Mexican telcom industry faces tax threat

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MEXICO CITY--The cash-strapped Mexican government is asking Congress to approve a new 15% tax on all telephone services.

The requested tax could slow the expansion of telephone coverage and crimp the growth of telephone usage among the middle and lower middle classes.

Faced with higher interest expenses and revenue shortfalls, the Zedillo administration has made the request as part of its proposed 1999 budget.

Telephony is already subject to the value-added tax (IVA), currently 15%. The proposal calls for an additional 15% tax levy on the entire bill. The government is essentially asking to revive a special tax that had been eliminated a number of years ago.

Finance Undersecretary Martin Werner says the government is targeting telephony as a source of additional tax income for two reasons. One, the relatively few number of telecom providers with existing billing systems will make collection easy, he says. Secondly, people with telephones represent the more affluent segments of the population.

Telephone penetration is about 10 lines per 100 people, vs. about 60 in the U.S. In the crisis that followed the December 1994 peso devaluation, the number of lines in Mexico contracted as consumers canceled phone service. Line growth has since resumed, and telephony has been expanding with the deregulation of the long-distance market.

Mexico is also opening up its local telephone market to competition. However, the new wireless telecom providers scheduled to begin operations next year are planning to target low-income customers who can't otherwise afford a regular telephone line, given high installation charges.

The proposed tax could affect their pricing plans. It may also affect former telephone monopoly Telefonos de Mexico (Telmex), for whose services fees have been increasing every month.

Copyright November 1998, Crain Communications Inc.

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