If we’ve learned anything after surviving 2020, it’s that no industry will return to its affairs as if the pandemic simply did not happen.
Regarding the post-pandemic supply-chain transformation in North America (Mexico, the United States, and Canada), we at Foley & Lardner have received the same message from both the U.S. President[1] and our clients[2]: resilient supply chains are the new name of the game, and they are to be secure, redundant and diverse; also, they will be more transparent regarding purchaser’s needs and the supplier´s ability to fulfill them, will favor provider adaptability over lean inventories, and preapprove alternate purveyors over a race to the bottom.
With the aforementioned in mind, we should begin by laying out the known truths by which Mexico has historically contributed to strengthening the North American supply chains: (i) the country provides quality manufacturing at the lowest costs in the region, (ii) it benefits from free trade agreement provisions with more than 60% of the world´s Gross Domestic Product (52 countries); (iii) almost all of the favorable factors when considering near-shoring, are present in Mexico, (iv) 25+ years of NAFTA experience created a skilled workforce whose numbers will grow as Mexico´s population ages, (v) intellectual property rights are duly protected, and (vi) trade promotion programs (i.e. IMMEX) are well known and have been running smoothly for years.
Said truths, however, could be hampered by a number of matters that we should keep a close eye upon, namely:
I. COVID-19 Vaccination
Both the Mexican federal government and individual States have concurrent jurisdiction regarding mandatory health measures, including vaccinations.
In December 2020, the federal government´s National Vaccination Policy set the goal to immunize the entire population within 18 months, firstly with frontline health care workers, followed by those 60 and older, those in their 50s, 40s, and lastly, 18 and older. Largely to scarce vaccine supplies and a rocky organizational start, progress to date casts doubt upon whether the 18-months goal is achievable.
In January 2021, the Mexican Ministry of Health issued high-level guidelines for individual Mexican states and private entities to acquire and administer vaccines, as long as they follow the National Vaccination Policy; operational details are still needed.
Furthermore, compliance with fluid COVID-related health and labor regulations in manufacturing facilities is still a major issue, both in terms of being able to continue production, as well as preventing lawsuits due to real or imaginary risk of exposure.
II. Outsourcing & Insourcing Ban
Due to his Political Party´s (MORENA) control of both Houses of the Mexican Congress, the President´s initiative to ban the current practice of outsourcing and insourcing will likely enter into effect on May 2021 (with an apparent 3-month vacatio legis).
But for “specialized services”, meaning those that are not part of the economic activity of the intended beneficiary, all workers will have to be in the payroll of the employer, which will entitle them to profit sharing provisions. Simulating receiving specialized services would constitute elements of proof towards the commission of criminal tax fraud.
Since most manufacturing operations in Mexico currently rely on outsourcing operations, incoming law will force reassessing and restructuring a number of labor, corporate and tax present-day structures.
III. VAT-Certified IMMEX Benefits Diluted
Mexican IMMEX (aka Maquila) companies operate under a governmental authorization that includes preferential conditions, both operational and fiscal.
The highest degree of preferential treatment conditions is granted to companies that are VAT (Value Added Tax)-certified, which allows them to avoid paying otherwise applicable VAT upon the importation of goods used in their manufacturing operations.
Such preferential treatment will automatically be diminished as soon as each VAT certification is renewed by individual IMMEX companies, which should occur every one to three years depending on their current authorization.
Upon VAT certification renewal, companies will, most importantly: (i) operate under a reduced time frame to utilize most temporarily imported goods (from 36 months to 18 months), although longer periods apply to products such as containers, machinery and equipment; (ii) no longer will be automatically enrolled in Sectorial import programs which allow for reduced duty imports on steel, textiles, others; (iii) have to file weekly import documents, instead of monthly; (iv) will not be able to temporarily import products without declaring serial numbers; (v) and will no longer have the ability to obtain expedited 16% VAT refunds on their operational balance (capacity to continue temporarily importing without paying VAT remains, however).
IV. Mandatory Technical Standards (NOMs) No Longer to be Exempted
Prior to October 2020, importation of certain materials, i.e. those to be utilized in production processes, were permitted to enter Mexico under “exemption letters” that would allow them to be imported without proof of NOMs compliance (note that not all imports are subject to NOM compliance, in accordance to their relevant Harmonized Tariff Schedule classification).
Even though little is still known in the importing community, importers are no longer allowed to use such exemption letters and, upon bringing goods into the country, are obliged to demonstrate compliance with relevant NOMs, either prior to the importation process or afterward.
In addition to evolving administrative application criteria, a number of procedural rules must be pursued for each of the aforementioned venues.
V. Labor Enforcement of USMCA (United States-Mexico-Canada Agreement) Obligations
As was required in USMCA, Mexico has already amended its labor laws to guarantee the basic rights of freedom of association and collective bargaining (with the non-stated objective of increasing wages in the country).
In accordance with such amendments, (i) effective immediately, existing collective labor contracts shall be free of “interference” from employers (this is, under their dominance or control), and (ii) in the medium term, labor contracts need to be “legitimized” by May 1, 2023 at the latest, in accordance with the July 2019 process issued by the Mexican Labor Secretary.
Due to the foregoing, there will be real, working unions, and current collective contracts signed with employer-friendly unions (commonly known as “protection” contracts or contracts with “white unions”) will soon be eliminated; it is probable that this will bring new leadership and more than one union to a company.
As per USMCA, determination of denial of freedom of association and collective bargaining rights may be made by a Facility-Specific Rapid Response Labor Mechanism; if such a determination is made, the covered facility´s goods or services could face a suspension of preferential tariff treatment or the imposition of penalties.
One thing is certain: labor relations in Mexico are changing rapidly, and now is the time for employers to preventively look into these issues.
VI. Tax Rules Regarding Permanent Establishment
Recent tax reforms have expanded the scope of permanent establishment rules in Mexico. As it is known, if a foreign company is deemed to have a permanent establishment for tax purposes in the country, it shall be subject to levies with respect to the relevant revenue of said establishment.
Thus, companies already doing business, or that are considering setting up operations in the country, should evaluate these recent changes to assess potential risks of being considered to have a local taxable presence.
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Alejandro Nemo Gomez Strozzi, a partner at Foley & Larder, focuses his practice on providing advisory and consulting services related to international trade compliance, antidumping, customs, foreign trade and Mexican administrative law. As a top international trade lawyer, he has advised major multinational companies in the automotive, steel and consumer products sectors.
Fernando Camarena Cardona, a partner at Foley & Lardner, is a senior business and legal advisor on international and domestic tax issues in Mexico, providing both tax counseling and assistance with litigation. He represents small companies to Fortune 500, FTSE 100 and other global and brand name corporations in the energy, manufacturing, nutritional supplement, insurance and other industries.
Marco Najera Martinez, a partner at Foley & Lardner, is a recognized go-to transactional and regulatory lawyer representing global companies doing business in Mexico. With particular experience in the Mexico antitrust laws, he represents Fortune 500 corporations, as well as Mexico companies, in this highly specialized area.