Mexico is considering a significant overhaul of its alcohol tax system, proposing a shift from the current ad valorem tax to an ad quantum system. This change aims to align with global best practices and increase revenue.

The new proposal suggests taxing alcoholic beverages based on their alcohol content rather than their price. The proposed rate is $1.40 MXN per degree of alcohol per liter, which would replace the existing three-tiered ad valorem system. Currently, products are taxed at rates ranging from 26.5% to 53%, depending on their alcohol content.

The move towards an ad quantum tax was first introduced in 2020 and reintroduced in 2021 but did not advance through the legislature. However, with a new tax review anticipated next year, the proposal may be revisited.

According to the proposal, "a revenue-neutral ad quantum tax rate per degree of alcohol per liter that replaces the existing ad valorem tax would be $1.06 MXN," indicating that the suggested $1.40 MXN rate could boost collections.

Excise taxes on alcohol have seen growth over the past decade, with total collections rising from $38 billion MXN in 2014 to nearly $74 billion MXN in 2023. Beer dominates the market with over 93% share but contributes only about two-thirds of excise tax revenues.

The illicit market for distilled alcoholic beverages is substantial under the current regime, accounting for up to 42.5% of sales being untaxed and resulting in approximately $11.5 billion MXN annual tax loss.

Proponents argue that "alcohol taxes should be simple, transparent, and neutral," aiming to efficiently provide revenue for public programs while discouraging excessive consumption.

An ad quantum system would simplify administration by reducing remitters by more than 99%. Currently, each production chain contributor must remit their portion of the tax under an ad valorem system similar to VAT. This results in compliance challenges and an estimated 60% under-remission.

In contrast, larger organizations like Grupo Modelo could handle compliance better under an ad quantum system focused on importers and manufacturers.

In summary, Mexico's proposed changes aim to create a more efficient and equitable alcohol taxation system that targets alcohol content directly while increasing compliance and revenue collection.