On December 8, 2020, Mexico published important new Miscellaneous Tax Rules amending numerous tax regulations in the Official Journal of the Federation. Article 30 of the Federal Tax Code is among the regulations amended, and the latest rules introduce new obligations with respect to maintaining supporting documents demonstrating the economic reasons behind corporate capital increases and decreases.

In regard to capital increases resulting from a capitalization of liabilities, in addition to the corporate meeting minutes approving such increases, companies must also provide a certification that, from an accounting perspective, shows the existence of the liabilities and their corresponding values. The certification must be issued in compliance with the requirements set forth in the general rules issued by Mexican tax authorities for such purposes.

This particular amendment also contains a special provision that allows tax authorities to issue general rules to set forth the requirements for companies to make such certifications showing the accounting existence of the capitalized liabilities and their corresponding values.

By means of the 2021 Miscellaneous Tax Rules published in the Official Journal of the Federation on December 29, 2020, a new rule was added: 2.8.1.23 “Certification of accounting existence of liabilities and their corresponding values”, which provides that such certification must be issued by a Registered Public Accountant, and shall include among other items, information which allows for the identification of the taxpayer, entity, or other legal figure that incurred the obligation in relation to which the liability was incurred, the document giving rise to such liability, and the value of such as of the date of capitalization, along with documents which prove that the amounts arising from the capitalized liabilities were in fact delivered.

Depending on the origin of the liabilities to be capitalized, the aforementioned certification may include more information processes, internal controls, and detailed descriptions of many types of transactions. Therefore, it is advisable to plan the execution of such certification in advance, and that the required information be at hand on the date the capitalization of liabilities is approved.

Both article 30 of the Federal Tax Code and Rule 2.8.1.23 of the 2021 Miscellaneous Tax Rules entered into force on January 1, 2021. Thus, taxpayers should review the scope of such provisions to be able to comply with their corresponding obligations.

A Decree was published in the Official Journal of the Federation (“DOF” for its acronym in Spanish) on May 19, 2021, amending the thirteenth transitory article of Mexico’s 2014 Hydrocarbons Law (the “Decree”) and granting the Energy Regulatory Commission (“CRE” for its acronym in Spanish) 30 days to abolish all general administrative regulations that had been issued to implement the “asymmetric” regulation of Petróleos Mexicanos and its subsidiaries and affiliates (“PEMEX” for its acronym in Spanish). CRE complied almost immediately on May 21, publishing Resolution A/015/2021in the DOF, which cancelled a total of 49 prior resolutions issued for such purpose.

The asymmetric regulation was based on the abovementioned transitory article, which granted authority to the CRE to establish general contractual terms and conditions, as well as maximum prices, in first-hand sales and marketing of hydrocarbons, refined oil products, and petrochemicals, performed by PEMEX. The purpose of the scheme was to limit PEMEX’s dominant power as a market agent until effective competitive conditions were achieved with new entrants in the Mexican market.

Regulations such as these are not new to Mexico. The CRE has had the authority to regulate first-hand sales of natural gas since 1995, as well as certain refined oil products since 2008. To fully implement the constitutional energy reform of 2013-14, the CRE issued new regulations. Such regulations have been cancelled and PEMEX remains a very powerful market agent, now deregulated.

Many would argue that Mexico’s Congress unreasonably assumed that sufficient diversity had been achieved in the market to consider it efficient and competitive. For example, at present, approximately 70% of gasoline consumed in Mexico is imported from the United States, while only 30% is produced by PEMEX. However, PEMEX performs 80% of imports, thereby satisfying up to 85% of Mexico’s domestic demand.

The Decree adds further concern to the private sector by further limiting access to a competitive hydrocarbons market in Mexico. Recently, the American Petroleum Institute (“API”) expressed its concern to the United States government in regard to the unfavorable treatment that several companies have received from Mexico’s current administration, alleging that the administration had taken measures to protect its own State-owned companies. The API’s allegations may constitute the basis for initiating protest processes set forth in international treaties to which Mexico is a party, such as the USMCA.

Recently, specialized antitrust federal courts in Mexico have granted some provisional suspensions against the Decree within certain amparo lawsuits. In general, Mexican courts have ruled that the Decree could have a devastating effect on market competitiveness. Companies other than PEMEX that hold permits for marketing hydrocarbons, refined oil products, and petrochemicals, as well as buyers of such products are most clearly affected.

CCN has actively followed the legislative process of the Decree, and of the prior amendments to the Hydrocarbons Law and the Electricity Industry Law. We are available to assist you in evaluating the impact of the Decree on your company, and if applicable, with the corresponding defense proceedings.

First Request for Rapid Response

On May 11, 2021, the first request for Rapid Response under the Labor Mechanism set forth in the United States-Mexico-Canada Agreement (“USMCA”) was filed by the American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”), Public Citizen, and the National Independent Union for Employees of Industries and Services (“SNITIS” for its acronym in Spanish).

The request was filed in connection with an allegation that Tridonex, a Mexican automotive company, violated its employees’ rights. The AFL-CIO alleges that employees have been harassed and fired because of their intention to join the SNITIS union.

The complaint is based on several allegations that Tridonex violated its employees’ labor rights, including: (i) that employees have not been allowed to choose their union leaders or legitimize their collective bargaining agreement; (ii) that more than 600 employees were fired in retaliation, and (iii) that the State of Tamaulipas has denied their right to choose which union the employees can join.

The USMCA provides for a Facility-Specific Rapid Response Labor Mechanism which allows the United States to request that measures be taken against Mexican companies that violate their employees’ rights to freely unionize and to bargain collectively. The U.S. government has 30 days to determine whether the complaint is admissible, and whether it will formally file such with the Mexican government, through Mexico´s Department of Economy (SE for its acronym in Spanish), giving such agency 45 days to respond as to whether or not the employees’ rights have been violated and, in the case of a violation, to propose a plan for remediation.

Second Request for Rapid Response

The second request for Rapid Response was filed by the United State Trade Representative (“USTR”) in connection with an alleged violation by General Motors of its employees’ rights to freely associate with any union and to enter into a collective bargaining agreement. The U.S. government determined that the complaint was meritorious; therefore, the Mexican government must commence the aforementioned process.

Mexico’s Department of Labor and Social Welfare (“STPS” for its acronym in Spanish) will be the governmental agency in charge of coordinating the legal evidence necessary to determine whether a violation of employees’ rights has occurred. It will do so by convening an Integral Analysis and Remediation Board (the “Board”), comprised of the SE, STPS, union associations, industry chambers, and representatives from the workplace involved in the allegations, to grant such parties the opportunity to offer additional evidence to document the matter and issue an advisory opinion.

If the Board determines that employees’ rights were violated, it is required to propose a plan of remediation which is well-grounded and sufficiently convincing so the complaining party, in this case the U.S. government, will accept it and therefore suspend the claim during its implementation. If the parties do not agree on a plan of remediation, the complaining party may request that a panel be appointed to determine if a violation of rights exists. The panel must be composed of a panelist from the complaining party, another from the respondent, and a third from the list of non-nationals, who will be responsible for presiding over the panel.

If the panel determines that the employees’ rights were violated, Mexico´s government will have five days to negotiate the nature of the sanctions, which may be any of the following: (i) suspension of preferential tariff treatment granted under the USMCA; (ii) imposition of penalties on related goods or services, and (iii) denial of entry of goods or services provided by the facility.

After the imposition of sanctions, the parties will continue to consult on an ongoing basis to ensure the prompt remediation of the violation and removal of the sanctions. As soon as the parties agree that the violation has been remediated, the complaining party shall immediately remove all sanctions implemented.

Finally, on May 11, 2021, the STPS published a communication regarding its determination that the process to legitimize the collective bargaining agreement for the General Motors facility located in Silao, Guanajuato will be replaced. Such decision comes from allegations of violations to employees’ rights to vote. The STPS instructed the National Union of Workers of the Metal-Mechanic Industry to replace the prior legitimization process within a period of 30 days, which time period may not be extended. This response is closely tied to the second request for Rapid Response. It is expected that the aforementioned actions will be part of the plan of remediation the STPS would issue, if necessary.

The U.S. business environment offers a favorable climate for foreign companies and individuals seeking to achieve positive results for their trade and investment activities. When assessing potential business opportunities in the U.S., it is essential for such foreign parties to carefully prepare a detailed plan which takes into consideration prevailing U.S. legal, tax and cultural aspects. 

The points described in this article summarize some of the most important topics that foreign businesses and investors should understand before doing business in the U.S. Experience has shown that successful projects require foreign businesses to assemble a team of legal, financial and tax advisers who are able to advise the business as it undertakes a particular trade or investment project in the state of Texas, or throughout the U.S. generally.  Below are several of the most important matters for foreign businesses to consider. 

1. Based on the applicable formula established in U.S. tax law, if an inbound foreign investor establishes residency anywhere in the United States and abandons his or her foreign homestead, such investor will likely become a U.S. tax resident and be responsible for declaring income generated on a worldwide basis for U.S. income tax purposes.

2. When selling real property located in the U.S., non-resident aliens (NRAs) will have tax from any such sale withheld from the sales proceeds, according to special tax rules that apply to such sales in the U.S.

3. Tax residence in the U.S. (those who remain for any part of 183 days or more during a 12 consecutive month period, as further defined in the U.S. tax code) is different from resident status for immigration purposes.  Someone can be a U.S. tax resident without being a U.S. permanent resident.

4. A third type of “residency” under U.S. law is residency for U.S. estate tax purposes.  Estate tax residence is a fact-based determination that can have a tremendous impact on an individual’s estate. This is because U.S. residents receive a substantially larger estate tax exemption than non-U.S. residents.  Under applicable U.S. tax law, foreign taxpayers receive an estate tax exemption of only $60,000, while individuals who reside in the U.S. for estate tax purposes receive an exemption of $11,700,000 for 2021. The difference is striking and can lead to negative results for foreign individuals who fail to make necessary plans.

5. The United States levies an estate tax on all non-cash equivalent U.S.-based assets at rates as high as 40%.

6. School age children attending public schools in the U.S. with tourist (B2) visas are at potential risk under U.S. immigration laws for attending school without the proper immigration authorization. 

7. U.S. corporations owned by Mexican corporations may be able to, after paying U.S. corporate income tax, distribute dividends to their Mexican parent corporations at reduced rates under the U.S.-Mexico Tax Treaty.

8. A U.S. corporation may not elect “S” small business status (S Corp status) if such corporation has any percentage of non-U.S. resident alien ownership.

9. Texas may impose a 1% franchise (margin) tax on entities doing business in Texas.  If inbound businesses and investors do not establish a taxable business presence in Texas, it may be possible to minimize applicable state income or franchise tax by operating through an entity formed in another jurisdiction such as Delaware or Nevada.

10. The U.S.-Mexico Tax Treaty seeks to avoid double taxation on binational business and investment activities.   The Tax Treaty may have an impact on Mexican businesses and investors in the U.S., and such should be consulted when reviewing binational tax and financial planning and business activities generally.

Please contact the following for additional information or for a consultation with respect to your particular U.S. legal matter:

Contact Information:

Daniel Cavazos | dcavazos@ccn-law.com

Robert Barnett | rbarnett@ccn-law.com

Marissa S. Rodriguez | msandoval@ccn-law.com

Natalie Cerón-Cuellar | nceron@ccn-law.com

Carrie Osman | cosman@ccn-law.com.mx

On April 8, 2021, the U.S. International Trade Commission (“ITC”) published details on its implementation of rules with respect to the investigation of Mexican carriers providing cross-border trucking services in the United States.  The purpose of the investigations is to determine whether the operations of Mexican carriers will cause or threaten to cause material harm to U.S. carriers.

The new rules arose from complaints by the ITC and various trucking associations in the United States with respect to the manner in which cross-border trucking services were regulated in the North American Free Trade Agreement (“NAFTA”). As a result of negotiations on the issue, in the United States-Mexico-Canada Agreement (“USMCA”) the parties agreed on the possibility of the ITC issuing new rules to structure a legal process that U.S. carriers can use to seek remedies against alleged material harm caused by Mexican carriers operating in the United States.

For purposes of the new rules, material harm means “a significant loss in the share of the United States market or relevant sub-market for cross-border long-haul trucking services held by persons in the United States”.

It is worth noting that the Mexican government opposed the language included in the rules, arguing that the ITC rules define material harm in a manner that is inconsistent with its definition in the USMCA, and that the U.S., Mexico and Canada agreed upon a more narrow definition in the USMCA, meanwhile the new rules follow a broader definition contained in U.S. domestic law in the Tariff Act of 1930.

Note that an interim version of the rules existed, and that the only update made to the interim rules is that these final rules require that petitioners requesting investigations include freight rates in their petitions to clarify the type of pricing information necessary instead of including pricing information in their requests.

These new rules are effective as of May 10, 2021.

Please contact us if you have any questions regarding the investigation process established by the ITC and/or the rules applicable to Mexican carriers in the United States.