By: Dr. Paula Morales Instituto Tecnológico Autónomo de México
The purpose of this paper is to examine, through empirical analysis, if the 2014 Tax Reform of the Special Tax on Production and Services Law (LIEPS, for its acronym in Spanish), particularly the added tax to sugary beverages and snack food, has managed to reduce the consumption of these products and, consequently, decrease the problems of child and adult obesity in Mexico.
I Introduction
The Special Tax on Production and Services Law (LIEPS) was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish) on December 30, 1980, by President José López Portillo. Its initial objective was to tax individuals and legal entities (corporations) that conduct acts or activities listed below:
The Special Tax on Production and Services Law (LIEPS) was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish) on December 30, 1980, by President José López Portillo. Its initial objective was to tax individuals and legal entities (corporations) that conduct acts or activities listed below:
The provision of the services referred to in this Law.
On December 11, 2013, the initiative to reform the law was launched and the law went into effect on January 1, 2014. The primary objectives for its amendment were the following:
To strengthen the financial capacity of the three levels of government, strengthening tax collection incentives in the states and municipalities that are accorded by the Federal Investment Funds.
To improve the distribution, destination and use of the resources from the Federal Contribution Funds, to strengthen the objectives for which they were created, and thus ensure better use of resources, greater transparency in the distribution to the states and municipalities, and greater predictability in these to facilitate planning.
To support the municipalities in the country to achieve and maintain sound public finances by implementing a system of incentives and schemes aimed at ensuring payments in respect of national waters and strengthening the collection of property taxes.
Added to the above, the report by the Health Secretary states that obesity and overweight are the main public health problem in Mexico, which is in first place worldwide in child obesity and second in adult obesity. Therefore, the federal government decided to issue a bill to reform the Special Tax on Production and Services Law, which is briefly explained below:
It is of vital importance to avoid the problem of being overweight and obese, which has increased in recent years in Mexico, as well as the risk of chronic, non-communicable diseases.
According to information issued by the Health Secretariat, Mexico spends 7% of the health budget on obesity, just two points behind the United States, which invests 9%. Poor diet, sedentary lifestyle and lack of access to nutritious food are the determinant factors in this situation. Taking into consideration the information gathered by the National Institute of Statistics and Geography (INEGI), per 100 inhabitants, an average of 24 people, including males and females five years of age and over, are obese and overweight (Graph 1).
Graph 1. Prevalence of being overweight and obese in the population five years of age and over by federal entity, according to gender, 2006
II Explanation of the taxing mechanism
II.1 Tax on food and beverages
In accordance with the reform applicable beginning with the financial year 2014, a tax of $1 Mexican peso per liter is applicable to the sale or importation of flavored beverages, concentrated juices, powders, syrups, essences or flavoring extracts, which when diluted become sweetened beverages, and syrups or concentrates for the preparation of these drinks, when these beverages are sold in open containers using any type of added sweetener.
For this law, flavored drinks are defined as those non-alcoholic beverages prepared through the dissolution in water of any type of sweetener.
This tax applies only to manufacturers, producers or importers and will be incurred at the moment they charge the compensation on the sale, so that the tax paid on the importation and transfer is passed on to the taxpayer in the acquisition of said products.
The tax shall be calculated on the sale of the total number of liters of flavored drinks with added sugars. In addition, the monthly payment of this tax shall be the amount obtained by applying the fee to the liters of the sugary beverages sold during the month or the total amount of liters that can be obtained from the concentrates.
11.2 Tax on non-staple foods with high caloric density
The new treatment consists in adding an 8% tax on the retail price of the sale or importation of non-staple food, with a caloric density of 275 or more kilocalories per 100 grams, which includes snacks, confectionery products, chocolate and other products derived from cocoa, as well as custards, puddings, sweets made from fruit and vegetables, peanut and hazelnut butters, sweet milk candies, cereal-based food and treats, ice cream and popsicles.
It also states that when the foods mentioned above comply with the general provisions on labeling specifications for this type of product, taxpayers will be able to consider the kilocalories shown on the label. When there is no label, these foods will be considered as containing an amount equal to or more than the 275 kilocalories per 100 grams, and therefore will be subject to this tax.
The IEPS taxes the sale and importation of these products; therefore, in principle, it taxes the entire market chain, and the tax will be incurred at the moment when the compensation is charged on the amount of the sales price.
The treatment to be applied to the entities that elaborate or prepare this type of food for consumption – as might be the case of restaurants, cinemas and theaters – is not specified. However, in the case of flavored beverages with added sweeteners, an exemption is expressly established.
Similarly, this law establishes that said tax will be applied to the services that consist in the commission, mediation, agency, representation, brokerage, consignment and distribution in connection with the sale of these non-staple foods. The applied tax will be the same as the sale of these goods (8%).
III Empirical Analysis
Whereas the primary objective of the reform initiative of the LIEPS was to increase the price of the products commonly called “junk food” and sugary beverages to the final consumer, we sought to analyze the elasticity in the quantity of these goods that were consumed as a result of the higher prices caused by the increase in raw materials during the supply chain1. To do this, we decided to interview the salespersons at grocery stores, as well as convenience stores.
The total sample consisted of 50 stores located in the Federal District, particularly in the Nápoles, Narvarte, Del Valle, Centro, Tacubaya and Escandón neighborhoods, with the objective of seeking consumers of different classes: upper middle, middle, lower middle, and low.
Of all the stores analyzed, 80% were convenience stores and 20% grocery stores.2
__________
1A supply chain is formed by all parts that are directly or indirectly involved in satisfying a customer request. The supply chain includes not only the manufacturer and the provider, but also the transporters, storeowners, salespersons (retail or wholesale) and also the customers themselves. Each organization, like that of the manufacturer, encompasses all the functions involved in the reception of and the compliance with a customer´s request. These functions include, but are not limited to, the development of new products, marketing, operations, distribution, finances and customer service.
2The interviews of the salespersons at the convenience stores, as well as those from the grocery stores, were conducted from the end of May to the beginning of the month of June.
The question asked of the salespersons of each of the stores was the following: “Since January 1, 2014, has there been a decrease in the consumption of soft drinks, juices, concentrates for preparing flavored beverages and, in general, all kinds of junk food?”
The responses were striking, as shown in Table 1 and in Graph 2.
Table 1. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.
Graph 2. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.
As can be observed, the objective of the federal government, according to this analysis, was not achieved, because unfortunately the diet of the average Mexican is based on the consumption of cola beverages and junk food. In spite of the increase in prices, it was not possible to reduce the amount consumed. Therefore, based on the data of this sample, it can be concluded that, among the economic classes analyzed, the demand is basically the same, despite the variation in the prices of these goods.
So the solution for attaining a reduction in the consumption of such food must come through the education within Mexican families. A change in the consumption habits of children should be encouraged, inculcating a healthy diet that does not contain so much sugar, fat and carbohydrates, i.e., inculcating the importance of a balanced diet.
Finally, the results of the Tax Administration Services (SAT), particularly the results of the IEPS for the first quarter of 2014 (Graphs 3 and 4), were analyzed.
Graph 3. Figures in millions of pesos for the first quarter of 2014 of the IEPS.
According to the information presented in the Tax and Management Report of the SAT for the first quarter of 2014, it can be seen that from the year 2005 to date, the average annual volatility has been 403%. However, the percentage change in the first quarter of 2014 compared to the same quarter last year was 313%. This demonstrates that part of the original objective of the reform applicable since 2014 has been achieved: increasing revenue.Similarly, we will analyze whether this increase is due to the increase in the number of active taxpayers, which includes both individuals and corporations.
Graph 4. Number of active taxpayers, quarterly comparative corresponding to the same period of last year.
According to this information, the increase in revenue is not directly proportional to the growth of the tax base, taking as a reference the percentage change in the first quarter of 2014, compared to the same quarter of last year, which was 2.6%.
Conclusions
Based on the result of the analysis conducted in this study, it can be concluded that the Tax Reform applicable from the beginning of the financial year 2014 has not yielded the results that were planned.
Originally, the federal government sought to increase the tax base. Nevertheless, the increase has not been very high. Unfortunately, the amendment to the IEPS law has fallen on the so-called “captive taxpayers”, i.e., those manufacturers, sellers, distributors, etc. who already paid taxes and whose tax burden has increased due to this modification.
The same thing applies to the final consumers, since it was found, based on the surveys, that the purchase volume in the Federal District, and particularly among the middle and lower classes, has undermined their budget, even though the consumption has not been reduced until now.
Therefore, the basic objective of reducing obesity among children and adults has not yet been achieved. ?
National Institute of Statistics and Geography, 2014. Consulted on June 13, 2014, at http://www3.inegi.org.mx/sistemas/sisept/default.aspx?t=msal75&s=est&c=26762 Tax Administration Services, “Informe Tributario y de Gestión (primer trimestre de 2014)”. Consulted on June 13, 2014, at http://www.sat.gob.mx/transparencia_focalizada/Paginas/informe_tributario_gestion.aspx
Interviews
40 salespersons in convenience stores10 salespersons in small grocery stores
Impact of Tax on Non-Staple, High Caloric Density Food and Sugary Beverages
Instituto Tecnológico Autónomo de México
The purpose of this paper is to examine, through empirical analysis, if the 2014 Tax Reform of the Special Tax on Production and Services Law (LIEPS, for its acronym in Spanish), particularly the added tax to sugary beverages and snack food, has managed to reduce the consumption of these products and, consequently, decrease the problems of child and adult obesity in Mexico.
I Introduction
The Special Tax on Production and Services Law (LIEPS) was published in the Official Gazette of the Federation (DOF, for its acronym in Spanish) on December 30, 1980, by President José López Portillo. Its initial objective was to tax individuals and legal entities (corporations) that conduct acts or activities listed below:
On December 11, 2013, the initiative to reform the law was launched and the law went into effect on January 1, 2014. The primary objectives for its amendment were the following:
Added to the above, the report by the Health Secretary states that obesity and overweight are the main public health problem in Mexico, which is in first place worldwide in child obesity and second in adult obesity. Therefore, the federal government decided to issue a bill to reform the Special Tax on Production and Services Law, which is briefly explained below:
It is of vital importance to avoid the problem of being overweight and obese, which has increased in recent years in Mexico, as well as the risk of chronic, non-communicable diseases.
According to information issued by the Health Secretariat, Mexico spends 7% of the health budget on obesity, just two points behind the United States, which invests 9%. Poor diet, sedentary lifestyle and lack of access to nutritious food are the determinant factors in this situation. Taking into consideration the information gathered by the National Institute of Statistics and Geography (INEGI), per 100 inhabitants, an average of 24 people, including males and females five years of age and over, are obese and overweight (Graph 1).
Graph 1. Prevalence of being overweight and obese in the population five years of age and over by federal entity, according to gender, 2006
II Explanation of the taxing mechanism
II.1 Tax on food and beverages
In accordance with the reform applicable beginning with the financial year 2014, a tax of $1 Mexican peso per liter is applicable to the sale or importation of flavored beverages, concentrated juices, powders, syrups, essences or flavoring extracts, which when diluted become sweetened beverages, and syrups or concentrates for the preparation of these drinks, when these beverages are sold in open containers using any type of added sweetener.
For this law, flavored drinks are defined as those non-alcoholic beverages prepared through the dissolution in water of any type of sweetener.
This tax applies only to manufacturers, producers or importers and will be incurred at the moment they charge the compensation on the sale, so that the tax paid on the importation and transfer is passed on to the taxpayer in the acquisition of said products.
The tax shall be calculated on the sale of the total number of liters of flavored drinks with added sugars. In addition, the monthly payment of this tax shall be the amount obtained by applying the fee to the liters of the sugary beverages sold during the month or the total amount of liters that can be obtained from the concentrates.
11.2 Tax on non-staple foods with high caloric density
The new treatment consists in adding an 8% tax on the retail price of the sale or importation of non-staple food, with a caloric density of 275 or more kilocalories per 100 grams, which includes snacks, confectionery products, chocolate and other products derived from cocoa, as well as custards, puddings, sweets made from fruit and vegetables, peanut and hazelnut butters, sweet milk candies, cereal-based food and treats, ice cream and popsicles.
It also states that when the foods mentioned above comply with the general provisions on labeling specifications for this type of product, taxpayers will be able to consider the kilocalories shown on the label. When there is no label, these foods will be considered as containing an amount equal to or more than the 275 kilocalories per 100 grams, and therefore will be subject to this tax.
The IEPS taxes the sale and importation of these products; therefore, in principle, it taxes the entire market chain, and the tax will be incurred at the moment when the compensation is charged on the amount of the sales price.
The treatment to be applied to the entities that elaborate or prepare this type of food for consumption – as might be the case of restaurants, cinemas and theaters – is not specified. However, in the case of flavored beverages with added sweeteners, an exemption is expressly established.
Similarly, this law establishes that said tax will be applied to the services that consist in the commission, mediation, agency, representation, brokerage, consignment and distribution in connection with the sale of these non-staple foods. The applied tax will be the same as the sale of these goods (8%).
III Empirical Analysis
Whereas the primary objective of the reform initiative of the LIEPS was to increase the price of the products commonly called “junk food” and sugary beverages to the final consumer, we sought to analyze the elasticity in the quantity of these goods that were consumed as a result of the higher prices caused by the increase in raw materials during the supply chain1. To do this, we decided to interview the salespersons at grocery stores, as well as convenience stores.
The total sample consisted of 50 stores located in the Federal District, particularly in the Nápoles, Narvarte, Del Valle, Centro, Tacubaya and Escandón neighborhoods, with the objective of seeking consumers of different classes: upper middle, middle, lower middle, and low.
Of all the stores analyzed, 80% were convenience stores and 20% grocery stores.2
__________
1A supply chain is formed by all parts that are directly or indirectly involved in satisfying a customer request. The supply chain includes not only the manufacturer and the provider, but also the transporters, storeowners, salespersons (retail or wholesale) and also the customers themselves. Each organization, like that of the manufacturer, encompasses all the functions involved in the reception of and the compliance with a customer´s request. These functions include, but are not limited to, the development of new products, marketing, operations, distribution, finances and customer service.
2The interviews of the salespersons at the convenience stores, as well as those from the grocery stores, were conducted from the end of May to the beginning of the month of June.
The question asked of the salespersons of each of the stores was the following: “Since January 1, 2014, has there been a decrease in the consumption of soft drinks, juices, concentrates for preparing flavored beverages and, in general, all kinds of junk food?”
The responses were striking, as shown in Table 1 and in Graph 2.
Table 1. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.
Graph 2. Answers to the question of how the consumption of junk food and sugary beverages was affected by the tax reforms applied since January 2014.
As can be observed, the objective of the federal government, according to this analysis, was not achieved, because unfortunately the diet of the average Mexican is based on the consumption of cola beverages and junk food. In spite of the increase in prices, it was not possible to reduce the amount consumed. Therefore, based on the data of this sample, it can be concluded that, among the economic classes analyzed, the demand is basically the same, despite the variation in the prices of these goods.
So the solution for attaining a reduction in the consumption of such food must come through the education within Mexican families. A change in the consumption habits of children should be encouraged, inculcating a healthy diet that does not contain so much sugar, fat and carbohydrates, i.e., inculcating the importance of a balanced diet.
Finally, the results of the Tax Administration Services (SAT), particularly the results of the IEPS for the first quarter of 2014 (Graphs 3 and 4), were analyzed.
Graph 3. Figures in millions of pesos for the first quarter of 2014 of the IEPS.
According to the information presented in the Tax and Management Report of the SAT for the first quarter of 2014, it can be seen that from the year 2005 to date, the average annual volatility has been 403%. However, the percentage change in the first quarter of 2014 compared to the same quarter last year was 313%. This demonstrates that part of the original objective of the reform applicable since 2014 has been achieved: increasing revenue.Similarly, we will analyze whether this increase is due to the increase in the number of active taxpayers, which includes both individuals and corporations.
Graph 4. Number of active taxpayers, quarterly comparative corresponding to the same period of last year.
According to this information, the increase in revenue is not directly proportional to the growth of the tax base, taking as a reference the percentage change in the first quarter of 2014, compared to the same quarter of last year, which was 2.6%.
Conclusions
Based on the result of the analysis conducted in this study, it can be concluded that the Tax Reform applicable from the beginning of the financial year 2014 has not yielded the results that were planned.
Originally, the federal government sought to increase the tax base. Nevertheless, the increase has not been very high. Unfortunately, the amendment to the IEPS law has fallen on the so-called “captive taxpayers”, i.e., those manufacturers, sellers, distributors, etc. who already paid taxes and whose tax burden has increased due to this modification.
The same thing applies to the final consumers, since it was found, based on the surveys, that the purchase volume in the Federal District, and particularly among the middle and lower classes, has undermined their budget, even though the consumption has not been reduced until now.
Therefore, the basic objective of reducing obesity among children and adults has not yet been achieved. ?
References
Interviews
40 salespersons in convenience stores10 salespersons in small grocery stores