The arrival of Joe Biden to the White House will bring about changes in the U.S.-Mexico relationship. Although both countries will fundamentally remain the same, what will change is how the new U.S. administration will handle international relations, specifically the relationship with its neighbor south of the Rio Grande. For starters, talks on the border wall that was supposed to be built will be canceled and, generally, a more institutional and predictable relationship can be expected. For example, it is unlikely that Mexico will once again face threats of tariffs to reduce the burden of tens of thousands of immigrants, mostly Central Americans, but many Mexicans too, crossing the border and settling in the U.S. The reality is that those who aspire to reach the United States will keep trying to do so, particularly because the economic conditions in their home countries have deteriorated even further, due to the health, security, and economic crises in Central America. Importantly, the U.S-Mexico bilateral relationship, one of the most complex international relationships in the world, will again be assumed by the U. S. State Department. Issues of security, the fight against drug trafficking, the economy, and the environment will return to the agenda as priorities. In any case, it is expected that the knowledge that U.S. president-elect Joe Biden has about Mexico after decades of building close ties with Mexico, will be an important factor in achieving a supportive, productive, respectful, and fruitful relationship, which is what both great countries deserve.
Amidst the background of the economic and health crises that continue to plague the world, the issue that continues to be a concern for Mexico is politics. Indeed, everything is gearing up for 2021 to be the year in which we will see high temperatures on the Mexican political thermometer. On Sunday, June 6, 2021, the largest election in the history of the country will be held. There will be elections in all 32 states of the Republic. There will be a new slate in the lower congressional Chamber of Deputies, with 300 members to be elected by a relative majority, and 200 to be elected by the proportional representation principle. The following fourteen states will have elections for governor: Baja California, Baja California Sur, Chihuahua, Colima, Guerrero, Michoacán, Nayarit, Nuevo León, Querétaro, San Luis Potosí, Sinaloa, Sonora, Tlaxcala, and Zacatecas. Additionally, elections for municipal presidencies and for the 16 mayors in Mexico City will take place. These figures show that the interest brought about by the upcoming elections is not by chance, given that the results will determine whether MORENA, the party to which President Andrés Manuel López Obrador belongs, will continue to maintain its dominance in the Mexico’s Congress (it has a majority in the Senate). The elections will also determine if the opposition will be able to maintain control of the state governments that they currently hold or advance in adding new ones to their list. City councils, being the level of government that is closest to citizens, also have important local relevance. The high interest in the upcoming elections is such that parties that hardly ever entered into agreements to form coalitions, such as the National Action Party (PAN by its initials in Spanish) and the Institutional Revolutionary Party (PRI by its initials in Spanish), have expressed their interest in and commitment to, presenting joint candidates. The leftist Democratic Revolution Party (PRD by its initials in Spanish) has also announced that it will form coalitions with the PAN and PRI parties, with which it had traditionally held opposing positions. The polarization is so widespread that PAN leaders issued a statement addressed to their local members instructing them to seek coalitions with other parties, but with a warning not to do so with MORENA. The president's party has indicated that it will present coalitions with its allied parties, specifically with the Labor Party (PT by its initials in Spanish) and the Social Encounter Party (PES by its initials in Spanish). The Green Party has not expressed interest in joining forces with MORENA. As can be seen, the political temperature in Mexico will certainly rise as next summer approaches, climaxing on the country-wide elections to be held on June 6, 2021.
On November 13, 2020, the Plenary Court on Labor Matters of the First Circuit issued a ruling in contradiction of ruling number PC.I.L. J/67 L (10a.) entitled: “Foreign employees. Such are entitled to the return of the accumulated funds in their individual Retirement Fund Administrator (AFORE) accounts, as well as contributions to the housing subaccount fund when they permanently return to their country of origin, and without being subject to the requirements otherwise set forth in the law.” In its ruling, the court held that the funds corresponding to the retirement subaccounts, advanced age and old age unemployment funds, as well as housing funds, must be paid to foreign employees who permanently return to reside in their country of origin, “in order to fully safeguard their rights to social security and guarantee the actual enjoyment of the social benefits they earned through their employment in Mexico.” The court considered that, in recognition of human dignity and taking into account fundamental rights, it is appropriate to distinguish between the treatment of domestic and foreign employees to avoid prejudicial treatment accorded to foreign employees. This is especially true considering that foreign employees are unable to comply with the applicable regulations required to access the accumulated funds in their individual accounts. Based on the court’s decision, foreign employees working in Mexico who are enrolled with the Mexican Social Security Institute may recover the sums deposited in their respective individual accounts currently held in the AFORES and the Employees’ National Housing Institute Fund.
Mexico’s new Federal Protection of Industrial Property Law (“LFPPI” for its initials in Spanish) was published in the Official Journal of the Federation on July 1, 2020 and entered into force on November 5, 2020. The LFPPI repealed its predecessor statute, the Industrial Property Law (“LPI” for its initials in Spanish), and contains numerous changes as compared to the LPI.
Below are the most relevant changes set forth in the LFPPI:
In the coming days and weeks, CCN will publish additional articles with further detailed analysis regarding this major new law.
The third edition of “Solar Asset Management Mexico”, one of Mexico’s most important conferences on solar energy, was held during the month of October 2020. Due to the current pandemic, the conference was held virtually via a high-quality digital platform that brought together representatives from the entire Mexican electricity sector. Over the course of four days, more than 200 participants attended the presentations of more than 30 panelists, they had the opportunity to interact with each other, and they received a complete picture of Mexico’s current solar industry.
The energy sector has not been impervious to the challenges posed by the pandemic. A number of actions taken by Mexico’s current federal administration have also created an environment that has slowed new energy investments, particularly in utility-scale generation projects. This contrasts with the period of tremendous growth that occurred between 2016 and 2019, especially as a result of the long-term auctions. This was highlighted by Leopoldo Rodríguez and Héctor Olea, presidents of the Mexican wind and solar energy associations, respectively.
Jeff Pavlovic, founding partner of Bravos Energía, pointed out that developers are currently more focused on defending existing investments than on planning new projects. He stressed that many utility-scale solar power plants are taking too long to start their operations, mostly owing to delays in permitting and authorizations. Similarly, Mario Pani, Regional Manager at BayWa r.e., noted that the pandemic itself has significantly affected the speed with which governmental agencies respond to stakeholders.
Fortunately, other areas of the industry have continued to grow, as is the case with qualified supply. For example, Raúl González, General Director of CFE Calificados, highlighted a great market potential noting that there are currently more than 5,000 possible qualified end users, in contrast to the 386 qualified end users registered as of February 2020. These statements were seconded by Juan Guichard, CEO of the supplier, Ammper Energy, who added that due to the pandemic, more consumers are exploring options for reducing energy-related costs. End users are interested in fixed and stable electricity rates, as well as in knowing the origin of the energy they consume, as underscored by the Global Head of Environmental Sustainability at Coca-Cola FEMSA, Salvador Trejo. More companies are looking for competitive prices in the procurement of energy while at the same time trying to reduce their carbon footprint.
Another way end users can decrease costs and mitigate environmental impact is throughon-site generation, which includes isolated supply or local generation projects, as well as distributed generation. Pablo Rivero, Country Manager at ForeFront Power, and Casiopea Ramírez, Partner with Fresh Energy Consulting, shared advice on the development of on-site projects with a capacity greater than 500 kW: it is easier for projects to succeed if they are located in areas where they are not subject to a lot of competition with CFE, and do not intend to interconnect to the National Electrical System to inject surpluses into the grid.
Undoubtedly, the greatest threat to the sector is regulatory uncertainty. This was confirmed by a survey conducted during the event, where 60% of participants identified it as the greatest risk. Carlos García from Zuma Energía summarized the feelings of several developers when he stated that it is "like a fight between David and Goliath where David has no stone". However this analogy is more nuanced, because to date the Mexican federal judiciary has leveled the playing field by granting injunctions against the energy regulatory agency, the system operator, and the Department of Energy itself (“SENER” for its initials in Spanish), ruling that their actions went beyond their legal authority.
In any case, despite the evident short-term concerns noted above, the future remains bright for Mexico’s solar industry considering the abundance of the resource, technological competitiveness, large-scale storage developments, and an increasing demand for inexpensive, clean energy.
Section VI of Part B of Article 27 of Mexico’s Federal Tax Code (Código Fiscal de la Federación) was recently amended to require entity taxpayers to file notice with the RFC stating the name and RFC number of their owners or shareholders each time the composition of the owners or shareholders of such entity is modified or changed. Rule 2.4.19 of the Miscellaneous Tax Resolutions for 2019/20 (RMF) stipulates that the notice must be filed using transmittal form 295/CFF and occur within 30 business days following the effective date of the change of the composition of owners or shareholders.
Apart from the above notice, Transitory Article Forty-Sixth of the RMF establishes that entities and other business associations that have not updated the information of their owners or shareholders before the RFC are required to file, on a one-time basis, the notice referred to in Rule 2.4.19 of the RMF, and such notice must include sufficient information to confirm the filing entities’ ownership structure.
Such “one-time” notice should be filed no later than June 30, 2020. Entities and business associations that do not have the information of their owners or shareholders updated before the RFC, or that have not filed said “one-time” notice yet, may file the notice with no fine if the notice is filed prior to the tax authority requiring their compliance with this obligation.
It is important to note that this new provision is independent of the notice that must be filed within the first three months after each calendar fiscal year in accordance with the terms of the final paragraph of Section VI of Part A of Article 27 of the CFF for information pertaining to foreign owners or shareholders. However, if the information regarding the owners or shareholders is already fully updated through the filing of the notice mentioned in this paragraph, it will not be necessary to file a new update.
Based on the new requirements detailed above, if a company is required to file a notice of any changes to their owners or shareholders, such notice must be filed in accordance with the following:
We strongly recommend that you to take this new tax obligation into account. The professionals in CCN’s Corporate Center are available to advise you on how to comply with this new legal requirement.
The Mexican omnibus tax bill for 2020 was published in the Official Journal of the Federation on December 9, 2019. Among other changes, a new Section, “Regarding the Disclosure of Reportable Transactions,” was added to the Mexican Federal Tax Code (“CFF” for its acronym in Spanish), which sets forth a mandatory disclosure or reporting requirement for certain transactions including or involving tax planning structures (“Reportable Transaction”). Depending on the date of implementation of the tax planning transaction and other factors, the tax planning transactions must be disclosed or reported by either the tax advisor involved or the corresponding taxpayer.
The primary objective of the new reporting requirement is to prevent transactions that involve aggressive tax planning. As a practical matter, the reporting obligations are triggered by routine and common transactions conducted by most taxpayers, such as the application of international treaty benefits provided by treaties to which Mexico is a party, and accounting and tax differences of more than 20%, which, among other reasons, may arise as a result of a series of interconnected payments, transfer prices or the use of certain tax attributes.
Tax advisors bear the primary responsibility for reporting transactions in which the advisor was involved during or after fiscal year 2020. However, there are also situations in which the taxpayer bears the reporting obligation, including, but not limited to, the following cases: by mutual agreement of the taxpayer and the advisor with respect the reporting of transactions conducted in fiscal year 2020 and subsequent years; transactions that occurred prior to fiscal year 2020; or, when the tax advisor failed to report a Reportable Transaction.
It is important to consider that unlike other reforms, which typically become effective upon their publication, in the case of Reportable Transactions, taxpayers are required to review such transactions retrospectively for as many years as necessary and as long as the tax benefits of the tax planning transaction continue in force in 2020 and/or subsequent years. The taxpayer is then required to report the transaction, regardless of whether a tax advisor participated in the transaction.
Reportable Transactions must be disclosed within 30 calendar days following tax benefits having been made available to the taxpayer, or the first legal act in such transaction taking place, whichever occurs first. Notwithstanding the foregoing, transactions that occurred prior to or during 2020, must be reported by February 15, 2021.
The information that must be reported is primarily: (a) the name or corporate name of the person reporting and the corresponding tax identification number; (b) the names of the advisor and taxpayer’s legal representatives; (c) a description of the tax planning transaction and the tax benefits obtained or expected; and (d) the fiscal year in which the transaction was carried out. Because the deadline to report Reportable Transactions is fast approaching, the timely identification and evaluation of transactions that were implemented in the past, or those that will be implemented in the future, is key to ensuring adequate compliance with this obligation. Failure to comply or deficient compliance could lead to substantial financial penalties for taxpayers, which can range from 50% to 75% of the tax benefit obtained, as well as the loss of said benefit. In addition, advisors may be subject to a fine of up to 20 million pesos for each Reportable Transaction that is not reported. Mexican tax authorities are expected to issue general rules that clarify numerous aspects that were pending definition prior to the application of these new provisions.
Article 69-B of the Mexican Federal Tax Code sets forth a procedure to be followed by taxpayers who contract with suppliers of goods or services who, pursuant to public information published in the Official Journal of the Federation and on the Tax Administration Service website on a quarterly basis, are listed as companies that invoice simulated (non-existent) transactions (“EFOS” by its initials in Spanish).Compliance with the aforementioned procedure is important because if the veracity of a transaction is questioned and cannot be proven to have actually occurred, then the taxpayer’s tax receipts from the EFOS are considered null with no tax effect, meaning that the expenses may neither be deducted for income tax purposes nor creditable for value added tax purposes. These consequences can have retroactive effects for up to five years.Pursuant to the Mexican Federal Tax Code, taxpayers have 30 days to demonstrate the materiality of a transaction following the objection thereto by the tax authorities; that is, to verify they actually acquired the goods or services.Accordingly, it is advisable to proactively detect the existence of these types of transactions by taking the following actions:a) Establishing internal controls for the contracting of services or the acquisition of goods from suppliers, through personal knowledge of the suppliers, their assets, personnel, infrastructure and capacity to carry out their business operations.b) In addition to maintaining digital tax receipts that evidence the transaction in question, taxpayers should also maintain files with all the information and documentation which fully evidences that the transaction actually occurred.c) Reviewing the list of taxpayers who invoice for allegedly non-existent operations as published on a quarterly basis in the Official Journal of the Federation and on the Tax Administration Service website to confirm whether transactions have been carried out with said taxpayers and if appropriate, evaluate the need to rebut and overcome the presumption of non-existence of a given transaction, or to correct the company’s tax filings, as applicable.