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MEXICO: An Introduction

Contributors:
Chevez, Ruiz, Zamarripa y Cia., S.C. Logo
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CHAMBERS GLOBAL – MEXICAN OVERVIEW 

After a landslide victory in the presidential election of 2018, the current Mexican public administration headed by President Andrés Manuel López Obrador has had two frenzied years of what will be a six-year presidential term. What remains of his term presents a great challenge for the president and his party (MORENA) in the form of laying the foundations for the transformation of Mexico's public administration and seeing the first results of their public policies and major decisions taken in this period. Midterm elections, taking place in June 2021 and involving a large number of governors, public officers and congressmen, will be the first major test of the popularity of the president's policies and decisions with the Mexican population. By now, all sectors of Mexican society have enough information and experience to set their expectations around the outcome of the elections, since at this point the policies and mindset of the president and his team are well known by followers, opponents, unions, workers, investors, entrepreneurs and business owners.

The president and his party are vehemently seeking a majority in the federal legislature, as well as in other local congresses and governments, with a clear goal of consolidating the exhaustively announced fourth transformation of the country’s public administration. It cannot be overlooked that the government efforts to undertake such a transformation have been severely impacted by the COVID-19 pandemic, which has been a great disruptor of the country's health and economy.

Mexico has been no exception to the terrible damage caused by the global pandemic crisis. As the country with the fourth highest mortality rate, and among the top 15 countries in terms of positive cases, Mexico has not found a good and effective solution to the problem. Vaccination, as the main and most effective solution for regaining the country’s health and achieving an economic recovery, has proven difficult and slow in its implementation in the world’s 14th largest economy. In its response to this crisis, the government has focused its aid and resource allocation on its social and people-oriented programmes, leaving most businesses and companies with no economic relief, nor any type of active or passive aid.

Finally, the federal government has constrained public spending even more and relied on its tax collection efforts and flagship infrastructure projects to reignite the economy and create jobs. In this regard, the topics that have been in the spotlight and that will set the course for this year are:

• ENERGY COUNTER-REFORM

The energy sector has been a target of the new policies to give back power to the state-owned companies PEMEX and CFE, which were formerly constitutional monopolies. Over the last two years, the government has taken regulatory actions to overrule the constitutional energy reform passed by the Mexican legislature at the end of 2013, which established a free market for power generation and commercialisation, also allowing private companies to participate in almost all activities in the electricity and oil and gas sectors. All of these regulatory measures have been contained by the judicial branch as a result of litigation from private companies, environmental NGOs and even the Mexican antitrust regulator (COFECE).

Notwithstanding the foregoing, on March 9, 2021, a major reform to the Electric Energy Law was published, which includes some of the regulatory changes already dismissed by the courts. It is expected that mass litigation (including international arbitration procedures) will immediately begin to resolve the energy controversy, which will decide the future of the energy reform. Likewise, the president announced that the Mexican administration will try to elevate the matter to a constitutional counter-reform in this sector to advance the agenda over the ongoing and upcoming litigation procedures against the initial reform.

• PROHIBITION OF LABOUR OUTSOURCING OR SUBCONTRACTING

On November 12, 2020 the president introduced a bill before Congress proposing the prohibition of any subcontracting of personnel or labour activity, establishing new rules for companies to contract only for the provision of specialised services or the execution of specialised work.

The bill contemplates new sanctions relating to tax, labour, social security, and criminal liability in respect of the illegal use of labour subcontracting.

With regards to the foregoing, if the present bill were to be approved and published, significant legal and financial implications for companies operating in Mexico under an outsourcing or insourcing regime would be expected, entailing corporate and labour restructuring where the personnel would be employed directly by operating entities.

• TAX REFORM AFTER MIDTERM ELECTIONS

The Mexican administration has been reluctant to undertake a full tax reform in Mexico during the past two years due to President Andrés Manuel López Obrador's campaign pledge not to raise taxes during the first half of his six-year term. Instead, the current administration has focused on increasing tax collection and enforcement through intensive audit programmes for some economic sectors, taxing digital services with indirect taxes and passing reforms to limit certain deductible items and increase taxpayers’ oversight, such as the ones enacted in 2020. Nevertheless, such efforts have been impacted by the pandemic, thus increasing the need for a comprehensive tax reform to support government spending and boost the country’s economy.

Under these circumstances, in the past few months, Mexico’s finance minister has announced that the federal government is working on a tax reform that would boost tax collection to fund government expenditure, as advised by the International Monetary Fund (IMF). However, due to midterm elections, any public discussions will most likely take place during the second half of 2021 and will probably include some measures to broaden the tax base, raise local taxes and reduce the value-added tax gap in line with advice from the IMF. Such measures may also include some initiatives that have been discussed but not approved during recent years, such as the ones that seek to limit inheritance exemptions currently granted. In any case, such a bill should be sent to Congress by September 2021.

• USMCA AND RELATIONSHIP WITH US UNDER BIDEN ADMINISTRATION

Mexico’s economy is intimately linked to the US. 80% of Mexican exports are directed to the US and 50% of imports come from the US. Therefore, having a modern and strong free trade agreement that would build upon NAFTA was of the utmost importance to the Mexican government and economy. In this regard, the entry into force of the USMCA on July 1, 2020 with its protocol of amendment was very much welcomed by the public and private sectors, ending years of uncertainty during the negotiations.

The USMCA is much more than just a free trade agreement that grants preferential access to Mexican goods and services to the US and Canadian markets. It also contains provisions on digital trade, anti-corruption, state-owned enterprises, small and medium-sized enterprises, and a special dispute settlement mechanism for labour disputes known as the Rapid Response Labour Mechanism. This mechanism, a novelty in free trade agreements, was a demand from the Democratic Party to approve and ratify the agreement in the United States Congress and, therefore, is expected to be used by the Biden administration to monitor and guarantee that Mexico complies with its labour obligations under the USMCA. Additionally, it is expected that the Biden administration will enforce the environmental provisions of the USMCA, a core issue of its 2021 Trade Policy Agenda.