MEXICO COUNTRY OVERVIEW
Contributed by Michell Nader S., Partner, Nader, Hayaux & Goebel© (Mexico City-London)
During the first full year of its administration and thus far in 2020, the executive branch of the Mexican federal government has continued with the implementation of public policies of its so-called transformation plan, mainly focusing on austerity and the redistribution of public funds to social programmes, state oil company Pemex, and certain controversial projects being developed under traditional public works structures. In turn, several existing programmes and policies in many sectors, including health and energy, have been overturned or weakened by means of regulatory or administrative decree.
There has also been activity in Congress, with a constitutional reform entailing a major shift in the national education system, a controversial law on eminent domain, a law on austerity and government officials' salaries, a significant tax reform, and implementing legislation to comply with the recently enacted US-Mexico-Canada Agreement (USMCA).
Counterbalancing governmental action, the judiciary is playing a crucial role with important decisions that have an impact on the current political and economic climate, some of which are addressed below. Also, due to the Covid-19 pandemic, and after having suspended activity for more than four months, courts will probably have to review numerous disputes resulting in judgments related to changes of circumstance, force majeure and material adverse effect, as well as an important number of default and insolvency cases.
After more than two decades with a low but sustained average annual GDP growth of 2.5%, Mexico’s economy did not grow in 2019 and a sharp contraction is expected for 2020. The slowdown was caused in part by uncertainty on governmental infrastructure and energy programmes, lack of investment, and slow government spending. While consumption and exports have been an underpinning factor to support the Mexican economy, the Covid-19 pandemic has deepened the recession, accompanied by decisions to downgrade the credit ratings associated with Mexico, Pemex and the CFE (the Federal Electricity Commission). Interest rates have been cut by Mexico’s central bank to their lowest level since 2016 to stimulate the economy, but little fiscal stimulus is expected.
Negotiations regarding the USMCA were completed, with an amendment protocol signed on 10 December 2019 addressing key provisions related to dispute resolution, labour, the environment, intellectual property, and rules of origin regarding steel and aluminium for the automobile industry. The legislative branches of each country have ratified the new treaty, which became effective on 1 July 2020.
The protocol included an annex for Mexico to commit to implement labour reforms that strengthen worker rights protection, including independent labour courts, union freedom and effective collective bargaining, as well as obligations on employers to establish protocols to prevent harassment and violence and to eradicate forced labour. To comply with its obligations under the treaty, the federal government has put in place a three-year implementation plan across the Mexican territory.
Additional implementing legislation has been approved by Congress, mainly new intellectual property and copyright laws complying with the trade agreement.
Energy and Infrastructure
A plan for investment by the private sector in energy projects was expected from the federal government during the first quarter of 2020, but so far it has not been issued. On the other hand, the Federal Electricity Commission commenced bidding processes for the construction of five combined-cycle power plants under a financed public works structure, which have been delayed until the end of the year. Although private electricity generation projects have continued their development, certain measures and policies issued by regulatory agencies in the sector and the Ministry of Energy have altered the rules for renewables. Some of these measures include a modified market for clean energy certificates, limiting pre-operational tests necessary to connect to the grid, modifying dispatch rules, giving priority to must-run generation plants and generally imposing additional limitations and exponentially increasing wheeling charges for certain projects.
We have witnessed activity in the tendering and award of public-private partnerships for the maintenance, rehabilitation and operation of federal toll roads across the country. Among the government's signature projects, the contracts for the construction of the Mayan Train have been awarded.
The judiciary may be transformed under a bill that has been submitted to Congress. The initiative includes the creation of a new judge academy, mandatory evaluations, stronger public defenders, measures against nepotism, corruption and sexual harassment in the judicial branch, gender equality, a new system for the creation of binding court precedents and a greater number of specialised courts.
Among the more relevant recent decisions of the judiciary, the National Supreme Court of Justice unanimously determined the unconstitutionality of a reform passed by the Congress of the State of Baja California - known as the “Bonilla Law” - which extended the constitutional term of the state governor Jaime Bonilla from two to five years. The opposing political parties filed an unconstitutionality complaint (acción de inconstitucionalidad) and the Supreme Court ruled that the Bonilla Law violated principles of legal certainty, non-retroactivity, democracy, electoral certainty and the right to vote, confirming that certain liberties afforded to local legislatures are constrained by federal constitutional review.
Another important decision was issued by a specialised antitrust and telecommunications court, confirming the legality and constitutionality of the public bid for the award of a public-private partnership contract regarding the deployment of the Red Compartida, a public shared 700 MHz telecommunications network.
The Supreme Court of Justice has also ordered Congress to legislate (i) on the right of indigenous communities to a free and informed public consultation prior to the enactment of legislative measures that may affect them, and (ii) on the use of medicinal cannabis.
Courts have also been busy with constitutional challenges against the regulatory measures affecting renewable energy projects and have granted injunctions suspending their effects. One of the most significant is a constitutional controversy filed by the Federal Antitrust Commission against the policy issued by the Ministry of Energy on the grounds that the policy violates fundamental principles of free competition set forth in the Constitution. The Supreme Court granted a suspension pending a definitive resolution, considering that the policy gravely affected the economic structure of the electricity sector, eliminating the possibility of operating in conditions of free competition and efficiency, as well as pursuant applicable legal provisions in place.
Earlier in the year, several amparos were granted to government officials whose salaries were reduced as a result of the federal government salaries law, including one granted by the Supreme Court to public officials of the Competition Commission.
A comprehensive tax reform entered into force as of 1 January 2020, with amendments across a broad range of topics including new rules regarding: (i) the creation of permanent establishments; (ii) the inbound and outbound treatment of tax-transparent vehicles; (iii) the deductibility of payments to non-residents subject to low tax jurisdictions; (iv) a cap on the deductibility of interest for income tax purposes; (v) an overhaul of the rules applicable to controlled foreign companies; (vi) requirements for maquiladoras; (vii) taxation of e-commerce; (viii) taxation of personnel services for value-added tax purposes; (ix) the offsetting of taxes; (x) tax auditing powers; (xi) reportable transactions; (xii) a new general anti-abuse rule; (xiii) joint liability of shareholders, managers and liquidators of Mexican resident entities; and (xiv) harsher treatment of certain tax felonies.
The Federal Antitrust Commission, as an independent government body, has been playing a significant role to promote competition in several markets. In addition to the constitutional action against a decree made by the Ministry of Energy, the competition authority is investigating certain strategic sectors in Mexico, such as finance, health and public procurement; more activity is expected in the near future. On the other hand, the merger control process has shown significant improvements through the implementation of a digital system, which simplifies the procedure from a document standpoint and shortens the clearance period for the benefit of the economic agents involved in the transaction.