Sorting Through Mexico’s Legal LandscapeWed, 02/22/2017 - 09:52
Investing in a new country can be an exciting opportunity but also a daunting challenge for a company that is not familiar with how business is done in that specific region. Particularly in Mexico, even though there are established regulations and laws, managing the bureaucracy and small details in deal-making can be a complex task. An experienced local partner is vital for a smooth transition, offering legal and consulting firms an opportunity to expand their presence in the market.
“The energy sector is not that different from other industries and companies, it just needs someone who knows how to do business in Mexico,” says Rafael Torres, Attorney at Rödl & Partner. Although oil and gas projects are in the spotlight, the Energy Reform has spurred new clients interested in electricity and renewables to diversify their portfolio. “Industry players are now looking for new alternatives in terms of energy sourcing and generation,” he adds. “However, there is still a lack of regulation and experience, so we must take the first steps.”
According to the World Bank Group, Mexico currently holds the 47th position in its 2017 Doing Business global ranking, the first Latin American country on the list, followed by Colombia. While Mexico shows considerable advantages in areas like financing with a rank of five out of 190, the country still has significant opportunities in tax payment and international commerce with 114 and 61 out of 190 respectively. Rödl and Partner has developed the skills to help clients maneuver these challenges. Regarding financing solutions, the company has created a platform to help investors analyze their options. “In some projects, it is much more viable to get financing through private equity arrangements than debt,” says Andreas Voss, Attorney at Rödl & Partner. “We created our NLX platform to help companies know the projects and make informed decisions on their investments.” There are similar opportunities in the manufacturing sector according to Torres, specifically for companies wanting to participate in the Ministry of Economy IMMEX program for manufacturing and Maquiladora export services and apply for tax exemptions. According to KPMG Mexico, increasing the tax rate from 17.5 to 30 percent for companies outside the IMMEX program has decreased Mexico’s competitiveness. Meanwhile, Torres highlights the difficulties for applying to VAT certification. “It is simple for manufacturing companies to get an IMMEX authorization but they also need a VAT certification. This usually takes around six months,” he says. “The law states that the process should last only 40 days but that is the time it takes for the government to even start reviewing a company’s documents and if it requires additional documents it starts the 40-day term again.”
Both Rödl & Partner and KPMG identify the need to improve the tax code to keep attracting investors. “Tax reforms must consider that businesspeople want to invest in Mexico but they lack the proper incentives,” says Torres. “Most companies have import and export operations and we have enough experience to support them,” Voss adds. Other areas are more complex to understand. Certain regulations are strange concepts for foreign investors such as the fact that companies need a legal address in Mexico to get a tax ID or the Statutory Profit Sharing scheme. According to Torres, Mexico is the only country in the world where it is mandatory for companies to share 10 percent of their revenue with their employees, which companies generally compute as a tax.
Bureaucracy and long procedures are not uncommon in other markets either but Torres is confident that investors can make the most of it. “Mexico has good legal foundations but sometimes not good people to enforce them. Even so, the system works and most companies have a good experience in Mexico and take advantage of the long list of Free Trade and Double Taxation Agreements signed by our country. They just need to be well advised to take advantage of the legal environment.”