Sunday, July 06, 2008

henny penny goes to hacienda

One of the disadvantages of aging is that I have recurring Henny Penny moments on the same topic.

Yesterday "
Eddie Willers" posted a piece on his blog concerning a new Mexican tax. Effective 1 July 2008, Mexico will impose a 2% tax on all cash deposited in a Mexican bank during a month in excess of 25,000 pesos. The tax is called Impuesto de Depositos en Efectivo (IDE). And, just like the United States, the bank will act as the tax collector and send it off to Hacienda.

I remember reading about this reform earlier this year -- and ran around as if I had been bonked on the head by an acorn. From a personal standpoint, I was worried that my buying power in Mexico was going to be reduced by another 2%. My plan had been to have my retirement checks electronically deposited in an American bank account and then I would electronically transfer whatever amount I needed to qualify for my FM3 visa to an affiliated Mexican bank.

It looked like a very clever plan. After all, quite a few expatriates do just that. It keeps a minimal amount available in a pesos account and the bank can then provide the necessary statements for the annual FM3 renewal.

But the loss of 2% would be a big financial hit to take merely for the convenience of some paperwork.

Now -- go back up to the third sentence of this post. The reason I should not worry is right there: "2% tax on all cash deposited." The electronic transfers will not incur the tax. Only if I redeposit money as cash in excess of 25,000 pesos per month will the tax kick in.

I had read earlier that the Mexican government is attempting to find methods to increase its tax base. Economists love terms like that. To the rest of us, it means that the government is trying to smoke out the tax cheats -- and to take more for itself.

Anyone who lives in or visits Mexico knows that the place is a cash economy. Rent? Cash. Groceries? Cash. Gasoline? Cash. A check? Sure, as long as it clears before you accept delivery of your goods. Credit cards? As rare as an honest politician in Illinois. And, as in any economy where cash changes hands, very little gets reported to the tax man.

This is a rather blunt weapon that will affect small businesses more than large corporations. But the obvious attempt is to force Mexico into a more modern economic model. And that translates into a system where the government can better track the flow of money to ensure that Hacienda can touch it for one brief moment and make a portion its own.

My libertartian spirit mourns the loss of another bit of liberty. But, even we libertarians realize that government needs a minimal amount of money to provide services. I would like to believe that is where this money will go. But I may as well believe that I will not act like Henny Penny the next time I hear about this issue.


Babs said...

I like the piece of art in your blog! Cool........You don't have to submit a bank statement for a local bank anymore......I submit 3 months of my WAMU account in the US where I have CDs. I have my social security go into another automatic deposit account and I use my ATM to get money as needed. The only reason I keep money in Lloyd is to pay the rent, maid and gardener on automatic's so simple.........It is also VERY easy to get your first FM-3 in the USA at the Mexican Consulate - I guess they have one in Portland?

JJ said...

Am I wrong? Do you have to have money in a Mexican bank to satisfy the financial requirement for a rentista FM3? Back in my day (2 years ago) you just had to have proof of the balance from ANY bank, meaning a US bank was perfectly fine. Perhaps it is different when you own property.

Steve Cotton said...

I may have learned my lessons incorrectly, but according to our fellw bloggers, the answer is -- it depends. On the region. On the clerk. On the day you go in for renewal of your FM-3. Having the money in a Mexican bank shortcuts the need for a translation of bank statements in English.

Billie said...

Steve, I think the real issue here is that Mexico's pot of money is running dry....that would be Pemex. Somehow the government has to find new sources to support it services....and yes some of the taxes end up in some places that you would not expect. That also happens in the USA.

We were talking with some people who were visiting in SMA this week. They live in a nice house, in a nice part of Houston and their property taxes will be $19,000 this year. That buys a lot of street repair, a decently paid police force, and all those other services that really jump out at us when we go back to Houston and realize what we are missing in Mexico. Our property taxes here are miniscule.

Mexican's do not want to pay taxes period. After having a cash cow (Pemex) for so long, they just don't believe it is running dry or that they are going to have to pay for services. In the USA we grumble about taxes but as we say the sure things are death and taxes.

1st Mate said...

Steve - I'm not sure how it will be for you, but when I got my FM-3 all I had to show was three months of $1K deposits in a bank (Santander, in my case). I renewed last year, same deal. I don't think I'll ever have $25K in pesos to deposit at one time, since I also have a stateside account. But if I do, I'll remember to do it electronically.

Theresa in Mèrida said...

We don't have our bank statements translated into Spanish. We don't have any money in Mexico except the cash under the mattress. We withdraw our maximum amount from an atm once or twice a month and that is that. Our more intelligent and less lazy friends have a monex account where they write a check when they need money.
Mexican banks in our experience, your mileage may vary,don't pay interest on savings accounts and charge you to have a (mostly useless) checking account. If you only live here part time you might want one so you can pay your utilities online though.
I would not get a Mexican account if I were you, nor would I translate my statements unless the clerk told me to when I was actually doing my paperwork. Here is the catch 22 many banks won't let you have an account unless you already have an fm2 or fm3.
Listen to Babs, she is a goddess!

Cynthia Johnson & Mike Nickell said...

Hey Steve - I´m just catching up with your posts and I have to laugh about your hot tub. Our motor went out the day before we had our Broker´s Open House for the local real estate agents) who also were my colleagues.)


I had planned to have the cover off and the bubbles bubbling, but I left the cover on and thank goodness none of those nosy real estate agents opened it up to feel the COLD water!

Next time I´ll tell you about the night before signing the closing docs and the dryer went out...cha-ching...

Anonymous said...

Actually credit and debit cards are very common in the big stores, hotels, restaurants etc. Can't buy a taco on the street with one.

Steve Cotton said...

Anonymous -- The places I frequent in Mexico are cash establishments. In Barra, Melaque, and La Manzanilla, I have not run into any restaurants that take credit cards. On the other hand, I have not asked, either. It would not do me much good; my credit union will not authorize use of its card in Mexico due to the level of card fraud. (Their conclusion; not mine.)

Anonymous said...

Well, aside from the practicalities, this law is incredibly stupid. I mean, if you want to ensure that cash stays in the underground economy, what better way than to tax bank deposits???? The U.S. gov't is stupid about economics*, but this kind of thing makes me think the Mexican gov't is completely clueless. Everyone I know in Mexico is working on ways to get around this law, and most probably will.

As for credit cards, I use my US-issued visa card all the time in Mexico City. But I found out the hard way that my credit-union ATM card wouldn't work in Rome. I was there and tried to make a withdrawal, but no-go. I called them on my cell phone and they assured me this new policy was for my "protection." Yeah, right, with no cash in a foreign country I'm feeling the love. What this really means is that my (and your) credit union have 1980's vintage fraud-prevention software. If I were you, I'd step up to a major-bank credit card or two before decamping the USA. I'd be very nervous in Mexico without a functioning credit card.

And though I have never lived there, I find that having my cash in a U.S. bank and withdrawing it via ATM in Mexico works just fine. Why subject yourself to the horror of Mexican banking if you don't have to?


Kim G
Boston, MA
(Where I've lived 13 years without ever having a bank account here)

*to wit: Congress is busy trying to nail "speculators" as the reason for high oil/gasoline prices. The obvious reasons (no increase in global production, rising demand) don't interest them. If speculators were indeed driving up the spot price, they'd have to store all that oil, and inventories haven't been rising. QED

Steve Cotton said...

Kim -- Governments are tone deaf in dealing with almost every economic issue -- especially in the populist era in which we live. Voters want immediate fixes. I have a rather intelligent friend who says she is going to vote for Obama for one reason: he will lower gasoline prices to $2 a gallon. When I asked her where she heard that, she said he was going to put the oil speculators in jail and get back our money. I did not know where to start. Of course, she merely wanted it to be true.

As for credit cards, I travel with one from a national bank, but it does not give me ATM access. I figure if really bad things happen, there is always a 5-star hotel somewhere who will take my card. But I need to fix this hole in my finances. Michael Dickson has given me some great advice.