Mexico Plans to Cut Tax for Companies Holding IPOs to 10%

(Bloomberg) -- Mexico will cut the tax rate paid by companies on the proceeds of initial public offerings to 10 percent as part of a broad-ranging plan to boost public offerings and spur growth in the financial system.

Finance Minister Carlos Urzua announced the measure at an event led by President Andres Manuel Lopez Obrador and Banco de Mexico Governor Alejandro Diaz de Leon at their first appearance together since AMLO, as the leftist is known, took office Dec. 1. The plan also includes boosting issuance of corporate bonds, making lending between banks easier, and strengthening the pension fund system and personal savings schemes.

Mexico’s private equity industry group Amexcap lobbied for the moves during the six-year term of President Enrique Pena Nieto, arguing that a high exit tax dissuades families and funds from for listing shares on the nation’s stock exchanges. Jose-Oriol Bosch, the chief executive officer of the 120-year-old Bolsa Mexicana de Valores, said companies have been asking for these measures for years. Mexico’s benchmark Mexbol stock index climbed 1.7 percent, the most since the end of November.

Cutting the tax from the current 35 percent will “encourage entrepreneurs to finance themselves through the stock market," which has a proven track record of boosting economic growth, Maria Ariza, chief executive officer of the Bolsa Institucional de Valores stock exchange, said in an interview. BIVA, as the exchange is known, opened last year as competition for the Bolsa Mexicana. Ariza previously worked as the head of Amexcap.

Positive Developments

The rollout, also attended by banking association head and Santander Mexico Chairman Marcos Martinez, is a positive moment in a relationship between Lopez Obrador and the financial services industry that got off to a rough start during the presidential transition. Lopez Obrador in October announced plans to cancel a new airport for Mexico City, sending markets into a tailspin, and some members of his party support cutting the fees that banks charge to clients.

The administration had already started to win back some confidence last month by striking a deal with airport bondholders and drafting a budget that most analysts consider fiscally responsible.

The Finance Ministry also said it would broaden areas in which pension funds can invest. Specifically, the Afores, as pension funds are called, will be able to diversify to invest more in "productive" infrastructure projects.

The government also plans to give foreigners a credit for buying Mexican corporate peso debt that’s subject to a withholding tax, the Finance Ministry said. The credit eliminates the corporate bond tax completely, which ranged from 4.9 percent to 35 percent, according to Luis Arturo Castaneda, the Finance Ministry’s tax legislation director. The IPO and corporate bond tax changes will be made official by decree either Tuesday or Wednesday, he said.

The bond plan makes "all the sense in the world" because its gets rid of an unnecessary cost to investors, said Luis Maizel, a senior managing director and LM Capital Group in San Diego. But Maizel said the impact of the change probably will be limited because large institutional investors will be unaffected. "It would not make a major difference on the institutional market, and that is the one that counts."

--With assistance from Justin Villamil and Ben Holland.

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net;Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Robert Jameson

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