(Bloomberg) -- Mexico’s elite are quaking after leftist lawmakers passed a new law that makes tax evasion a type of organized crime that could justify the seizure of assets even before judges rule on the validity of charges.
Lawmakers in the country’s lower house Tuesday passed the bill that would make tax fraud of more than 7.8 million pesos ($400,000) a national security threat and a type of organized crime that could be punished with prison without parole during trial and with as much as nine years behind bars.
The bid by President Andres Manuel Lopez Obrador to crack down on tax evasion may become the latest threat to growth in Latin America’s No. 2 economy, Mexico’s largest business lobby said.
”Investment confidence is already quite low in Mexico,” said Ernesto Revilla, an economist at Citigroup Inc. This law could “make it less probable that investment increases in coming months.”
AMLO, as the president is known, won a landslide election last year with a campaign that blamed corruption among the country’s wealthy for holding Mexico back. Spooked by shifting economic policy, investment has nosedived and the economy slowed to a halt in the first half of the year.
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The new tax law gels with a reform from earlier this year that increases prosecutors’ power to seize assets related to organized crime.
Senator Alejandro Armenta, who co-authored the bill, told Bloomberg News that such concerns were overblown, and that the government only intends to use the law to prosecute shell companies that mint fake receipts used by taxpayers to lower obligations.
At his Oct. 10 news conference, AMLO said that he had spoken with billionaire Ricardo Salinas Pliego and other business leaders about this legislation and assured them only true cases of falsifying tax receipts would be tried.
In Mexico, 8,000 shell companies have falsified 9 million tax receipts that’s led to evasion of about 400 billion pesos, Armenta said. “This legislation supports businesses because there’s illegal competition from companies that are using these receipts to introduce stolen merchandise” into the economy, he said.
Widespread tax evasion by the wealthy and corporations, as well as a vast informal economy of street merchants and unregistered businesses, has left Mexico with one of the lowest tax takes in Latin America.
Mexican business group CCE said lawmakers ignored their pleas that the new law could magnify a slowdown in investment by businesses already wracked with uncertainty about economic policy under AMLO.
“The lack of clarifications in this bill will generate a justified fear in the county’s established companies of arbitrary acts by authorities that endanger one’s personal integrity and assets,” the CCE said in a statement. “To invest, individuals and businesses need certainty.”
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AMLO’s cancellation of a $13 billion partly-built airport project and his move to block new private investment in energy have led to a contraction in business spending. Gross fixed investment has shrunk in seven of the past nine months through July, when it fell 9.2%, the most since the 2009 recession.
While cheered as necessary, a crackdown on corruption in Mexico City construction has chilled building investment in the capital. Mexico’s economy is projected to grow just 0.5% this year, according to estimates compiled by Bloomberg.
Gabriel Calvillo, a criminal law attorney who specializes in corporate clients, said that so far there had been no clear example of prosecutorial abuses by AMLO’s administration. But he warned companies needed to make sure they had protocols in place to distinguish themselves from criminal operations.
“These are very potent tools,” he said, referring to the reforms. “But they are tools, unfortunately, that are needed to fight the many crimes that occur every day in our country.”
--With assistance from Nacha Cattan.
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