In line with our objectives, VTZ Law Firm has developed a Doing Business in Mexico Guide with a strong focus on foreign investment in manufacturing activities. It is our goal as trusted advisors and business facilitators to guide foreign investors, providing insights in a concise manner.
Before the coronavirus outbreak, economists predicted that Mexico was heading to be the seventh economy of the world in 2050. Mexico would be growing at a 3.5% annual average rate over the next three decades, a growth rate superior to that of developed economies. Mexico’s size of the economy, demographic, sound macroeconomics, stable public finances, as well as recent amendments to strategic economic sectors have contributed to a better economic performance according to the OECD.
Today, Mexico is one of the most attractive foreign investment destinations. Besides being the 15th largest economy in the world, Mexico is a “free market” economy that is opened to international trade and foreign investment. As a result, Mexico has a highly diversified economy, modern industries, and a developed financial market. This is the result of a shift from protectionist towards liberal economic policies since the beginning of the 1990s, particularly, with the North American Free Trade Agreement.
Needless to say, there is still much work to be done to improve the general conditions of life for Mexicans, as well as for the business environment. For instance, the World Economic Forum identifies Mexico’s five most problematic factors for business: corruption, crime and theft, inefficient government bureaucracy, tax rates, and tax regulations. However, there is hope. In recent years, business facilitation measures have been in the political agenda as well as tackling corruption, which is now more relevant than ever as a result of Mexico’s modern free trade agreements (FTAs). In fact, it is clear that Mexico’s competitiveness relies on its extensive FTAs network as a pivotal force for its economic development.
Therefore, the United States-Mexico-Canada Agreement (USMCA), which entered into force in July 2020, will continue to consolidate the country as an attractive business destination as long as Mexico successfully implements said agreement.
Mexico is living a historic moment. The political map changed significantly following the general elections held in July 2018. Mexico’s president, Andrés Manuel López Obrador (AMLO), and his party, the National Regeneration Movement (Morena), have continued the trend to promote, for instance, free trade agreements, but they have also adopted new and controversial policies. For instance, Mexico’s investment and trade promotion agency, PROMEXICO, was extinguished as result of “austerity” measures.
Vázquez Tercero & Zepeda (VTZ) seeks to fill that void and promote Mexico as a business destination for international companies and foreign investors in an honest and concise manner. This is why VTZ has developed Doing Business in Mexico 2020, which is divided into seven chapters:
In these executive guides, VTZ aims to help and to provide insights regarding relevant legal topics on business, trade, tax, and labor for potential investors, that seek to reap the best out of Mexico and the manufacturing industry.
Business Law, Creating a Company in Mexico, Doing Business in Mexico, featured, Foreign Direct Investment, Guide, International Trade, labor, Manufacturing Industry, Migration in Mexico, Taxation in Mexico
Our seventh chapter of Doing Business in Mexico, Labor and Migration in Mexico, will provide a general overview of the relevant labor law provisions on employment, from worker rights, dismissals to unions and collective bargaining, including a brief summary regarding the USMCA, the rapid response mechanism, as well as information on migration.
This Chapter includes the following sections:
Mexico’s labor framework is set forth in the Constitution and the Federal Labor Law (hereon “Labor Law”). Accordingly, a “job” or “working relation” is defined as rendering of a subordinated personal service to another person in exchange for a wage. The job definition is quite broad because any person that renders a subordinated service to another, who in turn pays compensation, is deemed as an employee, regardless of the nature of the service performed, and he or she is entitled to labor rights.
Pursuant to the Labor Law, workers are entitled to numerous rights. Employees are entitled, for instance, to profit sharing, which can only be dismissed in a limited number of cases. If a worker is terminated without a justified cause, he or she is entitled to seek job reinstatement or severance pay. Indeed, foreign investors perceive Mexican Labor Law as “overprotective” and costly, as noted in WEF’s Global Competitiveness Index 2019.
In addition to the Labor Law, Mexico has the following labor-related laws or regulations that complete its regulatory framework:
The employers are required to register all of their employees before Mexican public institutions, namely the Mexican Social Security Institution (IMSS, acronym in Spanish), the National Housing Fund for Workers (INFONAVIT, acronym in Spanish) and the National Fund Institute for Workers’ Expenditures (FONACOT, acronym in Spanish). As a result, an employer has to pay “social-taxes” to these agencies. Failing to register or make timely payments regarding these social-taxes, the employer is subject to penalties and surcharges.
Also, the employer will have to register before the tax or treasury authority of the State (i.e. local authority). States collect a Payroll tax that is paid by the employer based on wages and other expenditures.
As a general rule, the Labor Law establishes that an individual employment agreement duration is indefinite (i.e. permanent). Temporary contracts are permitted, however, only when there is a justified cause, such as probationary periods, initial training, among other situations. The employer has the legal duty to have a copy of the agreement.
Mexican employers may hire foreign employees. However, the Labor Law provides that employers must comply… Continue reading.
Outsourcing labor legal schemes are carefully regulated to prevent their abusive use against employees and their labor rights. The 2012 labor reform introduced the “outsourcing or subcontracting regime”, including two very relevant provisions. In essence, a labor-intensive service agreement, for instance, may have far-reaching legal consequences to the extent of deeming service provider’s workers as employees of the contracting company.
In essence, the Labor Law considers that outsourcing entails a “contractor” (i.e. outsourcing company) that performs work or provides services to a “beneficiary”, an individual or enterprise. The beneficiary sets the tasks and supervises the development and execution of the contracted work. In turn, the outsourcing company will carry the services or work with his own employees.
An outsourcing company is responsible for all labor obligations, including social security and tax regarding, his employees. Needless to say, the beneficiary of the outsourcing services is jointly liable in the event that the outsourcing company fails to fulfill its labor obligations (including tax and social security).
The Labor Law considers, for instance, “human resources” companies (e.g. head-hunters) as……
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 Article 20 of the Labor Law.
 Published on October 23, 2018, in the Official Gazette.
 Amendments to Labor Law published on November 30, 2012 and being effective as of December 1, 2012.
On Monday, August 3, the United States Embassy in Mexico published, on its Twitter account, the “USMCA Hotline”, which is a platform to receive complaints or information on labor matters. This should not come as a surprise because it was foreseen in article 717 of the USMCA Implementation Act.
El Comité Laboral Interinstitucional para Monitoreo y Aplicación Laboral de #EEUU ha establecido un sitio electrónico multilingüe para recibir información confidencial sobre cuestiones laborales de partes interesadas en países integrantes del #TMEC. https://t.co/fEhcRJbD1J
— Embajada EU en Mex (@USEmbassyMEX) August 4, 2020
Through this “Hot-Line”, people will be able to write confidentially, either anonymously or by leaving their contact details, about issues related to “denials” of labor rights.
In essence, this mechanism will allow the gathering of information and testimonies that could eventually be used to present a USMCA “labor case”. Notwithstanding the foregoing, it is important to mention that if a party (e.g. the US) wishes to activate the rapid response mechanism, for example, the complaining party must have “good faith basis”; that is, having credible evidence or causes. In this sense, one or several anonymous complaints – by themselves – can hardly be classified as a good faith basis. However, a complaint through the USMCA Hotline can trigger the investigation by the US labor attaches in Mexico and, therefore, obtain additional evidence or elements to support a USMCA labor review.
On Thursday, August 6, 2020, President Trump announced the “re-imposition” of tariffs on certain Canadian aluminum products because they were “flooding” the American market and, therefore, such measures are necessary to protect the industry from the USA based on section 232 of the Trade Expansion Act.
The proclamation can be found at the following link: Proclamation on Adjusting Imports of Aluminum Into the United States.
Steel and aluminum from Mexico (as well as from Canada) were also subject, at the time, to tariffs in the US for national security reasons. However, these tariffs were eliminated on May 19, 2019, as we reported.
By virtue of the actions of the US government, the Mexican government will increase the “control” of steel and aluminum exports through an automatic license, as reported in a media outlet, for the purpose of avoiding the increase of exports through transshipment.
On Monday, our firm organized a webinar on the alert issued by the Tax Authorities (SAT) on Wednesday, August 5, which defines the guidelines for the retroactive payment of fees for those companies that obtained their registration as under the Certified Company Scheme.
Our partner Eduardo Zepeda, leader of the practice regarding the legal aspects of the manufacturing or maquila industry, commented that this issue is “regrettable and worrisome”, pointing out the numerous deficiencies in the legal grounds and reasoning on behalf of the SAT.
For his part, Eduardo González, leader of the litigation practice, presented the recommended legal strategy to avoid possible reprisals from the SAT, such as the non-renewal of the Certified Company Scheme registration (VAT / IEPS Certification, OEA, among others).
Should you wish more information on the recommended legal strategy, please let us know.
In our Trading Room economic newsletter, we address Robert Lighthizer’s appearance before the U.S. Senate to share the 2020 Trade Policy Agenda, where he commented on possible USMCA Labor Disputes and the use of the rapid response labor mechanism as well as WTO actions; we also address the selection process for the WTO Director-General.
On Thursday, June 17, the US Trade Representative, Robert Lighthizer, appeared before the Senate to share the Trade Policy Agenda 2020. We highlight the following two points of his participation:
Lighthizer noted that as of July 1, the U.S. will meet with the corresponding committees to discuss the possible use of TMEC’s enforcement mechanisms in environmental and labor matters.
In labor matters, the dispute settlement mechanisms are essentially the State-State dispute settlement panels (chapter 31 of the TMEC) and the rapid response labor mechanism
Mexican news outlets have reported that the possible first labor disputes could relate to child labor and forced labor issues, particularly in the agricultural sector; however, the freedom of association (i.e. unions) and collective bargaining should not be excluded.
The US-Mexico Bar Association (USMBA) earlier this month organized the webinar “Labor & Trade: Is Mexico Ready for USMCA’s Labor Chapter?”, where our Jr. Partner Emilio Arteaga participated. The panelists discussed the rapid response labor mechanism as well as the current labor environment in Mexico, the video of the webinar is available in the USMBA’s website:
In addition, VTZ will organize a series of Labor & Trade webinar (in Spanish) on the specific challenges for the Mexican manufacturing industry. If you are interested in attending, please click the following link:
Regarding environmental disputes, it is reported that it could be about agricultural biotech products because Mexico has not granted the necessary permits to import said goods since 2018.
Robert Lighthizer also noted that the U.S. bound tariffs in the WTO are outdated; U.S. bound tariffs are notoriously low with an overall 4.6%.
In this sense, Mr. Lighthizer pointed out that the U.S.’ bound tariffs no longer reflect the economic and political conditions of WTO members, some who continue to maintain very high tariffs compared to the U.S.
In short, the U.S. may seek to increase its bound tariffs in the WTO. If such event occurs, such change would impact products originating from WTO members that do not have a Free Trade Agreement with the U.S., such as China However, all WTO members must agree with any change regarding in the Schedule of Concessions (i.e. the bound tariffs) of another WTO Member. In other words, the process is not unilateral and requires negotiations.
It should be noted that since last year, President Trump has questioned the developing status of certain WTO members (e.g. China) and the benefits that it entails.
On June 8, 2020, the Mexican government formally submitted Jesús Seade, USMCA chief negotiator and current Under Minister for North America, as a candidate for the Director-General of the World Trade Organization.
Seade’s candidacy sparked diverse opinions among renowned Mexican professionals in the international trade arena that were reported on a news outlet. For example, an opinion is that the Director-General must have a certain status, that is being an ex-minister or former head of state, and he must have sufficient leadership to overcome the paralysis situation in the WTO.
It is expected that the selection process will last 3 months, so the WTO may have a new Director-General by the 1st of September. So far, three other candidates appear along with the Seade: the Nigerian Ngozi Okonjo-Iweala, the Egyptian Abdel-Hamid Mamdouh, and the Moldovan Mr. Tudor Ulianovschi.
In the end, how much will the Mexican reactions affect Seade’s aspirations to Director-General?
This week in our newsletter, The Trading Room, we address developments regarding the entry into force of USMCA as well as the modernization of the EU-Mexico Free Trade Agreement. Download our newsletter in PDF on the following link: Trading Room -30042020
Last Friday the US Government notified the US Congress that Mexico and Canada “have taken measures necessary to comply with their commitments under [USMCA]”; Mexico is still in the process of modifying legislation. After notification to its congress, the USA notified Mexico and Canada and, therefore, USMCA will enter into force on July 1, according to the rules established in said treaty.
In an interview, Undersecretary of International Trade, Luz María de la Mora, indicated that the governments of the three countries are working to define the Uniform Regulations, including those relating to Vehicles and Autoparts. The goal is that these regulations should be published by July 1.
However, the Undersecretary also commented that producers of passenger vehicles and light trucks have the possibility of requesting an alternative staging regime to comply with the respective rules of origin. Accordingly, this possibility reduces the “urgency” of finalizing said Uniform Regulations.
As a general rule, USMCA foresees a 3-year transition regime for said vehicles (e.g. VCR 66% to 75%); however, the appendix to Annex 4-B of USMCA foresees the possibility of an “alternative staging regime” to extend the transition for up to 5 years. Producers must justify their request and, if authorized, producers could benefit from a prolonged and gradual transition from Regional Content Value (including essential components), steel and aluminum content, and Labor Content Value.
Today, Thursday, April 30, the Mexican Ministry of Economy published in the Official Gazette the procedures to submit applications for an alternative staging regime. In general terms, the interested producers must present a (detailed) alternative staging regime plan, among other more specific requirements, that has to be submitted July 1, 2020, at the latest.
It should be noted that if the proposal is accepted by the Ministry of Economy, the alternative staging regime will be applicable to the producer’s eligibility to use the regime for imports into Mexico.
On Tuesday, April 28, the Interagency Labor Committee for Monitoring and Enforcement was established by executive order. This Committee is not provided in the USMCA, rather it is an internal body of the USA whose creation was ordered in Section 711 of the USMCA Implementation Act. The committee will be chaired by the US Trade Representative (USTR) and the Department of Labor and other agencies will be members.
The Interagency Labor Committee will monitor compliance with the labor commitments assumed by Mexico and Canada, the implementation of the labor reform in Mexico, and to request enforcement actions concerning a USMCA country that is not in compliance.
This Wednesday, April 29, and after four years of negotiations, the Ministry of Economy announced the end of the negotiations with the European Union on the modernization of the EUMEX-FTA.
The chapter that prevented the conclusion of the negotiations was the Public Procurement Chapter because the European Union had the interest of having access to tenders at the sub-federal (or state) level. Apparently, the result of the negotiations is to incorporate 17 Mexican states that are committed to international best practices. This is the first time that Mexico has negotiated public procurement at the sub-federal level in its history.
La negociación de compras subfederales con 🇪🇺 fue mi 1a tarea en la #DGDCI
Hoy logramos la primera cobertura de compras subfederales de 🇲🇽 17 estados comprometidos con las mejores prácticas internacionales.
— Ricardo Aranda G (@RicardoArandaG) April 28, 2020
Now, the pending steps for the entry into force of this agreement are the legal review, translation, signature and the domestic approval process, i.e. the European bloc (European Parliament) as well as the legislative branch of each EU members because an investment chapter was included in the agreement, and, on the other hand, the Mexican Senate.
A few days after the protocol amending USMCA was signed, a new controversy arose between Mexico and the USA at the weekend due to USMCA’s implementing act in the USA.
In essence, Mexican negotiator, Jesus Seade, wrote a letter stating that Mexico considered that the legislation went “beyond” the protocol since the USA was considering to include “labor inspectors” in Mexico.
In response, USTR mentioned that the USMCA’s authorized “domestic measures” such as having “Attachés”. In fact, US attachés currently operate in Mexico in different sectors or matters, such as agricultural, commerce, among others.
The existence of a maximum of 5 labor Attachés is planned, according to the USTR response and US legislation. The Attachés “will work with their Mexican counterparts, workers, and civil society groups on implementation of the Mexican labor reform, including by providing technical assistance and disbursing capacity building funds, and provide assistance to the new U.S. government interagency labor committee.”
Undersecretary Seade thanked the “clarity” of USTR’s response, considered that the Attachées will be 90% harmless and pointed out that the Attachées would abide by Mexican law.
The Modification Protocol to USMCA provides for Facility-Specific Rapid Response Labor Mechanism, which will operate independently.
Our labor expert, Rafael Alday, prepared an alert (only available in Spanish), addressing this mechanism briefly.
Under this context, it is clear that Mexico will have comprehensive monitoring of compliance with labor laws, particularly on unions and collective bargaining rights. In the same vein, Ricardo Ramírez, a former member of the WTO Appellate Body, said that never before a system so intrusive and with strict surveillance of labor legislation in another country had been established.
On Tuesday, the USMCA implementation act was approved by the Committee on Ways and Means of the House of Representatives, meanwhile, the House approved the act yesterday. Now, the Senate needs to vote on the act, but this will occur after the impeachment process that US President Donald Trump is facing according to media outlets.
The Mexican Minister of Economy mentioned in Twitter that the US Senate will vote on January 2020.
This Monday, VTZ and Adrián Vázquez participated in the Mexico-China Economic and Commercial Cooperation Forum organized by the Mexican Business Council for Foreign Trade, Investment and Technology (acronym COMCE) and the Chinese Council for the Promotion of International Trade (CCPIT). Detailed information about the plenary is available here.
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On Tuesday, the Decree that repeals the Declarations of all Special Economic Zones (“ZEEs”) was published in the evening edition of the Official Gazette of the Federation.
According to the Decree, one of the main reasons for ending this project is the omission of appointing the Integral Administrator, the person in charge of building and managing a Zone, due to the lack of compliance with legal requirements on behalf of the interested applicants; in addition, it was noted that the SEZ could not operate due to lack of both private and public investments.
The business sector in Mexico said it regrets the government’s decision since they were not consulted before officially ending the SEZ.
According to the Decree, the current administration will focus on the Mayan Train, the Tehuantepec Isthmus Development Program and the Northern Border Free Trade Zone Program.
In theory, a Mexican newspaper will share our Jr. Partner’s (Emilio Arteaga) thoughts in the following days regarding this decision. We will share the piece in our social media once published.
News outlets report that the points of disagreement regarding USMCA are now less between the Trump administration and the Democrats.
The president of the House of Representatives of the US Congress, Nancy Pelosi, said last week that an agreement on possible changes to the text of USMCA was imminent. However, Pelosi said during this week that there may not be enough time to close this agreement this year as there are still many legislative steps, such as the preparation of the implementing legislation and its voting.
The US Congress has only a few days of sessions left (there is the possibility of extending them) to resolve these pending issues and to approve the treaty in December. News outlets continue to highlight that the Democrats are not yet satisfied with the enforcement mechanism on the labor provisions, so it is possible that the “updated” USMCA will be approved next year in the US.
Everything seems to indicate that there will be a modification to USMCA’s text, these changes will obviously have to be approved by Mexico, possibly through amendment protocols.
This week on The Trading Room:
An “Agreement in Principle” between US and Mexico was reached this Monday, and President Trump suggested to change the name “NAFTA” to “US-Mexico Trade Agreement” (USMTA). This statement triggered the following doubt: Can the US enter into a bilateral agreement with Mexico? Jennifer Hillman…See more.
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Esta semana en “Trading Room”:
Un “Acuerdo en Principio” entre EEUU y México se logró este lunes, y el Presidente Trump sugirió cambiar el nombre TLCAN por “Acuerdo de Comercio EEUU-México” (ACEUM). Esta declaración creó la siguiente duda: ¿puede los EEUU celebrar un acuerdo bilateral con México? Jennifer Hillman …Ver más.
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