Openness to Foreign Investment
Mexico is open to foreign direct investment (FDI) in most economic sectors and has consistently been one of the largest recipients of FDI among emerging markets. In recent years, Mexico has become increasingly aware of its perceived loss of competitiveness and productivity relative to other emerging economies, notably China and Brazil. The peso devaluation in 2009 as well as recent government pension, tax and energy reforms, while often insufficient, have nevertheless improved business confidence and resulted in increases of foreign investment. But broader reforms in those sectors, as well as the nurturing a more flexible labor market and more competition in key sectors, are still needed to make the country more competitive. Mexico has significantly increased the tempo of efforts against organized crime, but rising narcotics-related violence, particularly in the north, remains a cause for concern among investors. As it approaches an election year in 2012, Mexico will need to focus on political and economic reforms to increase competitiveness as an FDI destination.
Foreign investment in Mexico has largely been concentrated in the northern states close to the U.S. border where most maquiladoras are located, and in the Federal District (Mexico City) and surrounding states. The Yucatan peninsula, historically an area for tourism investment, has seen notable growth due to its ability to quickly send goods from its ports to the United States. Financial services, automotive and electronics have received the largest amounts of FDI. Historically, the United States has been the largest source of FDI in Mexico. U.S. investors provided 44 percent of FDI in 2009 (2010 statistics are not yet available).
In June 2007, President Calderon created ProMexico, a federal entity charged with promoting Mexican exports around the world and attracting foreign direct investment to Mexico. Through ProMexico, federal and state government efforts, as well as related private sector activities, are coordinated with the goal of harmonizing programs, strategies and resources while supporting the globalization of Mexico's economy. ProMexico maintains an extensive network of offices abroad as well as a multi-lingual website (http://www.investinmexico.com.mx) which provides local information on establishing a corporation, rules of origin, labor issues, owning real estate, the maquiladora industry, and sectoral promotion plans. ProMexico coordinated Mexico's hosting of the 2010 World Conference of Trade Promotion Agencies in the Riviera Nayarit. The Embassy advises potential investors to contact ProMexico for detailed information on investing in Mexico.
The Secretaria of Economy also maintains a bilingual website (www.economia.gob.mx) offering an array of information, forms, links and transactions. Among other options, interested parties can download import/export permit applications, make online tax payments, and chat with online advisors who can answer specific investment and trade-related questions. State governments have also passed small business facilitation measures to make it easier to open businesses.
According to the most recent World Bank Study “Doing Business 2011”, Mexico succeeded in reducing the number of average days to complete all paperwork required to start a business from 28 days to 9 days, as well as the number of business procedures from 8 to 6. Mexico ranked better than its Latin American peers and Brazil, India, China and Russia.
The 1993 Foreign Investment Law is the basic statute governing foreign investment in Mexico. The law is consistent with the foreign investment chapter of NAFTA (the North American Free Trade Agreement). It provides national (i.e. non-discriminatory) treatment for most foreign investment, eliminates performance requirements for most foreign investment projects, and liberalizes criteria for automatic approval of foreign investment. The Foreign Investment Law identifies 704 activities, 656 of which are open for 100 percent FDI stakes. There are 20 activities in which foreigners may only invest 49 percent; 13 in which Foreign Investment National Commission approval is required for a 100 percent stake; 5 reserved for Mexican nationals; and 10 reserved for the Mexican state. Below is a summary of activities subject to investment restrictions.
Sectors Reserved for the State in Whole or in Part:
A. Petroleum and other hydrocarbons;
B. Basic petrochemicals;
C. Telegraphic and radio telegraphic services;
D. Radioactive materials;
E. Electric power generation, transmission, and distribution;
F. Nuclear energy;
G. Coinage and printing of money;
H. Postal service;
I. Control, supervision and surveillance of ports of entry.
Sectors Reserved for Mexican Nationals:
A. Retail sales of gasoline and liquid petroleum gas;
B. Non-cable radio and television services;
C. Development Banks (law was modified in 2008);
D. Certain professional and technical services;
E. Domestic transportation for passengers, tourism and freight, except for messenger or package delivery services.
U.S. and Canadian investors generally receive national and most-favored-nation treatment in setting up operations or acquiring firms in Mexico. Exceptions exist for investments in which the Government of Mexico recorded its intent in NAFTA to restrict certain industries to Mexican nationals. U.S. and Canadian companies have the right under NAFTA to international arbitration and the right to transfer funds without restrictions. NAFTA also eliminated some barriers to investment in Mexico, such as trade balancing and domestic content requirements. Local governments must also accord national treatment to investors from NAFTA countries.
Mexico is also a party to several OECD agreements covering foreign investment, notably the Codes of Liberalization of Capital Movements and the National Treatment Instrument.
Approximately 95 percent of all foreign investment transactions do not require government approval. Foreign investments requiring applications and not exceeding USD 165 million are automatically approved, unless the proposed investment is in a sector subject to restrictions by the Mexican constitution and the Foreign Investment Law that reserve certain sectors for the state and Mexican nationals. The National Foreign Investment Commission under the Secretaria of Economy determines whether investments in restricted sectors may go forward, and has 45 working days to make a decision. Criteria for approval include employment and training considerations, technological contributions, and contributions to productivity and competitiveness. The Commission may reject applications to acquire Mexican companies for national security reasons. The Secretariat of Foreign Relations (SRE) must issue a permit for foreigners to establish or change the nature of Mexican companies.
Despite Mexico's relatively open economy, a number of key sectors in Mexico continue to be characterized by a high degree of market concentration. For example, telecommunications, electricity, television broadcasting, petroleum, beer, cement, and tortilla sectors feature one or two or several dominant companies (some private, others public) with enough market power to restrict competition. The Mexican Congress passed some amendments to the law to strengthen the enforcement powers of the Federal Competition Commission (COFECO) in 2006, but COFECO remains weak relative to its OECD counterparts in terms of enforcement. COFECO Commissioner Eduardo Perez Motta and leading members of the Calderon Administration, including the President, have publicly committed to opening up the Mexican economy to greater competition. For more information on competition issues in Mexico please visit COFECO's bilingual website at: www.cfc.gob.mx. President Calderon sent a stronger competition law aimed at giving COFECO more power to go after monopolies, but the bill is currently stalled in the Chamber of Deputies.
Energy: The Mexican constitution reserves ownership of petroleum and other hydrocarbon reserves for the Mexican state. The energy reform package approved by the Mexican Congress in October 2008 did not address this prohibition, and oil and gas exploration and production efforts remain under the sole purview of Pemex, Mexico's petroleum parastatal. While Pemex had previously contracted with foreign companies to perform specific tasks such as drilling wells or equipment maintenance on a fee-for-service basis, the 2008 reform allowed some private participation in exploration and production of oil fields through so-called “performance-linked contracts”. The contracts will permit companies working in Mexico to receive a set price per barrel of petroleum recovered, and to recover exploration and production costs with incentives for additional production over and above the expected amount. Pemex intends to hold the first round of public tenders in 2011 for mature oil fields, with the intention of eventually issuing tenders for the Chicontepec field and for deep water fields. The constitution also provides that most electricity service may only be supplied by one state-owned company, the Federal Electricity Commission (CFE).
There has been some opening to private capital. Private electric co-generation and private or municipal power projects for self-supply are now allowed; companies involved in self-supply from renewable energy sources are also permitted to generate power to be fed into CFE’s grid at one location and take off the equivalent amount of power at different locations for a nominal “postage stamp” charge. Companies or households producing up to 15 kilowatts of energy are allowed to supply the excess to CFE’s grid and receive credit for the energy produced. Private investors may build independent power projects, but all of their output must be sold to CFE in wholesale transactions. Private construction of generation for export is permitted, including generation from renewable sources of energy, particularly wind. In 1995, amendments to the Petroleum Law opened transportation, storage, marketing and distribution of natural gas imports and issued open access regulations for Pemex's natural gas transportation network. Retail distribution of Mexico's natural gas is open to private investment, as is the secondary petrochemical industry. Since the government's announcement in August 2001 that national and foreign private firms will be able to import liquefied petroleum gas duty-free, LNG terminals in Tamaulipas state and Baja California have begun operations, and CFE is building a third in Manzanillo, on Mexico's Pacific Coast.
Finance Public Works Contracts (COPFs), formerly Multiple Service Contracts (MSCs) designed to comply with the country's constitution, are Mexico's most ambitious effort to attract private companies to stimulate natural gas production by developing non-associated natural gas fields. Under a COPF contract, private companies will be responsible for 100 percent of the financing of a contract and will be paid for the work performed and services rendered. However, the natural gas produced in a specific field remains the property of Pemex. Examples of work that contractors can perform include seismic processing and interpretation, geological modeling, fields engineering, production engineering, drilling, facility design and construction, facility and well maintenance, and natural gas transportation services. Some Mexican politicians still oppose COPFs as a violation of the Mexican constitution's ban on concessions. Some contracts have failed to attract any bids, demonstrating the limited success of COPFs.
Telecommunications: Mexico allows up to 49 percent FDI in companies that provide fixed telecommunications networks and services. A bill to completely open fixed telecommunications networks to foreign investors has been introduced in Congress, but the bill has been delayed several times due to a demand to include a “reciprocity clause” that would open the sector in partner countries to Mexican companies. This includes the Cable TV (CATV) industry, with one exception: companies can issue Neutral or "N" stocks up to 99 percent, which can be owned by a foreign company. In fact, one CATV company operates under this ownership scheme. There is no limit on FDI in companies providing cellular/wireless services. However, Telmex and Telcel (América Móvil) continue to reign as the dominant telecom fixed and wireless providers and wield significant influence over key regulatory and government decision makers. Mexico's dominant landline and wireless carriers are traded on the New York Stock Exchange. An initiative is currently in the Congress that would completely open fixed telephony to FDI.
Several large U.S. and international telecom companies are active in Mexico, partnering with Mexican companies or holding minority shares. Following a 2004 WTO ruling, international resellers are authorized to operate in Mexico and some companies are also looking to sell wholesale minutes to resellers. Telcel (technically independent, but majority owned by Telmex owner's Grupo Carso - Carso Global Telecom) still retains a great majority share (over 70 percent) of the cellular market. However, Spain's Telefonica Movistar, among others, continues to grow and challenge the status quo, deploying extensive mobile infrastructure to increase coverage across the country. Telmex continues to dominate the market in Long Distance (domestic and international), Internet access through DSL, and bundle services. The Convergence Accord, published in October 2006, allowed Telmex to offer broadcasting or TV services. However, the Federal Telecommunications Commission ruled that Telmex must first comply with interconnection, interoperability and number portability requirements before receiving permission to complete its triple-play offering. The accord has elicited strong concerns from the CATV industry, which fears that it will push CATV operators to consolidate. Under the accord, CATV operators (including TV duopolist Televisa's Cablevision) are allowed to independently offer Triple Play Service (VoIP-Telephony, Data-Internet and TV-Video), which might increase competition in the telephony market.
As in telecommunications, there are concerns that the two dominant television companies -- Televisa and TV Azteca, who share duopoly status in the sector -- continue to exercise influence over Mexican judicial, legislative and regulatory bodies to prevent competition. However, in August 2007 the Mexican Supreme Court ruled against the most blatant anti-competition measures of the April 2006 Radio and Television Law. Among other decisions, the Court ruled that it was unfair for broadcasting companies to keep and use at no cost analog spectrum freed from the digitalization process. Currently the Mexican Legislature is working on a new media law based on the Supreme Court's ruling. At present, U.S. firms remain unable to penetrate the Mexican television broadcast market, despite the fact that both Televisa and TV Azteca benefit from access to the U.S. market.
In 2010, the Mexican government completed the much-awaited spectrum auction of the 1.7 GHz and 1.9 GHz bands. However, a domestic wireless operator has aggressively challenged the Mexican courts on the awarding of the GHz band to a U.S wireless operator. The barrage of lawsuits may delay the company’s plan to expand its wireless services.
This year at the January 10, 2011 NAFTA Free Trade Commission meeting, the term sheet for the Comision Interamericana de Telecomunicaciones (CITEL) mutual recognition agreement was initialed. The agreement establishes procedures for accepting test results from laboratories or testing facilities in the territory of another NAFTA country for use in the conformity assessment of telecommunications equipment. This will allow a manufacturer to test a product only once and then have the test results accepted in other NAFTA countries.
Real Estate: Investment restrictions still prohibit foreigners from acquiring title to residential real estate in so-called "restricted zones" within 50 kilometers (approximately 30 miles) of the nation's coast and 100 kilometers (approximately 60 miles) of the borders. In all, the restricted zones total about 40 percent of Mexico's territory. Nevertheless, foreigners may acquire the effective use of residential property in the restricted zones through the establishment of a 50-year extendable trust (called a fideicomiso) arranged through a Mexican financial institution that acts as trustee.
Under a fideicomiso, the foreign investor obtains all rights of use of the property, including the right to develop, sell and transfer the property. Real estate investors should, however, be careful in performing due diligence to ensure that there are no other claimants to the property being purchased. Fideicomiso arrangements have led to legal challenges in some cases. U.S. issued title insurance is available in Mexico and a few major U.S. title insurers have begun operations here. Additionally, U.S. lending institutions have begun issuing mortgages to U.S. citizens purchasing real estate in Mexico.
Transportation: The Mexican government allows up to 49 percent foreign ownership of 50-year concessions to operate parts of the railroad system, renewable for a second 50-year period. The Mexican Foreign Investment Commission and COFECO must approve ownership above 49 percent. In a positive sign for competition, COFECO recently struck down a proposed merger between two of the three major railroad companies. The decision has been appealed. Consistent with NAFTA, foreign investors from the U.S. and Canada are now permitted to own up to 100 percent of local trucking and bus companies, however, several companies have encountered long wait times and legal tie-ups when trying to obtain permits.
CINTRA, the government holding company for the Mexican airline groups, Mexicana and Aeromexico, sold Grupo Mexicana to Grupo Posadas in December 2005. Grupo Aeromexico was sold to a consortium led by Citibank-owned Banamex in October 2007. In 2010, Mexicana filed for a bankruptcy process and suspended its flights. Grupo Posada was forced to sell the airline to a new group of investors, PC Capital, who after reaching an agreement with the unions in order to allow some layoffs, are currently restructuring the company’s debt. The emergence of low-cost domestic airlines such as Volaris and Interjet have increased competition and led to lower prices. However, foreign ownership of Mexican airlines remains capped at 25 percent and foreign ownership of airports is limited to 49 percent. Foreign express delivery service companies continue to complain that Mexican legislation unfairly favors Mexican companies by restricting the size of trucks international carriers are allowed to use.
Infrastructure: Mexican infrastructure investment, with certain previously noted exceptions, is open to foreign investment. The Mexican government has been actively seeking an increase in private involvement in infrastructure development in numerous sectors, including transport, communications, and environment. Improvement in the national infrastructure is seen as a key element to strengthening economic competitiveness and attracting investment to disadvantaged regions of the country. In July 2007, President Calderon presented the National Infrastructure Program 2007-2012. A key aspect of this program is to increase private investment through means of Service Lending Projects (public-private partnerships) and concessionary schemes. In October 2008 and January 2009 speeches, President Calderon underlined his commitment to the National Infrastructure Program as a countercyclical tool in the face of a slowing economy. Unfortunately, the credit crunch in 2008-2009 and a lack of planning have delayed spending in infrastructure. In 2009, President Calderon sent a new bill to Congress, the Public-Private Associations Law, that seeks to give more certainty to private investors by streamlining the process to obtain the required authorizations to provide services and build infrastructure for the government. The law was approved by the Senate in October 2010, and is awaiting the lower house’s approval. The Office of the President provides an English language copy of the plan at: www.infraestructura.gob.mx.
Conversion and Transfer Policies
Mexico has open conversion and transfer policies as a result of its membership in NAFTA and the OECD. In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees, and travel expenses are handled at market-determined exchange rates. Peso/dollar foreign exchange is available on same-day, 24- and 48-hour settlement bases. Most large foreign exchange transactions are settled in 48 hours. In June 2003, the U.S. Federal Reserve Bank and the Bank of Mexico announced the establishment of an automated clearinghouse for cross-border financial transactions. The International Electronic Funds Transfer System (IEFT) began operating in 2004 and commissions on transfers through the system have dropped rapidly.
Expropriation and Compensation
Under NAFTA, Mexico may not expropriate property, except for public purpose and on a non-discriminatory basis. Expropriations are governed by international law, and require rapid fair market value compensation, including accrued interest. Investors have the right to international arbitration for violations of this or any other rights included in the investment chapter of NAFTA.
There have been twelve arbitration cases, of which two are still pending, filed against Mexico by U.S. and Canadian investors who allege expropriation, and other violations of Mexico's NAFTA obligations. Details of the cases can be found at the Department of State Website, Office of the Legal Advisor (www.state.gov/s/l).
Dispute Settlement
Chapter Eleven of NAFTA contains provisions designed to protect cross-border investors and facilitate the settlement of investment disputes. For example, each NAFTA Party must accord investors from the other NAFTA Parties national treatment and may not expropriate investments of those investors except in accordance with international law.
Chapter Eleven permits an investor of one NAFTA Party to seek money damages for measures of one of the other NAFTA Parties that allegedly violate those and other provisions of Chapter Eleven. Investors may initiate arbitration against the NAFTA Party under the Arbitration Rules of the United Nations Commission on International Trade Law ("UNCITRAL Rules") or the Arbitration (Additional Facility) Rules of the International Center for Settlement of Investment Disputes ("ICSID Additional Facility Rules"). Alternatively, a NAFTA investor may choose to use the registering country's court system.
The Mexican government and courts recognize and enforce arbitral awards. The Embassy has heard of no actions taken in the Mexican courts for an alleged Chapter 11 violation on behalf of U.S. or Canadian firms. There have been numerous cases in which foreign investors, particularly in real estate transactions, have spent years dealing with Mexican courts trying to resolve their disputes. Often real estate disputes occur in popular tourist areas such as the Yucatan. American investors should understand that under Mexican law many commercial disputes that would be treated as civil cases in the United States could also be treated as criminal proceedings in Mexico. Based upon the evidence presented, a judge may decide to issue arrest warrants. In such cases Mexican law also provides for a judicial official to issue an "amparo" (injunction) to shield defendants from arrest. U.S. investors involved in commercial disputes should therefore obtain competent Mexican legal counsel, and inform the U.S. Embassy if arrest warrants are issued.
Performance Requirements and Incentives
The 1993 Foreign Investment Law eliminated export requirements (except for maquiladora industries), capital controls, and domestic content percentages, which are prohibited under NAFTA. Foreign investors already in Mexico at the time the law became effective can apply for cancellation of prior commitments. Foreign investors who failed to apply for the revocation of existing performance requirements remained subject to them.
The Mexican federal government has eliminated direct tax incentives, with the exception of accelerated depreciation. A fiscal reform package was passed in September 2007 that includes a Flat Rate Corporate Tax (IETU). This tax limits the deductions that companies are allowed, though changes made at the behest of the business community still allow some credits for previous inventories and investments, as well as for companies that fall under the maquiladora scheme. In 2009, the IETU will increase from 16.5% to 17% and to 17.5% in 2010. Investors should follow IETU developments closely.
Most taxes in Mexico are federal; therefore, states have limited opportunity to offer tax incentives. However, Mexican states have begun competing aggressively with each other for investments, and most have development programs for attracting industry. These include reduced price (or even free) real estate, employee training programs, and reductions of the 2% state payroll tax, as well as real estate, land transfer, and deed registration taxes, and even new infrastructure, such as roads. Four northern states -- Nuevo Leon, Coahuila, Chihuahua and Tamaulipas -- have signed an agreement with the state of Texas to facilitate regional economic development and integration. Investors should consult the Finance, Economy, and Environment Secretariats, as well as state development agencies, for more information on fiscal incentives. Tax attorneys and industrial real estate firms can also be good sources of information.
U.S. Consulates have reported that the states in their consular districts have had to modify their incentive packages due to government decentralization. Many states have also developed unique industrial development policies. Sonora, for example, is working to expand the free entry area for tourists (south from the border to the port of Guaymas.) Sonora has also implemented long-term agriculture and infrastructure development plans. The government of Yucatan provides information and support to potential investors and business entrepreneurs through several programs that target different industries such as technology, agroindustry and energy exploration. Several states are competing to attract manufacturing in the aerospace industry.
A government-owned development bank, Nacional Financiera, S.A., provides loans to companies in priority development areas and industries. It is active in promoting joint Mexican-foreign ventures for the production of capital goods. Nacional Financiera offers preferential, fixed-rated financing for the following types of activities: small and medium enterprises; environmental improvements; studies and consulting assistance; technological development; infrastructure; modernization; and capital contribution. The Mexican Bank for Foreign Trade, Bancomext, offers a variety of export financing and promotion programs. There is an initiative in the Mexican Congress to merge both development banks in order to make them more efficient and streamline the granting of loans.
Mexico's maquiladora and Program for Temporary Imports to produce Exports (PITEX) programs aim to stimulate manufactured exports and operate in largely the same manner. The first focus is on companies that specialize in bond manufacturing and export, while the second is for companies that may have significant domestic sales. In November 2006, the maquiladora and PITEX programs were combined into the renamed IMMEX (Industria Manufacturera, Maquiladora y Servicios de Exportacion) program. The IMMEX program adds services, such as business process outsourcing, to the maquila scheme and also simplifies and streamlines the process under the two previous schemes. The new program continued to exempt companies from import duties and applicable taxes (like Value Added Taxes) on inputs and components incorporated into exported manufactured goods. In addition, capital goods and the machinery used in the production process are tax exempt, but are currently subject to import duties.
Companies interested in investing in industrial activity in Mexico need to follow the new IMMEX guidelines closely, preferably in close consultation with locally based legal advisors. Two export programs implemented during the 1990s, ALTEX (Empresas Altamente Exportadoras) and ECEX (Empresas de Comercio Exterior), also allow expedited VAT returns and financing from government-owned development banks. Please refer to the Ministry of Economy's IMMEX program website at http://www.economia.gob.mx/?P=immex. The Mexican government will soon publish modifications to the industry’s tax regime that will provide these companies financial and operational benefits, such as development of Mexico’s maquila-servicing and supply industries. Other modifications to the IMMEX Program include: reducing the grounds for which the government can terminate a company’s inclusion in the IMMEX Program (and exempts certain qualified companies from being excluded at all); eliminates the requirement that companies submit certain information to both the Ministry of Economy and the Mexican Tax Service (companies will now only be required to submit the information one time); and extends the temporary importation term for raw materials from 18 months to 36 months for certified companies (or 60 months for companies registered in the Inventory Control System, SECIIT).
In order to maintain competitiveness of maquiladora and PITEX companies and comply with NAFTA provisions, Mexico has developed "Sectoral Promotion Programs" (PROSEC). Under these programs, most favored nation import duties on listed inputs and components used to produce specific products are eliminated or reduced to a competitive level. These programs comply with NAFTA provisions because import duty reduction is available to all producers, whether the final product is sold domestically or is exported to a NAFTA country. PROSECs supported 22 sectors, including electronic and home appliances, automotive, and auto parts, textile, and apparel, footwear and others. However, since 2008, the government has eliminated some PROSECs that have not been used for several years or that already have a most favored nation low import duty thanks to a new trade policy implemented by the government. The reduction of PROSECs will conclude in 2012. In December 2008, President Calderon issued in the Official Gazette (Diario Oficial) an immediate and gradual reduction of import duties for more than 10,000 tariffs in order for companies to obtain inputs at competitive prices. When the gradual elimination and reduction of import duties concludes in 2013, the tariff structure will have six basic rates: 0, 5%, 7%, 10%, 15% y 20%. In the last four years, the Secretariat of Economy conducted, in partnership with the private sector, 12 studies of the country's most important sectors according to their levels of exports, employment and FDI, called "Programs for Sectoral Competitiveness." These studies are currently available at the website of the Secretariat of Economy (http://www.economia.gob.mx/?P=944).
Right to Private Ownership and Establishment
Foreign and domestic private entities are permitted to establish and own business enterprises and engage in all forms of remunerative activity in Mexico, except those enumerated in Section One. Private enterprises are able to freely establish, acquire and dispose of interests in business enterprises. The two most common types of business entities are corporations (Sociedad Anonima) and limited partnerships (Sociedad de Responsibilidad Limitada). Under these legal entities a foreign company may operate an independent company, a branch, affiliate, or subsidiary company in Mexico. The rules and regulations for starting an enterprise differ for each structure.
For a corporation (Sociedad Anonima):
A) Can be up to 100 percent foreign-owned;
B) Must have a minimum of 50,000 Mexican pesos in capital stock to start;
C) Must have minimum of two shareholders, with no maximum. Board of Directors can run the administration of the company;
D) The enterprise has an indefinite life span;
E) Free transferability of stock ownership is permitted;
F) Operational losses incurred by the Mexican entity or subsidiary may not be used by the U.S. parent company;
G) Limited liability to shareholders.
Limited Liability Company (Sociedad de Responsabilidad Limitada):
A) Can be up to 100 percent foreign-owned;
B) Must have a minimum of 3,000 Mexican pesos in capital stock to start;
C) Must have a minimum of 2 partners to incorporate a corporation with limited liability. The partners must manage the company but 50 is the maximum number of shareholders;
D) Exists only when the business purpose and partners remain the same;
E) Restricted transferability of partnership shares. Any changes in the partnership composition may cause the partnership to be liquidated;
F) If structured properly, it may offer tax advantages by allowing operational losses incurred by the Mexican entity to be used by the U.S. parent company;
G) Limited liability is afforded the partners.
Protection of Property Rights
Two different laws provide the core legal basis for protection of intellectual property rights (IPR) in Mexico -- the Industrial Property Law (Ley de Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor). Multiple federal agencies are responsible for various aspects of IPR protection in Mexico. The Office of the Attorney General (Procuraduría General de la Republica, or PGR) has a specialized unit that pursues criminal IPR investigations. The Mexican Institute of Industrial Property (Instituto Mexicano de la Propiedad Industrial, or IMPI) administers Mexico's trademark and patent registries and is responsible for handling administrative cases of IPR infringement. The National Institute of Author Rights (Instituto Nacional del Derecho de Autor) administers Mexico's copyright register and also provides legal advice and mediation services to copyright owners who believe their rights have been infringed. The Mexican Customs Service (Aduanas México) plays a key role in ensuring that illegal goods do not cross Mexico's borders.
Despite strengthened enforcement efforts by Mexico's federal authorities over the past several years, weak penalties and other obstacles to effective IPR protection have failed to deter the rampant piracy and counterfeiting found throughout the country. The U.S. Government continues to work with its Mexican counterparts to improve the business climate for owners of intellectual property.
Mexico is a signatory to at least fifteen international treaties, including the Paris Convention for the Protection of Industrial Property, the NAFTA, and the WTO Agreement on Trade-related Aspects of Intellectual Property Rights. Though Mexico signed the Patent Cooperation Treaty in Geneva, Switzerland in 1994, which allows for simplified patent registration procedure when applying for patents in more than one country at the same time, it is necessary to register any patent or trademark in Mexico in order to claim an exclusive right to any given product. A prior registration in the United States does not guarantee its exclusivity and proper use in Mexico, but serves merely as support for the authenticity of any claim you might make, should you take legal action in Mexico. The Anti-Counterfeit Trade Agreement is currently pending ratification in the Mexican Senate.
Although a firm or individual may apply directly, most foreign firms hire local law firms specializing in intellectual property. The U.S. Embassy's Commercial Section maintains a list of such law firms in Mexico at: http://www.buyusa.gov/mexico/en/business_service_providers.html.
Transparency of Regulatory System
The Federal Commission on Regulatory Improvement (COFEMER), within the Ministry of Economy, is the agency responsible for reducing the regulatory burden on business. The Mexican government has been making steady progress on this issue in the last few years. On a quarterly basis, these agencies must report to the President on progress achieved toward reducing the regulatory burden. In December 2006, President Calderon replaced the Regulatory Moratorium Agreement, issued by the previous administration, to ensure agencies streamline their regulatory promulgation processes, with the Quality Regulatory Agreement. The new agreement intends to allow the creation of new regulations only when agencies prove that they are needed because of an emergency, the need to comply with international commitments, or obligations established by law.
The federal law on administrative procedures has been a significant investment policy accomplishment. The law requires all regulatory agencies to prepare an impact statement for new regulations, which must include detailed information on the problem being addressed, the proposed solutions, the alternatives considered, and the quantitative and qualitative costs and benefits and any changes in the amount of paperwork businesses would face if a proposed regulation is to be implemented. Despite these measures, many difficulties remain. Foreign firms continue to list bureaucracy, slow government decision-making, lack of transparency, a heavy tax burden, and a rigid labor code among the principal negative factors inhibiting investment in Mexico. The Mexican government, with the OECD, the private sector and several think tanks, is currently working to streamline bureaucracy and procedures, with a particular focus on several Mexican states.
The Secretariat of Public Administration has made considerable strides in improving transparency in government, including government contracting and involvement of the private sector in enhancing transparency and fighting corruption. The Mexican government has established several Internet sites to increase transparency of government processes and establish guidelines for the conduct of government officials. "Normateca" provides information on government regulations; "Compranet" allows for on-line federal government procurement; "Tramitanet" permits electronic processing of transactions within the bureaucracy thereby reducing the chances for bribes; and "Declaranet" allows for online filing of income taxes for federal employees.
In May 2010, President Calderon and President Obama agreed to create a High-Level Regulatory Cooperation Council. The group is currently determining its terms of reference and intends to work on regulatory issues on a bilateral basis in 2011.
Efficient Capital Markets and Portfolio Investment
The Mexican banking sector has strengthened considerably since the 1994 Peso Crisis left it virtually insolvent. Since the crisis, Mexico has introduced reforms to buttress the banking system and to consolidate financial stability. These reforms include creating a more favorable economic and regulatory environment to foster banking sector growth by reforming bankruptcy and lending laws, moving pension fund administration to the private sector, and raising the maximum foreign bank participation allowance. The bankruptcy and lending reforms passed by Congress in 2000 and 2003 effectively made it easier for creditors to collect debts in cases of insolvency by creating Mexico's first effective legal framework for the granting of collateral. Pension reform allows employees to choose their own pension plan. Allowing banks or their holding companies to manage these funds provides additional capital to the banking sector, while the increased competition permits fund managers to focus on investment returns. In December 2007, the Mexican Congress approved amendments to the Law of Credit Institutions (LIC) that include creating a new limited banking license and transferring power from the Mexican tax authority to the Banking and Securities Commission (CNBV), the primary banking regulator.
The financial profile of the banking sector has improved due to the reduction in the problem assets brought about by write-offs, problem loan sales, and the conclusion of most debt-relief programs. These developments, combined with more stringent capital requirements, have contributed to an improvement in the level and composition of capital across the banking system, particularly among the larger institutions.
The banking sector remains highly concentrated, with a handful of large banks controlling a significant market share, and the remainder comprised of regional players and niche banks. The Mexican Tax Authority has approved the opening of several new banks since 2006, including Wal-Mart Bank and Prudential Bank, but the sector's competitive dynamics and credit quality are still being driven by six large banks (Banamex, Bancomer, Santander, HSBC, Banorte and Scotiabank)—five of which are foreign-owned. The newcomers are mostly focused on the unbanked population (D, E market segments) and will present only limited competition to the group of old banks.
Bank lending, especially consumer lending and mortgages, grew rapidly in 2005 and 2006, fueled by lower interest rates and historically low inflation. However, the global financial crisis slowed down all types of lending in 2008 and 2009. According to the CNBV, total loan balances rose to 2.025 trillion pesos ($156.8 billion dollars) at the end of July 2010, a 9.4% increase from 2009. Businesses and consumers are demanding more credit as the economy enjoys an export-led rebound, with economists widely expecting an expansion of between 4% and 5% in gross domestic product at the end of 2010. The Association of Mexican banks has forecast double-digit loan growth this year.
Small- and medium-sized businesses still complain of a lack of access to credit, but government-owned development banks have expanded their lending to this sector. Despite the expansion, such lending remains low as a percentage of GDP. Private banks argue that due diligence in lending to such business is difficult given the large amount of revenue they keep off the books to avoid increased tax liability.
Commercial loans to established companies with well-documented accounts are available in Mexico, but many large companies utilize retained earnings to fund growth. Supplier credit is the main source of financing for many businesses. The largest companies are able to issue debt for their financing needs, tapping into a growing pool of pension funds looking for investment options. Non-bank financing is generally available, however, to large companies with strong credit ratings and important commercial ties with their suppliers -- i.e., companies that could easily procure bank financing.
The Secretariat of Finance and Public Credit sets regulatory policy and oversees the CNBV. Mexico's central bank, the Bank of Mexico (Banxico), also has a regulatory role in addition to setting monetary policy. The Institute for the Protection of Bank Savings (IPAB) handles deposit insurance.
Reforms creating better regulation and supervision of financial intermediaries and fostering greater competition have helped strengthen the financial sector and capital markets. These reforms, coupled with sound macroeconomic fundamentals, have created a positive environment for the financial sector and capital markets, which have responded accordingly. The implementation of NAFTA opened the Mexican financial services market to U.S. and Canadian firms. Banking institutions from the U.S. and Canada have a strong market presence, holding approximately 70 percent of banking assets. Under NAFTA's national treatment guarantee, U.S. securities firms and investment funds, acting through local subsidiaries, have the right to engage in the full range of activities permitted in Mexico.
Foreign entities may freely invest in government securities. The Foreign Investment Law establishes, as a general rule, that foreign investors may hold 100 percent of the capital stock of any Mexican corporation or partnership, except in those few areas expressly subject to limitations under that law. Regarding restricted activities, foreign investors may also purchase non-voting shares through mutual funds, trusts, offshore funds, and American Depositary Receipts. They also have the right to buy directly limited or non-voting shares as well as free subscription shares, or "B" shares, which carry voting rights. Foreigners may purchase an interest in "A" shares, which are normally reserved for Mexican citizens, through a neutral fund operated by a Mexican Development Bank. Finally, state and local governments, and other entities such as water district authorities, now issue peso-denominated bonds to finance infrastructure projects. These securities are rated by international credit rating agencies. This market is growing rapidly and represents an emerging opportunity for U.S. investors.
Competition from State Owned Enterprises
The Mexican Constitution constrains private investment in the hydrocarbon sector. Articles 27 and 28 specifically establish the monopoly control of the State. Mexico’s energy sector faces one of the most restrictive regimes in the world. During the past 15 years, there have been changes in the law to allow some private investment in electric co-generation and self-supply, as well as power generation for export, and, as part of the 2008 energy reform, to permit companies to enter into “performance-linked” contracts for hydrocarbon exploration and drilling. The first such contracts are due to be issued in 2011. Amendments to the Petroleum Law opened transportation, storage, marketing and distribution of natural gas imports and issued open access regulations for Pemex's natural gas transportation network, as well as retail distribution of Mexico's natural gas and secondary petrochemical industry. Since 2001, the government allowed national and foreign private firms to import liquefied petroleum gas duty-free.
There are two main state-owned companies in the energy sector: Petroleos Mexicanos (Pemex), in charge of running the hydrocarbons (oil and gas) sector and the most important fiscal contributor to the country, and the Comision Federal de Electricidad (CFE), in charge of the electricity sector. As required by the Constitution, the electricity sector is also federally owned, with CFE controlling most of installed generating capacity. CFE also holds a monopoly on electricity transmission and distribution. It operates Mexico’s national transmission grid, which consists of 27,000 miles of high voltage lines, 28,000 miles of medium voltage lines, and 370,000 miles of low voltage distribution lines. It generates electric power for almost 33.8 million customers (or 100 million people). The infrastructure to generate electric power is made up of 177 generating plants, having an installed capacity of 51,081 megawatts. Reforms to the electricity sector now permit independent power producers to develop projects and sell their electricity to CFE, and for CFE to solicit bids from private companies for new power plant construction: 22.41% of CFE’s current installed capacity stems from 21 plants which were built using private capital by Productores Independientes de Energía (PIE). Attempts to reform the sector, including the subsidized rates provided to agricultural users and some consumers, have traditionally faced strong political and social resistance in Mexico, even though the existence of subsidies for residential consumers absorbs substantial fiscal resources.
The President of the United Mexican States appoints the Chief Executive Officer of PEMEX. The Mexican Government closely regulates and supervises the operations of PEMEX through three Ministries: The Secretary of Energy monitors the company’s activities, and serves as the chairman of Pemex’s Board of Directors; The Comision Nacional de Hidrocarburos (CNH), which is part of SENER, evaluates Pemex’s reserve estimates and provides regulations for Pemex’s operations in areas such as deep-water exploration and drilling and gas flaring; the Secretary of Finance and Public Credit incorporates the annual budget and financing program of Pemex and its subsidiaries; and the Secretary of Environment and Natural Resources, in coordination with other federal and state authorities, regulates Pemex’s activities that affect the environment.
Pemex has a board of directors, which includes government representatives from the Secretary of Energy, Secretary of Finance, the Secretary of Public Function, and the Officer of the President; four professional members; five representatives from the union; one commissioner; and one independent auditor, which in this case is the private consulting group, KPMG. Pemex’s accounting and balance sheets are subject to internal and external audits. The Audit and Performance Evaluation Committee of PEMEX’s Board of Directors appoints PEMEX’s external auditors. Pemex’s financial reports are issued in accordance to Mexico’s Generally Accepted Accounting Principles (GAAP), which differ somewhat from U.S. GAAP. PEMEX has registered bond issues in the Securities and Exchange Commission (SEC). Thus, in order to maintain its registration with the SEC, PEMEX has the obligation to file several international standard forms, such as the Form 20-F, on an annual basis. Pemex has also issued bonds in the domestic market, and in accordance with the Stock Market Law, it also has to submit audited quarterly and annual reports to the National Banking and Securities Commission. These reports, along with the annual Hydrocarbons Reserves Report and the Primary and Financial Balance, are published on Pemex’s webpage. The state-owned oil company has moved forward in incorporating best corporate and social responsibility practices.
The CFE is a decentralized government agency, duly incorporated, and controls its own assets. Like Pemex, CFE has a Board of Directors, which includes representatives from the Secretariats of Energy, Environment, Social Development, Economy, Finance; Pemex’s CEO; and three representatives from the union. CFE’s books are also subject to domestic general accounting rules and are reviewed by independent auditors. The Energy and Finance Secretariats approve and submit Pemex’s and CFE’s budgets to the lower house for approval.
The Servicio Postal Mexicano (Sepomex), or Correos de Mexico, is the national postal service of Mexico and officially retains a monopoly on all mail items under one kilogram. The mail is regulated under Mexico’s Communications and Transport Secretariat, and postal service is reserved to the state under Mexico's Constitution. Private delivery under one kilogram is officially illegal, but loopholes in the law have allowed some domestic and foreign privately-owned shippers to provide some delivery services through certified delivery and other advanced-service options to differentiate their business from that of a standard postal delivery. In the past, there were calls for legal reforms that would give Correos de Mexico a strictly enforced monopoly on packages weighing 350 grams or less and require private couriers to charge up to seven times Correos de Mexico's prices, but the government has not moved ahead on this front.
In 1986, Sepomex was formally created as an autonomous agency to provide postal service. It was also allowed to create a higher-priced courier service, Mexpost, to compete with foreign express delivery services. In 2008, the Director General changed Sepomex’s name to Correos de Mexico in an attempt to revamp its image and improve its weakened finances. Technically, Correos de Mexico is responsible for financing itself, but the government does subsidize the agency if there is insufficient revenue. Liberalization and privatization of postal markets are not currently on the agenda in Mexico. Correos de Mexico has a Board of Directors presided over by the Ministry of Communications and Transportation. Other members of the Board are: the Secretary of Foreign Affairs, the Secretary of the Economy, the Secretary of Finance, and the Under Secretary of Communications. The Director General is appointed by the President.
Mexico does not have any Sovereign Wealth Funds.
Corporate Social Responsibility
Both the private and public sector have taken several actions to promote and develop Corporate Social Responsibility (CSR) in Mexico during the past decade. CSR in Mexico began more as a philanthropic effort, but it has gradually evolved to a more holistic approach, trying to match international standards, such as the OECD Guidelines for Multinational Enterprises and the United Nations Global Compact. Mexico completed in March 2009 the reorganization of their National Contact Point (NCP) as set by OECD’s guidelines for MNEs and CSR when the Directorate General for Foreign Investment (DGFI) within the Ministry of the Economy assumed the office for the implementation and operation of the NCP. The guidelines can be found on the website www.economia.gob.mx. The UN Global Compact reports that there are 209 participants and stakeholders (100 are businesses) from Mexico.
The Mexican Center of Philanthropy (CEMEFI), a well-respected NGO for the promotion of CSR and philanthropy, was created in 1998, and among its achievements has been the creation of the CSR distinctive award in 2001 to those companies that comply with CSR best practices in Mexico and Latin America. To receive the award, CEMEFI takes into consideration whether the company adheres to international standards, including the OCED Guidelines, the UN Global Compact, International Labor Organization, and SA (Social Accountability) 8000, among others. Some of the domestic and foreign companies, of the more than one hundred that have been awarded, are: Bimbo, Nestlé, Coca Cola, Wal Mart, Hewlett Packard, General Electric, Pfizer, and many more.
There is a general awareness of CSR of both producers and consumers for those companies carrying CEMEFI’s distinctive logo and there are currently more than two hundred Mexican and foreign companies that have become members of CEMEFI. Following CEMEFI’s efforts, the largest and most important business and trade chambers in Mexico created “Aliarse”, a high-impact network aimed at promoting CSR in the business sector. In 2005, the Mexican Standards Institute (IMNC) officially issued the CSR standard NMX-SAST-004-IMNC. On November 26, 2010, Mexico officially launched the ISO 26000 Guidance on Social Responsibility, an international standard that offers guidance on socially responsible behavior and possible actions; it does not contain requirements and, therefore, in contrast to ISO management system standards, is not certifiable.
Corporate social responsibility reporting has made progress in the last few years with more companies developing a corporate responsibility performance strategy. The government has also made an effort to implement CSR in state-owned companies such as PEMEX, which has been publishing corporate responsibility reports since 1999. The reports comply with the indicators set forth in the Global Reporting Initiative (GRI) Guidelines and meet the guidelines of the United Nations Global Compact for communication.
Perhaps one of the most challenging issues in Mexico is to promote CSR in small and medium-sized enterprises (SMEs). Recently the Ministry of Economy has included CSR as a key factor in providing government support to SMEs through various government programs.
Political Violence
Several sources say there are signs that domestic and foreign investment has been affected by the current insecurity levels. Figures released by the Ministry of Economy confirm this concern. From January through September, FDI in six of the seven border-states fell 78% compared to the same period in 2008, before the crisis. Similar figures revealed that from January through September, FDI in Nuevo Leon, Sonora and Baja California was the lowest since 1999. During the same period, USD 4.3 million in investment left Coahuila for the first time ever. In Ciudad Juarez during the past year the number of companies declined from 600 to 400. Many companies decided to move their operations to El Paso.
Peaceful mass demonstrations are common in the larger metropolitan areas such as Mexico City, Guadalajara, and Monterrey. In November 2006, the Ejército Popular Revolucionario (EPR), a leftist guerilla movement, claimed responsibility for three explosions in Mexico City, one of which damaged a branch of Scotia Bank. On two occasions in the summer of 2007, the EPR also claimed responsibility for bombings of PEMEX pipelines in the states of Guanajuato and Veracruz. While no injuries were reported, there was extensive property damage and temporary disruption to flows of oil and natural gas along damaged pipelines, negatively impacting up to 1000 businesses. Economic losses were reported to be in the hundreds of millions of dollars.
The last half of 2006 saw intense protests in the state of Oaxaca demanding the state governor's resignation. The capital city of Oaxaca was under siege by demonstrators for more than five months. Businesses -- particularly those in the tourist sector -- reported millions of dollars in losses and many Western countries, including the United States, issued travel warnings advising their citizens to avoid the area. At least 11 civilian deaths, including that of an American journalist, occurred as a direct result of the violence in Oaxaca and hundreds more were injured and/or arrested. Since this clash Oaxaca has remained calm and has experienced only sporadic disturbances.
In May 2010, Diego Fernandez de Cevallos, former National Action Party (PAN) candidate for president and party elder, was kidnapped outside his ranch home in the state of Queretaro. Seven months later, in December 2010, he was released alive and healthy, reportedly after his family paid a multimillion-dollar ransom. Leftist groups, including the EPR, were linked to the kidnapping, but the government continues investigating and no suspects have yet been arrested.
In 2010, Mexico also saw an increase in violence against local politicians. 14 small town mayors were murdered, which equaled the combined number of all mayors murdered between 2004 and 2009. While some of these murders were directly related to organized crime, others were the result of local political and economic disputes and an environment of impunity in which few perpetrators of these crimes are punished.
Criminal and Narcotics Violence: While political violence has been relatively minimal, narcotics and organized criminal violence has spiked over the past three years. As President Calderon continues a full-court press against the major cartels in Mexico, kingpins have lashed back with violent acts unprecedented both in number and nature. 2010 set a new record for organized crime-related homicides with some 11,583 killings, nearly double the previous record of approximately 6,587 reached in 2009. Five states – Chihuahua, Sinaloa, Guerrero, Durango, and Tamaulipas – account for over 66% of the national total. All of those states have seen a significant increase over 2009; Sinaloa with 1,959 narco-executions, saw a 155% increase and Tamaulipas with 714, saw more than a 13-fold increase. Cartel tactics evolved as well – victims were tortured or mutilated, and then left in public venues to intimidate others. Institutions including major media outlets and a U.S. Consulate have been subject to unprecedented attack, including grenade attacks. In 2010 cartels began using car bombs and bombs were detonated in Chihuahua, Tamaulipas, and Nuevo Leon, although they remain an infrequently used tactic. Frustrated traffickers continue to rely on kidnappings and extortion to compensate for increased pressure from the Mexican government, targeting those innocent of any involvement in narcotics trafficking.
The United States is working with Mexico more closely than ever to combat organized crime and drug trafficking through the Merida Initiative, which was signed in June 2008. This initiative is a multi-year program to provide equipment and training to support law enforcement operations and technical assistance for long-term reform and oversight of security agencies. So far the U.S. Congress has appropriated over $1 billion USD for this initiative. This funding has helped provide, among other things, helicopters and surveillance aircraft, non-intrusive inspection equipment, technical advice and training to strengthen investigative techniques, prison systems, border management, and judicial practices. In addition, the Merida Initiative has invested in job creation programs, engaging youth in their communities, expanding social safety nets, and building community confidence in public institutions to create a culture of lawfulness and undercut the allure of the cartels. Though the violence is not political in nature, the U.S. Embassy in Mexico has noticed that general security concerns remain an issue for companies looking to invest in the country. Many companies find it necessary to take extra precautions for the protection of their executives. They also report increasing security costs for shipments of goods. The Overseas Security Advisory Council (OSAC) monitors and reports on regional security for American businesses operating overseas. OSAC constituency is available to any American-owned, not-for-profit organization, or any enterprise incorporated in the U.S. (parent company, not subsidiaries or divisions) doing business overseas (https://www.osac.gov/).
The Department of State maintains a Travel Alert for U.S. citizens traveling and living in Mexico, available at: http://travel.state.gov/travel/cis_pa_tw/pa/pa_3028.html.
Corruption
Corruption is pervasive in almost all levels of Mexican government and society. President Calderon has stated that his government intends to continue the fight against corruption in government agencies at the federal, state and municipal levels. Aggressive investigations and operations have exposed corruption at the highest levels of government. In 2008, Calderon launched "Operacion Limpieza," investigating and imprisoning alleged corrupt government officials in enforcement agencies. The Ministry of Public Administration has the lead on coordinating government anti-corruption policy. In 2010, the Mexican Congress considered legislation to prevent the use of money from organized crime groups in elections. The bill has not yet passed, but Congress will most likely take the law up again in 2011.
Other government entities, such as the Superior Audit Office of the Federation (ASF), have been playing a role in promoting sound financial management and accountable and transparent government with limited success, as most Mexican external audit institutions (mostly at the state level) lack the operational and budgetary independence to protect their actions from the political interests of the legislators they serve.
Mexico ratified the OECD Convention on Combating Bribery in May 1999. The Mexican Congress passed legislation implementing the convention that same month. The legislation includes provisions making it a criminal offense to bribe foreign officials. Mexico is also a party to the OAS Convention against Corruption and has signed and ratified the United Nations Convention against Corruption.
The government has enacted strict laws attacking corruption and bribery, with average penalties of five to ten years in prison. The Transparency and Access to Public Government Information Act, the country's first freedom of information act, went into effect in June 2003 with the aim of increasing government accountability. Mexico's 31 states have passed similar freedom of information legislation that mirrors the federal law and meets international standards in this field. Five years after its passage, transparency in public administration at the federal level has noticeably improved, but access to information at the state and local level has been slow.
According to Transparency International’s 2010 Index of Corruption Perception, Mexico scored 3.1 on a scale of 1 to 10 where lower numbers represent a greater perception of corruption. The tally places Mexico in 98th place out of 178 nations, its worst result in 10 years. Nearly one in three Mexicans paid a bribe to speed up paperwork or other administrative processes between June 2009 and June 2010, according to the Global Barometer of Corruption by Transparency International. According to this survey, the percentage of people who reported they had paid a bribe increased from 28 percent in 2006 to 31 percent in 2010.
Local civil society organizations focused on fighting corruption are still developing in Mexico. A handful of Mexican non-governmental organizations, including Mexico Without Corruption and the FUNDAR Center for Analysis and Investigation, work to study issues related to corruption and raise awareness in favor of transparency. The Mexican branch of Transparency International also operates in Mexico. The best source of Mexican government information on anti-corruption initiatives is the Ministry of Public Administration (www.funcionpublica.gob.mx).
Bilateral Investment Agreements
NAFTA governs U.S. and Canadian investment in Mexico. In addition to NAFTA, most of Mexico's eleven other free trade agreements (FTAs) cover investment protection, with a notable exception being the Mexico-European Union FTA. The network of Mexico's FTAs containing investment clauses include Bolivia, Chile, Costa Rica, Colombia, El Salvador, Guatemala, Honduras, Japan, and Nicaragua.
Mexico has enacted formal bilateral investment protection agreements with 25 countries: 15 European Union countries (Austria, Belgium, Luxembourg, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Portugal, Spain, Sweden, United Kingdom and the Czech Republic), as well as Australia, Argentina, Cuba, Iceland, India, Panama, South Korea, Switzerland, Trinidad and Tobago, and Uruguay. Agreements with China, Belarus and Slovakia were signed in 2009. Mexico continues to negotiate bilateral investment treaties with Russia, Saudi Arabia, Malaysia, Singapore, Brazil and the Dominican Republic.
The United States and Mexico have a bilateral tax treaty to avoid double taxation and prevent tax evasion. Important provisions of the treaty establish ceilings for Mexican withholding taxes on interest payments and U.S. withholding taxes on dividend payments. The implementation of the flat tax on January 1, 2008 has led to questions as to whether the new tax meets the requirements of the bilateral tax treaty. The U.S. Internal Revenue Service presently allows businesses to credit flat tax against their U.S. taxes. However, businesses should continue to monitor this issue.
Mexico and the United States also have a tax information exchange agreement to assist the two countries in enforcing their tax laws. The Financial Information Exchange Agreement (FIEA) was enacted in 1995, pursuant to the Mutual Legal Assistance Treaty. The agreements cover information that may affect the determination, assessment, and collection of taxes, and investigation and prosecution of tax crimes. The FIEA permits the exchange of information with respect to large-value or suspicious currency transactions to combat illegal activities, particularly money laundering. Mexico is a member of the financial action task force (FATF) of the OECD and has made progress in strengthening its financial system through specific anti-money-laundering legislation enacted in 2000 and 2004.
OPIC and Other Investment Insurance Programs
In August of 2004, Mexico and the U.S. Overseas Private Investment Corporation (OPIC) finalized an agreement that enables OPIC to offer all its programs and services in the country. Since then, OPIC has aggressively pursued potential investment projects in Mexico, and the country rapidly became one of the top destinations for projects with OPIC support. OPIC is actively providing over $730 million in financing and political risk insurance support to 17 projects in Mexico. For the third quarter of 2010, OPIC established 4 funds in Mexico in the areas of Housing, Equipment Leasing and two more in Renewable Energy. It also announced its first-ever support of a local currency capital market bond issuance, guaranteeing 2.765 billion pesos of bonds (approximately $217 million) issued in the Mexican market. In addition, OPIC-supported funds are among the largest providers of private equity capital to emerging markets. For 2009, OPIC had 4 projects in Mexico totaling 292,800,000 USD; for 2008 the amount was 405 million USD and for 2007 was 295 million USD.
The OPIC funds which are currently investing in Mexico include two Alsis Latin America Funds and two Latin Power III funds. For a more detailed description of these funds, including fund contact information and investment strategy, please consult OPIC's website at www.opic.gov.
Labor
Mexico's Federal Labor Law, enacted in 1931 and revised in 1970, is based on article 123 of the Mexican constitution. Under the law, Mexican workers enjoy the rights to associate, collectively bargain, and strike. The law sets a standard six-day workweek with one paid day off. For overtime, workers must be paid twice their normal rate and three times the hourly rate for overtime exceeding nine hours per week. Employees are entitled to most holidays, paid vacation (after one year of service), vacation bonuses, and an annual bonus equivalent to at least two weeks’ pay. Companies are also responsible for these additional costs. These costs usually add about 30 to 35 percent to the average employee’s salary. Employers must also contribute a tax-deductible two percent of each employee's salary into an individual retirement account. Most employers are required to distribute ten percent of their pre-tax profits for profit sharing. Speaking on behalf of the current administration, the Labor Secretary has repeatedly affirmed that labor reform is and remains one of the top priorities of President Calderon's government. A proposal for the labor reform was introduced by the Calderon administration in March of 2010, but the Congress did not debate it quickly. In November 2010, the primary opposition party, the Institutional Revolution Party (PRI), introduced a different proposal, but both were pulled from Congress’ agenda without having been debated before the end of the legislative session. The political strength of the unions remains an issue, and reforms to the labor law – nearly universally acknowledged as necessary – have become highly politicized and complicated by the important elections in 2011 and 2012.
There is a large surplus of labor in the formal economy, largely composed of low-skilled or unskilled workers. On the other hand, there is a shortage of technically skilled workers and engineers. Labor-management relations are uneven, depending upon the unions holding contracts and the industry concerned. Many actors also note that the Mexican government wields veto power in the supposedly neutral and balanced tripartite arrangement of labor-business relations. Mexican manufacturing operations are experiencing stiff wage competition from Central America, China, India, and elsewhere in low technology work, such as textile and garment manufacture. Mexico’s minimum wage averages around US$4.66 per day and is less than a living wage in this OECD country. It is set by the tripartite National Commission for Minimum Wage each year.
The Calderon administration prides itself on reducing the number of strikes in Mexico, but labor unions – especially independent ones like the miners’ union, the Mexico City electricians’ union, and the National Workers Union (UNT) – note that absence of strikes is not a reasonable proxy for labor peace. Several long-running issues (notably the miners’ union’s strike at Cananea and the Mexico City electricians’ union’s battle to restore their employment) have marred the Mexican government’s record. Information on unions registered with federal labor authorities is supposed to be available to the public via Internet (www.stps.gob.mx), but this database is incomplete. Independent unions and international observers also have concerns about so-called “employer protection contracts,” or non-representative unions set up to provide the employer with a filler union, thereby protecting the employer from internal grassroots organizing.
Foreign Trade Zones/Free Ports
In addition to the IMMEX programs that operate as quasi-free trade zones, in 2002 Mexico approved the operation of more traditional free trade zones (FTZ). Unlike the previous "bonded" areas that only allowed for warehousing of product for short periods, the new FTZ regime allows for manufacturing, repair, distribution, and sale of merchandise. There is no export requirement for companies operating within the zone to avail themselves of tax benefits. Regulatory guidance for the new regime is still being amended; therefore investors should consult a tax lawyer for detailed information. Most major ports in Mexico have bonded areas ("recinto fiscalizados") or customs agents ("recintos fiscal") within them. There are currently two approved FTZ's, both operating in San Luis Potosi. The first major plant in the FTZ is currently under construction. Several states have filed to convert their bonded areas into Free Trade Zones.
Foreign Direct Investment Statistics
|
78. Foreign Direct Investment in Mexico (USD Million) |
|||||
|
2006 |
2007 |
2008 |
2009 |
2010 |
|
|
Total FDI Inflow: |
20,103 |
29,084 |
24,913 |
14,463 |
14,362 |
|
New Investments |
6220 |
15265 |
9355 |
5833 |
8793 |
|
Earnings Reinvestment |
7750 |
8079 |
7763 |
4414 |
2534 |
|
Inter-company Investment |
6133 |
5740 |
7805 |
4215 |
3035 |
|
79. Foreign Direct Investment Realized in Mexico By Industrial Sector Destination (USD Million) |
|||||
|
2006 |
2007 |
2008 |
2009 |
2010 |
|
|
Total FDI Inflow: |
20103 |
29084 |
24,913 |
14462 |
14362 |
|
Agriculture |
29 |
133 |
32 |
8 |
2 |
|
Extractive |
400 |
1664 |
4610 |
699 |
354 |
|
Manufacturing |
10105 |
13226 |
7570 |
5212 |
8713 |
|
Electricity and Water |
-85 |
120 |
458 |
98 |
-4 |
|
Construction |
394 |
1883 |
873 |
520 |
12 |
|
Retail |
669 |
1532 |
1796 |
1346 |
2419 |
|
Transport and Communication |
650 |
767 |
1440 |
69 |
102 |
|
Financial Services |
4896 |
7200 |
5014 |
3152 |
1794 |
|
Others |
3052 |
2559 |
3118 |
3358 |
970 |
|
80. Foreign Direct Investment Inflows Realized By Country/Economy of Origin (USD Million) |
||||||
|
2006 |
2007 |
2008 |
2009 |
2010 |
5 year Totals |
|
|
Total FDI: |
19169 |
26834 |
23782 |
13506 |
14203 |
76094 |
|
United States |
12696 |
12132 |
10561 |
6398 |
4362 |
46149 |
|
Spain |
1769 |
5203 |
4647 |
2584 |
968 |
15171 |
|
Holland |
2785 |
5619 |
1419 |
1858 |
7641 |
19322 |
|
France |
150 |
202 |
179 |
300 |
96 |
927 |
|
United Kingdom |
936 |
598 |
1083 |
265 |
35 |
2917 |
|
Virgin Islands |
301 |
1101 |
1456 |
24 |
32 |
2914 |
|
Canada |
562 |
288 |
3003 |
1497 |
481 |
5831 |
|
Switzerland |
580 |
591 |
380 |
82 |
216 |
1849 |
|
Germany |
629 |
597 |
395 |
-1 |
168 |
1788 |
|
Argentina |
21 |
21 |
33 |
2 |
-13 |
64 |
|
South Korea |
72 |
45 |
368 |
76 |
-17 |
544 |
|
Brazil |
50 |
25 |
88 |
124 |
345 |
632 |
|
Taiwan |
22 |
10 |
34 |
48 |
25 |
107 |
|
China |
20 |
9 |
0 |
29 |
4 |
62 |
|
Japan |
-1424 |
395 |
138 |
220 |
41 |
-630 |
Source: Secretaria de Economia
