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Potential Impact of the Trump Administration and Recent Legal Developments in Mexico.
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Baker McKenzie
1.
Baker & McKenzie
LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2016 Baker & McKenzie LLP Potential Impact of the Trump Administration and Recent Legal Developments in Mexico Hugo Dubovoy U.S.-Mexico Chamber of Commerce Mexico Tax and Legal Update, and Economic Outlook for 2017 February 9, 2017
2.
© 2017 Baker
& McKenzie Protectionist Measures Promised 2 NAFTA overhaul (or withdrawal) Renegotiation: Mexico willing to consider Improving working conditions and environmental standards. Rules of origin to require more North American content Investor-State arbitration system. Import duties (35%, 20%) TPP Not the case of NAFTA.
3.
© 2017 Baker
& McKenzie Protectionist Measures Promised 3 WTO membership under review. Withdrawal might require Congress approval. Withdrawal might also trigger a global trade war. The President has also promised to bring more anti- dumping and countervailing duty actions against other countries under the WTO rules.
4.
© 2017 Baker
& McKenzie Dismantling NAFTA Without Congress 4 Withdrawal 6-month notice for withdrawal. Presidential authority to withdraw. Tariffs - Inside the Box Trade Act of 1974 NAFTA tariff rates to continue for one year Can the President avoid? Can Congress override?
5.
© 2017 Baker
& McKenzie Dismantling NAFTA Without Congress 5 NAFTA Implementing Act Does withdrawal trigger repeal? Recourse to US federal courts. Recourse to WTO. “Most Favored Nation” (MFN) rates Generally capped at approximately 3.5% (for the U.S.). Carrier example – 1% - 2.2%. Discriminatory application to one country would violate WTO principles. Exchange rate
6.
© 2017 Baker
& McKenzie Dismantling NAFTA Without Congress 6 Tariffs - Outside the Box Trade Act of 1974 (e.g., 15% import duty for up to 150 days without investigation). Tariff Act of 1930 (“discrimination in fact”). Trading with the Enemy Act of 1917 (“time of war”). International Emergency Economic Powers Act of 1977 (“threat to national security”). Trade Expansion Act of 1962 (imports constituting “a threat to national security”). All prior to the creation of the WTO in 1994. "Border Tax Adjustment” Would be part of corporate tax reform. Congressional approval.
7.
© 2017 Baker
& McKenzie Dismantling NAFTA Without Congress 7 Example Assume 20% corporate income tax rate. Corporate income tax would apply to domestic income only (not export sales). Only domestic costs deductible (not costs of imports). Company A Company B Company C Domestic Sales $100 Domestic Sales $100 Export Sales $100 (0) Domestic Costs $ 80 Import Costs $ 80 (0) Costs $ 80 Taxable Income $ 20 Taxable Income $100 Taxable Income $ 0 20% Tax $ 4 20% Tax $ 20
8.
© 2017 Baker
& McKenzie Dismantling NAFTA Without Congress 8 A BTA could violate WTO rules. Also, Mexico has indicated that, should a BTA be implemented, it could provide tax relief to the affected companies with the purpose of minimizing the BTA’S effect. Traditional Trade Remedies Anti-dumping and countervailing duty orders. Additional duties in excess of 200%. When unfair trade practices.
9.
© 2017 Baker
& McKenzie Mexico’s Network of International Agreements 9 12 Free Trade Agreements with 46 countries, including the European Union, and Japan. More to come: UK, TPP countries (Australia, New Zealand, Singapore, Malaysia, and possibly Vietnam). Other 9 partial scope agreements. 30+ Investment Protection Treaties. 55+ Tax Treaties (prevention of double taxation, preferential or 0% tax rates). Multiple Opportunities.
10.
© 2017 Baker
& McKenzie Mexican Anti-Corruption Reform 10 Latest component of the Mexican structural legal reforms (e.g., energy, financial, telecomm, and education). It is another indication of Mexico’s interest in having a solid legal structure that can withstand changes in Presidential administrations. Preceded by Constitutional reform in May of 2015 (the opposite extreme of Executive Orders). In June and July of 2016, new laws or significant amendments to various laws, including the Law for the National Anti-Corruption System, the Federal Criminal Code, and the Administrative Liability Law were published. The Law for the National Anti-Corruption System: (i) Sets forth the bases for coordination among the Federal, State and Municipal levels of government to fight corruption; and (ii) Provides for the participation of the citizenship to help the government fight corruption.
11.
© 2017 Baker
& McKenzie Mexican Anti-Corruption Reform 11 The Federal Criminal Code: now establishes criminal liability for companies for over thirty crimes, including bribery of public officials, fraud, influence trafficking, health crimes, obstruction of justice, money laundering, bankruptcy fraud and tax fraud. This is a major change in the Mexican legal system. Penalties include fines, seizure of property, suspension of activities (for up to 6 years), foreclosure (6 years), prohibition to bid in government procurement projects (6 years), and even dissolution of the entity. Reduction of penalties if the company has a compliance program.
12.
© 2017 Baker
& McKenzie Mexican Anti-Corruption Reform 12 The Administrative Liability Law: The new law applies to governmental officials, and, unlike the law that preceded it, also to non-governmental entities and their executives. It will enter into effect on July 18. Until then, the current law will continue to be in effect. Now, to reign in corruption, all government officials will be required to file 3 documents: these are a statement of their personal assets, a statement of interests to verify whether conflicts of interest exist, and even their personal tax return. Annual filing. The first two will be made public.
13.
© 2017 Baker
& McKenzie Mexican Anti-Corruption Reform 13 Penalties applicable to legal entities will include (i) fines as high as twice the economic benefit they obtained, or, absent an economic benefit, approximately $6M; (ii) ineligibility to participate in government procurement projects, for up to 10 years; (iv) suspension of activities for up to 3 years; (v) dissolution of the entity; and (vi) payment for damages. There will be some mitigating factors, like having a compliance program and cooperating with the investigations. Another noteworthy aspect of this law is that it introduces the concept of the whistleblower.
14.
© 2017 Baker
& McKenzie Potential need for Companies with Shelter Operations to Restructure in 2018 14 Shelter operations. Exception to rule of having a taxable presence. As of January 1, 2014 operations of non-Mexican companies through shelter companies started being subject to a term of 4 years from the (i) date of the Shelter Agreement, or (ii) January 1, 2014 for contracts of an earlier date. So, all non-Mexican companies with Shelter Agreements entered into prior to January 1, 2014 need to consider what to do starting on January 1 of next year. Otherwise, the non-Mexican company will be considered to have a taxable presence (a “permanent establishment”) in Mexico.
15.
© 2017 Baker
& McKenzie Potential need for Companies with Shelter Operations to Restructure in 2018 15 Transition Review Shelter Agreement and plan for transition. Was a special purpose vehicle organized for the shelter operations? Does the Shelter Agreement provide for the transfer of operations? Mexican entity IMMEX/maquila program Facility lease (third-party consent?)
16.
© 2017 Baker
& McKenzie Potential need for Companies with Shelter Operations to Restructure in 2018 16 M&E Inventory Personnel Termination of employees with payment of severance and re-hire. Resignations by employees and simultaneous re-hire. Employer substitution (same terms and conditions of employment). Personnel that provides services to various companies.
17.
© 2017 Baker
& McKenzie Potential need for Companies with Shelter Operations to Restructure in 2018 17 Per rules that took effect on January 1, 2016, after the initial 4-year term of a Shelter Agreement, those non-Mexican companies, if they wish to continue operating through shelter companies, may comply with their Mexican tax obligations through the shelter company. They will become subject to Mexican income tax, but will not be required to register as Mexican taxpayers for an additional period of 4 years, provided, among other requirements: Tax residency in country with which Mexico has an information exchange agreement. Filing a notice. Shelter company will determine and pay tax (joint liability);
18.
© 2017 Baker
& McKenzie Potential need for Companies with Shelter Operations to Restructure in 2018 18 Shelter company must contract a multinational firm to certify key components of the tax determination. The shelter company must comply with its tax obligations and be certified for VAT and IEPS purposes (highest certification level). The shelter company’s revenue must come from shelter services provided to non-residents in its entirety (no revenue for sales or distribution of products into Mexico).
19.
© 2017 Baker
& McKenzie Worst Case Scenario- Should It Be Necessary to Shut Down U.S. Export Operations in Mexico 19 So far, in spite of the uncertainty, we’ve seen that: Various companies have confirmed their plans for Mexico (e.g., Toyota, Daimler, BMW, Mazda). Others stated that they will create jobs in the U.S., but they will also continue manufacturing in Mexico (U.S. auto manufacturers). Some American companies continue investing heavily in Mexico. Export markets other than the U.S. But there might be some companies that need to consider the possibility of shutting down their U.S. export operations in Mexico, and to have an idea of how that could look like.
20.
© 2017 Baker
& McKenzie Worst Case Scenario- Should It Be Necessary to Shut Down U.S. Export Operations in Mexico 20 Shelter Operations Review terms of Shelter Agreement Term. Termination rights (e.g., notice). Termination obligations (e.g., early termination fees, severance pay for employment terminations). 3 months of total compensation plus an additional 20 days of total compensation per year of services. M&E and Inventory. Real Estate. Might delay the reorganization of operations discussed before Calculate Mexican income tax liability. Review in the context of company’s global tax position.
21.
© 2017 Baker
& McKenzie Worst Case Scenario- Should It Be Necessary to Shut Down U.S. Export Operations in Mexico 21 Wholly-Owned Operations Corporate resolutions including the appointment of a liquidator (usually a CPA resident of Mexico). Need to be notarized and recorded with the Commercial Registry. The liquidator must conclude any pending business of the Company, such as: collecting accounts receivable paying accounts payable selling any assets prepare the final balance sheet The Company’s final balance sheet prepared by the liquidator must be published in the Mexican Official Gazette three times, in ten-day intervals.
22.
© 2017 Baker
& McKenzie Worst Case Scenario- Should It Be Necessary to Shut Down U.S. Export Operations in Mexico 22 The final balance sheet for the Company must be approved at a shareholders meeting (the “Liquidation Meeting”). The minutes of the Liquidation Meeting must be notarized in a notarial deed. The notarial deed that formalizes the Liquidation Meeting, together with evidence of publication of the balance sheet, must be registered with the Commercial Registry, and the Company’s registration must be cancelled. The Company must notify the Foreign Investment Registry of its liquidation. The liquidator will be required to keep the corporate records of the Company for ten years after the liquidation process concludes. The liquidator will be required to make various tax filings, including (i) notice of initiation of liquidation process, (ii) tax returns, (iii) notice of termination of liquidation process, and (iv) cancellation of tax ID number.
23.
© 2017 Baker
& McKenzie SUMMING IT UP 23 There are some measures that the President can take on his own, and others that would require Congressional approval. Simply withdrawing from NAFTA would not significantly affect Mexico. A renegotiation of NAFTA might be beneficial for all NAFTA countries. Other more drastic measures could violate WTO principles or even US law. Withdrawal from the WTO might require Congressional approval and could trigger a global trade war. Mexico’s network of international agreements, both current and future, and its solid structural reforms, would still make it an attractive country, even without NAFTA or with a renegotiated NAFTA.
24.
© 2017 Baker
& McKenzie 24 Hugo Dubovoy Partner, International/Commercial Baker & McKenzie LLP 300 East Randolph Street Suite 5000 Chicago, IL 60601, USA Tel: 312-861-7970 Fax: 312-698-2141 hugo.dubovoy@bakermckenzie.
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