MEXICO COUNTRY OVERVIEW
Contributed by Michell Nader S., Partner, Nader, Hayaux & Goebel© (México City–London)
Six months have passed since President Andrés Manuel López Obrador took office and we have witnessed major public shifts in the economic, political, social and legal landscape in Mexico. With the ruling party holding a majority in Congress, i.e. two thirds in the House of Representatives and a majority in the Senate, the President has the power to pass any federal laws, and is very close to having the votes required for constitutional reforms.
The agenda of the Federal Government has been busy, mainly on (i) reducing the budget of governmental entities and programmes; (ii) channelling those funds to social programmes providing grants directly to marginalised segments of the population and to other insignia projects; (iii) centralising the use of the federal budget; (iv) changing the direction of the energy industry, trying to make Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE) self-sufficient; (v) gaining a foothold in certain institutions and constitutionally autonomous regulatory agencies; (vi) appointing two new Supreme Court justices; (vii) changing the national security strategy through the creation of the National Guard; (viii) passing a labour reform and increasing minimum wages; (ix) cancelling projects or procurement processes underway or to be tendered; and (x) completing negotiations of a new trade agreement with the U.S. and Canada (USMCA).
The Federal Budget for 2019 forecast growth at 2% in GDP and inflation at 3.4%, considering an exchange rate of USD20 per peso and a price of USD55 per oil barrel. However, and despite the recent agreement to halt the imposition of import tariffs on Mexican products by the US government, Mexico's growth prospects have been gradually revised downwards between 1 and 1.5%. This has been caused mainly by a slowdown in investments during this period of adaptation and structural changes, uncertainty related to the cancellation of projects, the austerity policies of the government and tensions related to trade and the global economy.
At present, Mexico is the only country that has ratified the USMCA. The USMCA modified a number of matters vis-à-vis NAFTA, including (i) contemplating country of origin rules for automakers in order to qualify for zero tariffs; (ii) an increase of minimum wages and other protections for workers; (iii) extending IP protections for copyrights, pharmaceutical drugs and no duties on music and e-books; and (iv) changes to dispute resolution mechanisms. A 16-year termination provision was included and periodical reviews every 6 years.
To comply with the USMCA, Mexico passed a labour reform in May of this year with substantial modifications to the Federal Labour Law. The revised law contemplates the gradual disappearance of labour boards, giving authority in labour disputes to the judiciary. The law also now regulates outsourcing, gives more certainty to labour termination agreements entered into by mutual consent of the employer and employee and provides more rights to workers for collective bargaining.
With a more centralised Federal Government, the judiciary is gaining relevance and is becoming a counterbalance for a number of the government’s initiatives. Among other relevant decisions, the Supreme Court declared unconstitutional certain provisions in the Mexico City Constitution and the Organic Law of the Superior Tribunal of Mexico City, which created a system for the appointment of judges; the Court considered that the new system infringed upon the autonomy and independence of the judiciary. Also, federal judges have been granting relief in constitutional challenges against the cancellation of the new Mexico City Airport and the construction of a substitute airport.Originated by a Supreme Court decision ordering Congress to legislate on government spending for publicity and advertising, a new law is being discussed with the purpose of imposing limitations and stricter controls on the government's use of public funds for such purposes.
After the cancellation of the new airport in Texcoco, the Federal Government has announced four major infrastructure projects, including: an alternate airport in the Santa Lucía military base 30 miles north of the current airport; a refinery in Dos Bocas, Tabasco; the Mayan Train, which is intended to traverse the Yucatán Peninsula; and the Transoceanic Corridor in the Isthmus of Tehuantepec, intended to provide transportation and industrial infrastructure as an alternative to the Panama channel.
At the beginning of the year, the Ministry of Finance and Mexico’s Central Bank announced a number of measures to boost the financial sector. One of the most relevant that is still being discussed in Congress is a new Pension Funds Systems Law. The new law might entail a new investment system for AFORES (Retirement Fund Managers), the creation of Specialised Investment Funds of Retirement Funds to substitute the SIEFORES (Specialised Retirement Fund Investment Companies), greater authority to the Pension Funds System Commission to determine the investment regime and a wider spectrum of investments.Fintech is a regulated industry that is quickly developing in Mexico. Enabling regulations of the Fintech Law have been gradually published by the competent authorities and now there is greater clarity as to how this sector is regulated. The regulations include provisions applicable to the operation of financial technology institutions, electronic payment funds institutions, crowdfunding and other compliance and anti-money laundering provisions.
The energy industry has taken a new direction. The pending auctions for the purchase of electric energy, capacity and clean energy certificates were cancelled. Notwithstanding such cancellation, the wholesale electricity market remains active and market participants are looking for other options to develop renewable energy projects by selling energy to the market or through power purchase agreements with other market participants other than CFE. Instead of acquiring energy from private parties, CFE plans to generate more energy itself, recovering conventional energy plants and developing other renewable energy projects.In oil and gas, the tenders for exploration and extraction contracts and farmouts have been cancelled. Pemex’s business plan includes the construction of a refinery in Dos Bocas, Tabasco (after a failed tendering process) and reversing oil production on its own to 2.48 million bpd by the end of the administration.
While the Government has been very vocal against corruption, there are a number of actions pending to implement the National Anti-corruption System. The anti-corruption judges have not been appointed yet.
AntitrustThe Mexican Antitrust Commission has been quite active in different markets, including energy, transportation, agro-foods, finance, health, digital platforms and government procurement as it relates to potential collusion among bidders. For this reason, the Commission has indicated the need to improve the legal framework to avoid the abuse of loopholes. It has suggested increasing transparency, providing new price determination methods prior to public bids, and creating unified regulations instead of several local regimes, among other measures.
In recent months, the Mexican Antitrust Commission has also passed relevant resolutions. It blocked the acquisition by a major retailer of a digital app platform through which consumers can purchase products sold by retailers and have them immediately delivered. It fined two Mexican airlines for exchanging information to fix prices on passenger transportation in Mexico. It also fined a provider of credit score databases for abuse of dominance for refusing to deal with a credit bureau.
The most important tax change in 2019 is the limitation on offsetting favourable value added tax (“VAT”) balances against other federal taxes, such as income tax.
Tax incentives have been established in a number of northern states including: (i) the reduction from 16% to 8% VAT for certain activities conducted in such states; and (ii) the reduction to 20% of income tax for qualified taxpayers operating in such states.
Another tax benefit provides that between 2019, 2020 and 2021, a reduced 10% tax rate may apply to Mexican individuals resident in the country, as well as non-residents (individuals or entities), on the profits obtained from the sale of shares issued by Mexican companies if the sale takes place through an authorised stock exchange, among other conditions. Also, Mexican residents who are required to apply a withholding tax on interest paid to non-resident holders of publicly traded bonds issued by companies resident in Mexico placed through an authorised stock exchange may benefit from a tax credit of up to 100% of said withholding tax.