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After a long legislative process, Mexico’s Federal Congress has approved amendments to several laws implementing a judicial restructuring in Mexico. Among the amendments restructuring the Mexican Judicial Branch is a transitory article that has sparked national debate in numerous: political, judicial, academic and the media. Mexican public opinion was that such transitory article came as a surprise, because it was not included until the very end of the amendment process. Transitory article thirteenth approves a two-year extension to the existing four-year term of the chief justice of the Mexican Supreme Court, Arturo Zaldivar, which existing four-year term had already been approved by the full Supreme Court, as required under the Constitution.
As opposed to the United States, where the executive branch appoints the Chief Justice of the Supreme Court with the approval of the Senate, in Mexico the full Supreme Court appoints its own Chief Justice for a four year term, and such term may not be extended. The above amendment was clearly unconstitutional, and the opposition has filed a lawsuit to declare the amendment unconstitutional and invalid. This created a conflict of interest, given that the Supreme Court would have to rule on the constitutionality of the transitory article that specifically applied to and affected the Court itself. Such ruling would have negative consequences on the relevant work of the Supreme Court’s justices. To put an end to the controversy, the Chief Justice waived any right to extend his term. Chief Justice Arturo Zaldivar stated that he will use the remainder of his term on the Supreme Court to advance the implementation of the new regulations applicable to the Mexican Federal Judicial Branch. By his actions, the Chief Justice resolved a conflict that would have impacted the Supreme Court and the Federal Judicial Branch.
The removal from office process, or recall, is a direct democratic process through which citizens decide whether an elected official should continue to serve after the expiration of his term or be removed. Amendments to the Mexican Constitution published in the Official Journal of the Federation on December 20, 2019 establish that the removal from office process is a citizens’ right. In accordance with such amendments, the process to recall the Mexican President must be invoked by the National Electoral Institute (INE for its acronym in Spanish). It must be requested by at least 3% (2.6 million) of Mexico’s registered voters and may be requested only once. Such single request must be made within the three months following the end of the third year of the President’s constitutional term.
Since the beginning of his term, Mexican President, Andres Manuel López Obrador proposed that he would promote the removal from office process under the premise that “the people elect, and the people recall”. It seemed theorical and academic, but it has now become political. Mexico’s political thermometer has risen several degrees due to the different and opposing views on this topic. Ironically, Mexican President López Obrador and his supporters are proponents of the removal from office process, as are those who are openly opposed to his government and would prefer that he leave the presidency in the event a recall were to be successful. On the other hand, a group of opposing political parties view the recall process a political scheme by the President to secure his power and demonstrate that the people not only approve his administration, but that they would like to expand his constitutional term. There are arguments for and against the removal from office process and it is a topic that will continue to affect Mexico’s political thermometer.
Toward the end of last month, Mexico’s Federal Electricity Commission (“CFE”) stated in a press conference that a December 28, 2020, interruption in electricity supply was mainly due to a failure of the San Carlos wind power plant in Tamaulipas, which is owned by the Spanish company Acciona. Such conclusion was based on an expert report ordered by CFE itself, which has not been made public.
This statement is consistent with the declarations made by CFE in January, in which it blamed the variability of some renewable energy power plants as the cause of the failure, and it is consistent as well with numerous affronts by the government against foreign companies over the last few months, including Iberdrola and Enel.
In the press conference, CFE stated that it will take several actions, including being more demanding in verifying interconnection requirements, implementing a system of inspections, and requesting the Energy Regulatory Commission (“CRE”) to not grant new permits in areas lacking transmission capacity. It further called on the CRE to suspend permits to power plants that have not made progress in their construction.
Regarding this last point, it should be noted that generation permit holders have several obligations. These include adhering to the construction schedule, not suspending construction for more than three months, and complying with the authorized commercial operation date. The CRE has the power to revoke permits for failure to initiate the activities covered by the permit, and to suspend operations to protect the public’s interests regarding quality, reliability, continuity, and security of electric supply.
A proper basis and justification should exist in order to suspend operations or revoke permits. Both involve formal procedures, including the right to a hearing in accordance with the Mexican Constitution. Accordingly, permit holders may assert force majeure or acts of God defenses, provided they can provide reliable evidence of such occurring.
In any case, as has already been seen, considerable delays can be expected with respect to the CRE’s granting of generation permits, as well as greater scrutiny for existing permits, both for projects that are underway and those already in operation. The CFE is also expected to take an even more proactive role in interconnection procedures, especially when evaluating applicable requirements prior to a new power plant’s commissioning.
In recent months, the electricity sector has taken several blows. The CRE has been weakened and left unable to fulfill its constitutionally mandated role. Since the personnel cuts instituted in 2018 at the beginning of the president’s six-year term, deadlines to respond to applications have rarely been respected. This will only be made worse by two term suspensions supposedly justified by the pandemic, the second of which continues in force until further notice.
Previously it had been complicated, and nearly impossible, to initiate new power generation projects; now it will also be difficult to maintain them.
On August 30, 2021, updated financial indicators reflected:
Peso/Dollar Exchange Rate: $20.2293 pesos per Dollar.
Mexican Stock Exchange: The Mexican Stock Exchange (BMV) closed 52,602.07 points.
Interest Rates: The Average Interbank Rate (TIIE) for a 28-day period was at 4.7500%.
The Fifth Resolution Amending Mexico’s 2020 General Foreign Trade Rules (the “Resolution”) was published in the Official Journal of the Federation on May 27, 2021. Among other amendments, it repeals rule 5.2.5. Rule 5.2.5. allowed a sale of temporarily imported goods to be considered as a sale that occurred abroad between a foreign seller and a Mexican IMMEX entity buyer. This meant that such sales would not be subject to the Value Added Tax Law. In essence, rule 5.2.5. established a legal fiction whereby such sales were considered to have occurred abroad, even if the subject goods were physically located within Mexican territory.
In accordance with the Resolution’s First Transitory Article, the repeal entered into force 30 days following publication of the Resolution.
Starting on July 8, 2021, transactions fitting the above description are now governed by the general regime established in articles 1-A section III (withholdings) and 10 (sales in Mexican territory), of the Value Added Tax Law. Therefore, beginning as of such date, IMMEX entities which acquire temporarily imported goods (or finished goods) from foreign sellers, must withhold corresponding value added tax arising from such transactions.
A special tax resolution published in the Official Journal of the Federation on April 23, 2021, amends several current rules to establish that Mexican tax authorities will now disallow any credit or deductions for wages or other payments made for outsourced services that relate to the taxpayer company’s purpose and main economic activity. Once Mexico’s new Outsourcing Decree enters into force, such payments will be considered violations of the Decree. The Decree’s entry into force has been extended until September 1st, 2021.
The General Federal Tax Auditor’s Office of the Mexican Tax Administration Service (“SAT”) has created an Introductory Program to Audit Specialized Services (the “Program”), designed to identify taxpayers with inconsistencies which could harm Mexico’s federal treasury. Mexico’s Federal Attorney General and the SAT’s Financial Intelligence Unit will join the SAT’s efforts.
The SAT’s Central Office of Planning and Programming for Federal Tax Audits will identify taxpayers receiving specialized services and the work. Such department will then assign such matters to the Central Administration for Strategic Audits and the Decentralized Office of Tax Audits and will oversee a database containing information on the relationships between taxpayers and their service providers, including those classified as entities that issue invoices for simulated or fraudulent transactions (“EFOS” for its acronym in Spanish), and those not classified as such. The database will also include taxpayers the SAT has identified as previously having issued invoices for outsourcing services, and which have therefore paid 6% in VAT withholdings.
The Program will have three stages, (i) notice to the taxpayer, informing it of an irregularity or inconsistency in the Central Platform of Internet Digital Tax Receipts (“CFDI” for its acronym in Spanish); (ii) formal notice requesting taxpayers who received outsourcing services and who currently receive specialized services to file certain information, including information found on the CFDIs issued by their service providers, and (iii) a resulting audit of taxpayers who have not provided information to demonstrate the materiality of the services received, or who have submitted such information with inconsistencies. It is important to note that the Program involves an active and close administrative collaboration among the SAT, the Mexican Department of Labor, the Mexican Social Security Institute, and the National Fund Institute for Employee Housing. Finally, it is also important to note that tax authorities will not provide taxpayers with minutes or written statements as a result of their failure to respond to the process outlined above. A taxpayer’s failure to respond may result in the SAT cancelling the taxpayer’s certificates of digital tax seals, which will most likely result in severe economic consequences for the taxpayer.
Based on recently approved amendments to Mexican labor laws prohibiting the outsourcing of personnel (with the only exception being those providing specialized services), it is crucial for those companies that customarily engage specialized services to take certain actions to avoid any violations of Mexico’s new labor regulations. As such, companies with specialized service providers should consider carrying out the following actions:
Our firm is closely following the amendment process. We have reviewed in detail the requirements of the new regulations. We are consulting with many clients on these major legal changes and are available to review specific issues or questions your company may have.
