C: The Brookings histitution, 1981),"This is illustrated for the agricultural sector in pp. 43 60.

the columns 1, 2, 3, and 4 of Table 3. Contreras, H., and L Gonzalez, "Diez Anos del IVA,"Net-of tax sales are defined as GP + M (columns 1975 1985," CEPET Editorial (Chile), Vols I and

I + 2) mirius change in stocks (column 7) minus tax 11(1985)revenue (column 15) for each sector. Note that exports Giraldo, C El tmpacto Econ6mico del Impuesto sobreare not removed from this definition because an ex- el Valor Agregardo," Revista de Planeac16n y De-porter would receive a VAT credit for intermediate sarrollo (Bogotd), No. 18 (March 1986), pp. 79 95good use only if it is taxed and not if it is exempt. Habibi, N , "L'introduction de la TVA au Maroc souleve

"For the manufacturing sector, sales of Mex$8,511 7 une polemique," Journal de LEconomm Africatnebillion are derived as Mex$9,749.4 billion in GP + M (Paris), No. 86 (June 1986), pp. 57-59.minus MeK$350 billion in change in stocks minus Heller, P.S., "Testing the Impact of Value Added andMex$887 7 billion in tax revenue. Global Income Tax Regimes on Korean Tax Inci-

' The negative influences included: (1) an increase dence: An Input-Output and Sensitivity Analysis,"in the share of agriculture in GDP between 1982 and Staff Papers, International Monetary Fund (Wash1984; (2) a decrease in domestic absorption of petro- ington, D.C.), Vol. 28, No 2 (1981), pp. 375 410.leum production; (3) a substantial decrease in imports Jap, K. S., "Taiwan. An Outline of the Proposed Valuein terms of GDP; and (4) a further negative impact Added Tax System," Bulletin for International Fisdue to the change in the composition of imports in cal Documentation, Vol 40, No. 1 (1986), pp. 18favor of agricultural goods from manufactured ones. 19.

The positive influences included: (1) large in- Lent, G. E., "Value-Added Tax in Developing Coun-creases in the domestic price of petroleum and the tries,"Finance anddevelopment, Vol. 11, No. 4 (De-added effect of increased excises, which form a part cember 1974), pp. 35 37.of the VAT base; (2) a substantial fall in fixed capital McLure, Jr, C. E., "The Tax on Value Added- Prosformation between 1980 and 1983; (3) a fall in the and Cons," in Value Added Tax: Two Views, ed. byshare of financial services which lie primarily outside C. E. McLure, Jr., and N. B. Ture (Washington, D.C:the VAT base; and (4) an increase in the percentage American Enterprise Institute, 1972), pp. 1 68.of private to total consumption between 1980 and 1983, Pedone, A., "Italy." in The Value Added Tax: Lessonsimplying a shift to a wider VAT coverage within con- from Europe, ed by H. A. Aaron (Washington, D.C.:sumption, even though the overall share of total con- The Brookings Institution, 1981), pp. 31 42.sumption in demand declined. Tait, A. A., 'is the Introduction of a Value-Added Tax

Inflationary9,' Ft?tance and Development, Vol. 18,No. 2 (June 1981), pp 38 42.

REFERENCES Tait, A A., Value Added Tax: International Practiceand Problems, (Washington, D.C.: International

Aguirre, D., J. Alejandro, and J. J. Passarella, "Con- Monetary Fund, 1988).sideraciones sobre el Impuesto al Valor Agregado," Statistical Publications on MexicoBoletin de la Direcei6n General Impositiva (Buenos Estadisttca Industrial Anual, Inatituto Nacional deAires), No. 62 (October 1984), pp. 371-82. Estadfstica, Geografla e Inforindtica, Secretaria de

Campo, W. E., and C. Costa, "Efectos Econ6micos y Programaci6n y Presupuesto.Sociales del WA," Revista Tribularta (Montevideo), Matrices de Insumo-Producto de Mdxico, 1980, InstiNo. 11 (May-June 1984), pp. 197 229. tuto Nacional de Estadistica, Geografla e In

Casanegra de Jantscher, M., "Problems of Adminis formdtica, Secretaria de Programaci6n y Presu-tering a Value-Added Tax in Developing Coun- puesto.tries," IMF Working Paper, WP/86/15 (December Sistema de Cuentas Nacwnales de Mdxwo, Instituto1986). Nacional de Estadfstica, Geogratla e Informtitica,

Chakraborty, A., "Idea behind a Modified VAT," Cap Secretaxia de Programac16n y Presupuesto.ital (Calcutta), No. 196 (June 1986), pp 41 43.