Doing Business in Mexico, English

Doing Business in Mexico: A Guide

24 Aug , 2020  

Invest in Mexico, Doing Business in Mexico 2020, Mexican Law Firm, Guide, Foreign Investment Guide, Doing Business Ranking

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.

Why Doing Business in Mexico?

Before the coronavirus outbreak, economists predicted that Mexico was heading to be the seventh economy of the world in 2050.[1] 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.[2]

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.

The Economy and Free Trade Agreements

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.

¿What happen with the Mexican Promotion Investment Agency (PROMEXICO)?

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:

1. Why Invest in Mexico?

2. Foreign Investment

3. International Trade Policy

4. Trade Policy for the Manufacturing Industry

5. Creating a Company in Mexico

6. Taxation in Mexico

7. Labor & Migration

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.

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[1] PWC, The World in 2050, 2017 p 6.

[2] OECD, Towards a Stronger and More Inclusive Mexico, p 1

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Doing Business in Mexico, English

Why Invest in Mexico?

24 Aug , 2020  

Invest in Mexico, Doing Business in Mexico 2020, Mexican Law Firm, Guide, Foreign Investment Guide, Doing Business Ranking

Our first chapter of Doing Business in Mexico, Why Invest in Mexico?, will serve as an introduction providing a general overview of the current economic and business environment.

VTZ Law Firm analyzes Mexico’s doing business rankings and economic indicators –positive and negative– from the World Bank and the World Economic Forum.

Also, we summarize trade and foreign direct investment statistics with a strong focus on the manufacturing industry, land in Mexico for industrial purposes, and security considerations.

  1. Mexico in Competitiveness Rankings
    1. 1 Positive Economic and Business Indicators in 2019
    1. 2 Negative Economic and Business Indicators in 2019
  2. Trade and Investment in the Manufacturing Sector
  3. Land in Mexico for Industrial and/or Manufacturing purposes
  4. Security Considerations
  5. Mexico in Brief

1. Mexico in Competitiveness Rankings

Although Mexico is not one of the most competitive countries in the world, Mexico is the second Latin American most competitive economy according to the World Economic Forum (WEF) and the World Bank (WB). WEF’s Global Competitiveness Index 2019, a yardstick for policymakers, analyzes 12 “broad” pillars that shape an economy of a country. Meanwhile, the WB’s Doing Business gathers information regarding the regulatory environment and how it impacts in local firms, reporting 10 key indicators.

Doing Business in Mexico World Bank ranking 2019, how to do business in Mexico, mexican lawyer

1.1 Positive Economic and Business Indicators in 2019

WEF’s Global Competitiveness Index 2019

Mexico stands out in macroeconomic stability (41st) and market size (11th) pillars, which are very relevant indicators to invest or do business in Mexico. This is no surprise as Mexico’s inflation has been controlled, around 3% to 4% per year; its GDP has had a stable growth, about 3%, in the last decades; and, its public debt has been properly managed.

Needless to say, inflation has had few spikes, notably in 2017, as a result of the liberalization of energy goods; and, despite having the second largest market of Latin America (124 million people), Mexico has a low GDP per capita or purchasing power.  

Furthermore, Mexico also stands out in the following specific indicators: budget transparency (6th), energy efficiency regulation (30th), renewable energy regulation (30th), road connectivity (22nd), airport connectivity (15th), liner shipping connectivity (34th), electricity access (% of population) (2nd), debt dynamics (36), trade openness (27), ease of hiring foreign labor (48),  financial stability (30), cluster development (36), among others.

WB’s Doing Business 2020

Mexico is ranked in 60th place overall, out of 190 economies, and is one of the top business-friendly environments in Latin America, only behind Chile that ranks in the 59th position. Mexico’s top three topics or indicators are getting credit (11th), resolving insolvency (33), and contract enforcement (43rd).

As a result of strong legal rights in relation to collateral laws (securities) as well as a robust credit reporting system, Mexico outperforms most economies in getting credit. Mexico also has a decent performance in the resolving insolvency and contract enforcement indicators, particularly, due to time to carry out a dispute in a court (under certain assumptions) and strength of insolvency framework index. 

1.2 Negative Economic and Business Indicators in 2019

WEF’s Global Competitiveness Index 2019

Unsurprisingly, Mexico underperforms in the Institution and Labor Market pillars of the WEF’s Global Competitiveness Index 2019. Although serious legislative steps have been made on security, corruption, and “regulatory improvement”, Mexico continues to rank particularly low in a handful of matters that fall under the Institution pillar such as security (138th), burden of government regulation (116th), judicial efficiency (116th), judicial independence (103rd), as well as incidence to corruption (116th). 

Insecurity is a concern not only for foreign investors. We note that the new administration has pushed for constitutional and legal reforms that have overhauled security bodies, the attorney general’s office, and powers to the Tax Authority (SAT, acronym in Spanish) against tax evasion schemes. The Financial Intelligence Unit (UIF, acronym in Spanish) has been tackling high profile individuals and companies that are allegedly involved in laundering money or in corrupt practices.  

As for the Labor Market pillar, Mexico underperforms in redundancy costs (e.g. severance of labor contracts) (103rd), as well as labour tax rates (116). Needless to say, Mexican Labor Law has undergone a significant overhaul as a result of USMCA’s Labor Chapter, which seeks to protect collective labor rights. However, neither redundancy costs nor labor tax rates (i.e. a state tax) were addressed in such reform.   

WB’s Doing Business 2020

Known to have a complicated tax environment, Mexico is ranked in the 120th position out of 190 economies in the Paying Taxes topic of WB’s Doing Business 2020. Under normal circumstances, a company would have to pay six taxes throughout the year, namely corporate income tax, value-added tax, security social contributions, payroll tax, property tax*, and vehicle tax*.

Despite a low number of tax payments as compared to other jurisdictions, Mexico’s tax environment is poorly ranked especially due to (1) total tax and contribution rate and (2) the post-filing index. For instance, Mexico’s statutory tax rates for the corporate income and VAT, which are the most time consuming and prone to tax audits, are set at 30% and 16% respectively. Furthermore, VAT refunds or income tax corrections take a considerable amount of time and effort.

Mexico’s also underperforms in Starting a Business (107th). Though starting a business is discussed in the ChapterCreating a Company in Mexico, the process to incorporate a company appears, in its face, straightforward in Mexico. According to the guide, a non-foreign entrepreneur has to complete eight procedures to incorporate a company and to have all registrations in order; however, a significant practical hurdle is that concerning to the company’s registration before SAT.

Likewise, the number of procedures and time are factors that negatively affect Mexico’s score in Getting Electricity (106th), meanwhile the number of procedures, cost, among other matters, influence Mexico’s negative performance in Registering Property (105th).

2. Trade and Investment in the Manufacturing Sector

Mexico’s foreign direct investment (FDI) and international trade are, to a great extent, attributable to the established manufacturing sector, which convinces foreign investors to invest in Mexico. According to UNCTAD’s World Investment Report 2020, Mexico is the 14th  country with most FDI inflows in the world in 2019. In sum, Mexico is a top FDI destination.

UNCTAD, FDI, Top FDI Inflows, Top 20 host economies, 2018 and 2019
Source: UNCTAD

As noted by the WEF, Mexico has a strong cluster development. This feature explains why almost half of Mexico’s FDI inflows are related to the manufacturing sector.

Investment Inflows in the Mexican Manufacturing Sector

The top five manufacturing sub-sectors that have attracted investment from 1999 to 2019 are (1) transport equipment (e.g. auto), (2) beverages and tobacco, (3) chemical, (4) computer, communication, and measurement equipment, and (5) the food industry

For instance, FDI in the transport equipment (or auto sector) has amounted to 79,053 million USD since 1999, which represents 21% of Mexico’s total foreign direct investment inflows as noted in the table below:  

Foreign Direct Investment in Mexico 2020, Mexico, Manufacturing

Mexico has different levels of industrialization. In fact, most of the manufacturing sector has established itself in the north and the center of the country. For instance, the (passenger) auto industry and the OEM (Original Equipment Manufacturers) are located in the States as indicated in the image below.

OEMs in Mexico, Promexico, Auto Industry in Mexico, Foreign Investment, International Trade, Foreign Investment

International Trade and Manufactured Goods

Establishing itself as an important manufacturing hub, Mexico is an economy with a significant presence in international trade. Mexico ranks in 12th place among world economies in both exports and imports, its trade balance amounts to 916 billion USD in 2019. The World Trade Organization describes Mexico as:

“a ‘buyer’ in GVCs and therefore has a significant rate of GVC backward participation, standing at 36 percent in 2015. The economy imports inputs mostly from the United States and China to produce its exports.”[1]

Mexico’s main exports include (1) manufactured goods, (2) fuels and mining products, (3) agricultural products that amount a total of 461 billion USD.

Trade Balance, Mexico, Exports, Manufactured goods

Mexico’s Export Destination in 2019

Mexico Exports, Trade Balance, International Trade, 2019,

In 2019, Mexico exported 461 billion USD. Unsurprisingly, Mexico’s main export destination is USA exports amounting to $371 billion USD, followed by the European Union $24 billion USD, Canada $14 billion USD, and China $7 billion USD%.

Mexico’s Origin of Imports in 2019

Mexico Imports, Trade Balance, International Trade, 2019,

As for import data, US imports amount to 205.733 billion USD, China 83.052 billion USD, European Union imports amount to 51.237 billion USD, Japan 17.963 billion USD, and Korea 17.649 billion USD

Comparing the US-China trade relations, US exports more goods in value to Mexico than to China. For instance, US exports to China amounted to $106 billion in 2019. 

Land in Mexico for Industrial and/or Manufacturing purposes.

Land in Mexico may be purchased or leased for industrial purposes. Needless to say, Mexican law has restrictions as to the ownership of land when, for instance, it is located in the northern border strip or near the coastline (see our Foreign Investment Chapter)…..

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Security Considerations: Does it Affect Decisions to Invest in Mexico?

Mexico limps from security-related matters that affect its competitiveness indicators significantly, which may affect decisions to invest in Mexico. We cannot turn a blind eye on this fact, and foreign investors normally pose the question:

How risky is Mexico?

The American Chamber of Commerce in Mexico (Amcham), which we are members, published…

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[1] World Trade Organization, World Trade Statistical Review 2019, pg. 43

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Doing Business in Mexico, English

The Manufacturing Industry in Mexico

24 Aug , 2020  

Manufacturing Industry in Mexico, IMMEX, VAT, IVA, Duty Deferral, Authorized Economic Operator, International Trade, Customs, Mexican Lawyers

Our fourth chapter of Doing Business in Mexico, Policy for the Manufacturing Industry in Mexico, will provide a general overview of the programs that promote the Mexican manufacturing industry, including the requirements and benefits to obtain various programs.

  1. Mexican Policy for the Manufacturing Industry
  2. What is the IMMEX Program?
    1. IMMEX Options
    2. IMMEX Benefits
    3. IMMEX Obligations
    4. Grounds for Suspension and/or cancellation of the IMMEX Program
    5. Tax Aspects: Income Tax and Value Added Tax
    6. Corporate Matters
    7. International Trade Matters
  3. Comprehensive Certification Company Scheme
    1. VAT/IEPS Certification
    2. General Requirements to Obtain VAT/IEPS Certification
    3. VAT/IEPS Certification Benefits and Requirements
    4. Authorized Economic Operation Certification
    5. Authorized Economic Operator Requirements in Mexico
    6. Benefits of Authorized Economic Operator
  4. Sector Promotion Program (PROSEC) and Eight Rule
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Mexican Policy for the Manufacturing Industry

The export manufacturing industry represents one of the most important pillars of Mexico’s economy. Once characterized for being in the northern border, the manufacturing industry has spread and established itself as well in the center of the country. As noted in Chapter 2 – Foreign Investment, about half of foreign investment inflows are destined for the manufacturing sector.

Within the manufacturing industry, the automotive sector is the most economically important, followed by the food, chemical, and basic metal sectors. The success of the automotive industry is largely explained by the integration of supply chains that began with the entry into force of the North American Free Trade Agreement (NAFTA). As noted in Why Investing in Mexico? Mexican manufacturing exports have left behind agricultural, extractive, and oil exports, which for many years were the most important in the Mexican economy.

During the economic crisis due to the COVID-19 pandemic, Mexico is committed to the opportunities offered by the USMCA so that the maquiladora industry can innovate and add more added value to manufactured goods.

As explained in the following lines, Mexico has created different international trade promotion policies specifically designed for the manufacturing industry. These policies aim to facilitate international trade operations, create economic incentives, and provide legal security for export manufacturing companies. At the same time, international trade promotion policies have contributed significantly and positively to the Mexican economy, attracting foreign investment, creating industrial clusters, and jobs.

The IMMEX Program: What is the IMMEX Program?

The IMMEX Decree is a duty-deferral government program that provides benefits to authorized companies that engage in the manufacturing or maquila operation scheme in Mexico, including import-export. In essence, the IMMEX Program grants administrative facilitation measures and tariff incentives to manufacturers, and foreign-owned companies may also access income tax incentives. The companies must be “residents” in Mexico to access the IMMEX Program per the provisions of the Federal Tax Code and the Income Tax Law.

Notably, IMMEX companies are authorized to introduce goods under the temporary importation customs regime, deferring (avoiding) the payment of import duties or the General Import Tax (known as IGI in Spanish acronym), and where appropriate, antidumping and countervailing duties. The purpose of these benefits is to create an attractive regulatory framework for the export-oriented manufacturing industry; in other words, IMMEX companies can carry out manufacturing activities with temporarily imported goods in a low tax or tariff environment, but upon the condition that the imported goods are exported after submitted to production or some service.

Many foreign investors benefit from the IMMEX Program because it allows, for instance, to manufacture or repair products in Mexico preserving the company’s cash-flow and using excellent and low-cost labor.

The Ministry of Economy and the Ministry of Treasury have joint responsibility for issuing the IMMEX authorization. However, the Ministry of Economy is the authority in charge of issuing the IMMEX authorization or certificate to a company (hereon referred to as “IMMEX company”), while the Ministry of Treasury has to approve the company prior said authorization is issued. Besides, an IMMEX company may access extra tax benefits such as the VAT/IEPS Certification issued by the Mexican IRS (known as SAT, in Spanish). For more information on the VAT/IEPS Certification, see Section 4.2.1. 

IMMEX Options

Depending on the planned operations or activity, a company may apply for the following five IMMEX options:

IMMEX IndustrialThe Industrial IMMEX is the most common type of IMMEX option, and it is granted to a company that uses imported materials and carries out an industrial manufacturing process or transforms goods for export.
IMMEX Holding CompanyThis modality is like the industrial modality, but it is for an industrial group that carries out the industrial process. The IMMEX program is granted to a  certified company, called the “holding company”, and one or more companies that are integrated into the manufacturing operation and controlled by the holding company. 
  IMMEX Services  This modality is for a company that performs services for the process of producing goods for export or carries out export services.
IMMEX  Accommodation (or Shelter)This modality is for Mexican firms that offer maquila (or tolling) services to foreign companies, while the foreign companies will provide the technology and inputs without operating its own IMMEX company. In other words, the IMMEX Shelter company will import the technology, raw materials, and components supplied by the foreign company and will carry out the industrial activities according to a contract; the finished or semi-processed products are exported to the foreign company.
IMMEX TertiaryThis modality consists of a certified IMMEX company, that due to lack of appropriate infrastructure, carries out a manufacturing process through third parties registered under its IMMEX Program.
More information Trade Policy Review Mexico (2017)

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English, News

USMCA Labor Disputes | The Trading Room

19 Jun , 2020  

USMCA Labor Disputes, WTO, Webinar, VTZ, Trade Lawyers, Mexico

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.

 

Future Labor Disputes in the US Trade Policy Agenda in 2020

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:

USMCA Labor Disputes

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:

USMBA, Labor and Trade, USMCA Labor Chapter, Video, Lawyers, Bar Association, Mexico, Labor Disputes

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:

TMEC, Capítulo Laboral, Industria Maquiladora, Contratos Colectivos, Sindicatos

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.

 

U.S. Bound Tariffs in the WTO

 

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.

 WTO Director-General Selection Process

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?

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