Mexico-United States: 200 Years of Diplomacy
Mexico and the United States celebrated 200 years of diplomatic relations, two centuries in which everything imaginable has occurred between the two countries. Regardless of the current difficult times, fortunately the priorities and interests of both nations remain, with a focus on shared cooperation and solidarity. In this sense, the reactions of both countries upon the commemoration of these events augur tremendous prospects.
The future seems promising due to the warmth of the exchanges between the two presidents. President Joe Biden sent a kind letter to President Andrés Manuel López Obrador and later both leaders had a telephone meeting in which, as indicated by information from the White House, they discussed the ways in which both countries should continue advancing goals and common objectives in economic matters, in issues related to climate change, in energy and in the management of migration.
In the same way, it was an opportunity for the presidents to review their points of view ahead of the next Summit of the Americas to be held in Mexico City in January 2023. It is worth noting that an emphasis will be placed on cooperation for the development of southern Mexico and Central America, strengthening supply chains and modernizing shared borders to improve commercial and agricultural traffic. The presidents did not fail to mention the importance of joint efforts related to infrastructure projects on both sides of the two-thousand-mile border that unites the two countries. Unity, cooperation, respect and optimism for the future are precisely the signs emerging from the celebration of 200 years of diplomatic relations between Mexico and the United States.
From a political point of view, the current year 2022 now ending, may be characterized as the year of the fight for Mexico’s National Electoral Institute (INE). The contenders in this fight have been, on the one hand, the federal government, and on the other political opposition of Congress and numerous citizen groups. The constitutional amendment initiative presented by President López Obrador did not receive the legislative approval needed, since the qualified majority (2/3) required for an amendment of the Mexican Constitutional was not reached, so the Federal Executive decided to enter the path of legal reforms. However, the Executive branch estimated that it could obtain, as in fact has happened, a majority of votes required to alter the legal framework of the National Electoral Institute and the Electoral Tribunal of the Federal Judiciary.
The debate, which is typical of a democratic society, faced the legislative opposition accompanied by a large group of citizens organizing under the slogan “The INE should not be touched.” This led to two great political demonstrations. The first of these consisted mostly of citizen groups, mainly from Mexico City, although there were demonstrations in other cities around the country and some abroad, in favor of preserving the current regulatory regime of the INE. The citizen demonstrations were followed by an official response from the government with another massive demonstration led by President López Obrador himself.
The legal amendments are currently in the process of being implemented, and it is highly likely the Mexican Supreme Court of Justice will have the last word on the constitutionality of the official proposal that was supported by majorities in both houses of Mexico’s Congress: the federal Senate and Chamber of Deputies. The fact that demonstrations of hundreds of thousands of people have taken place and that the presidential proposal has been conducted through institutional channels and in a notoriously civilized and peaceful manner, show the maturity that politics has reached in Mexico. It will now be necessary to wait for the determination of the Supreme Court on a matter of interest to the entire country.
On November 9, 2022, the Department of Public Administration (“Department”) published the Agreement issuing the Guidelines for the Registry of Business Integrity and Distinction of the Department of Public Administration (“Decree”).
In accordance with the published guidelines (Guidelines), the registry consists of a record maintained by the Department of companies that have an integrity policy; that is, principles, guidelines, standards and activities designed to promote integrity in their operations and prevent corruption risks (the “Registry”). Additionally, the Guidelines provide that those companies registered with CompraNet’s Single Registry of Suppliers and Contractors may link the information contained in said system with the platform implemented by the Department to carry out their registration process in the Registry and granting of the business integrity distinction.
Companies interested in registering with the Registry must submit their application to the Department, complying with the requirements and attaching the documentation provided in the Guidelines. Such include a commitment to promote and disseminate a culture of integrity and the adoption of best practices, and that the company will not engage in disqualifying activities under the Guidelines or falls under the scenarios foreseen in the Public Sector Acquisitions, Leases and Services Law (“Acquisitions Law”), or in the Public Works and Related Services Law (“Public Works Law”) based on which, public agencies shall abstain from receiving proposals or award contracts for public works projects , or is disqualified from participating in contracting procedures or from entering into contracts regulated by said laws.
Likewise, the Guidelines establish that the business integrity distinction (“Distinction”) consists of a recognition granted by the Department to companies registered in the Registry, which certifies that their integrity policy complies with all the elements provided by the General Law of Administrative Responsibilities, the purpose of which is to “highlight the commitment of companies to prevent corruption in their interactions with the business sector and with the agencies and entities of the Federal Public Administration.”
Once registration has been obtained in the Registry, as well as the status of Distinction, companies must ensure that they comply with the obligations established in the Guidelines to maintain said registration in the Registry and the recognition of Distinction, consisting mainly of the annual update of certain information presented at the time of filing the corresponding application, and reporting of any changes to both the information presented and the integrity policy, among others.
It is noteworthy that the Distinction status will be valid for four years from the date it is granted, and must be renewed through the same platform at least one month prior to its expiration.
Additionally, it is important to take into account that the Department may cancel both the registration in the Registry and status of Distinction if companies do not comply with their obligations under the Guidelines, if they fall under the mentioned scenarios whereby the public agencies are prohibited from receiving proposals or entering into contracts with them, or the companies become disqualified in terms of the Acquisition Law and the Public Works Law.
This undoubtedly represents a step forward in terms of integrity and the fight against corruption.
Mexico has enacted a new law governing how time zones will be treated throughout the country. On October 28, 2022, the Decree issuing the Time Zone Law in the United Mexican States (the "Law") was published in the Official Journal of the Federation. The new Law became effective October 30, 2022 and, with it, the previous Law of the Time System in the United Mexican States was repealed, as was the Decree establishing the seasonal time schedule applied in the United Mexican States.
This new Law is mandatory throughout Mexico and acknowledges the application and validity of four different time zones within Mexican territory, as well as the hours that correspond according to their location.
For the purposes of the Law, the following time zones and their corresponding meridians were established: (1) Central Zone, corresponding to the meridian 90 degrees West of Greenwich and comprising most of the Mexican territory; (2) Pacific Zone, referring to the meridian 105 degrees West of Greenwich and comprising the states of Baja California Sur, Nayarit (except for the municipality of Bahía de Banderas, which corresponds to the Central Zone), Sinaloa, and Sonora; (3) Northwest Zone, referring to the meridian 120 degrees West of Greenwich and comprising the state of Baja California; (4) Southeast Zone, referring to the meridian 75 degrees West of Greenwich and comprising the state of Quintana Roo; and (5) the islands, reefs and keys are included within the meridian to which their geographical location corresponds and in accordance with accepted international legal treaties and agreements.
The Law provides that in Mexico a standard time schedule is established according to the zones described in the prior paragraph, and that a seasonal time schedule will apply only to certain states and municipalities of the Northern border in accordance with the following rules: (a) for the border municipalities of Coahuila (also including the municipalities of Allende, Morelos and Villa Unión), Nuevo León and Tamaulipas, the meridian 75 degrees West of Greenwich will be applied; and (b) for the state of Baja California, the meridian 105 degrees West of Greenwich will be applied. Said border seasonal time schedule will take effect from 2 a.m. on the second Sunday in March and will end at 2 a.m. on the first Sunday in November.
Likewise, the Law specifies certain mechanisms so that a state, through its legislature, may request to modify the time zones or seasonal time schedules in the state or its municipalities by sending an initiative to the federal Congress for its consideration and voting, subject to the opinion of the Ministry of the Interior. In this case, upon a proposal by the majority of the state legislature or the Governor of the respective state, forums and/or citizen consultations will be held to understand the public’s opinion on the matter.
This new Law represents a challenge for the border areas in the North of the country, especially with respect to the application of seasonal time schedules, since during their application these areas will be subject to a different time schedule with respect to states or municipalities with which they have historically shared the same time schedule. This issue is especially relevant for border municipalities in Sonora and Chihuahua, since the Law does not contemplate a seasonal time schedule for them, unlike the rest of the municipalities along the Northern border of Mexico.
On the other hand, there is some concern about the possible negative effects that the elimination of the summer time schedule could have after 26 years being of applied in Mexico,, including for example, increases in the consumption of electrical energy, logistical confusion, or increases in crime during night hours. It is hoped that Mexican legislators have duly studied and considered these concerns.
There are generally two ways to raise capital for the start-up or expansion of a U.S. business, either by debt financing or equity financing. Debt financing involves a loan wherein the borrower must pay the lender the principal amount of the loan plus interest, and equity financing involves selling equity interests in the business to investors in exchange for the injection of capital into the business.
Key factors to consider in determining the best financing option are the size of the business, the nature of the business, the market opportunity being targeted, the potential for substantial growth of the business, and the costs related to financing. In the case of a small business, typically the founders desire to maintain full control of the business and therefore do not want to grant an equity interest to an investor to fund or partially fund the start-up or expansion of their business. On the other hand, if the founders predict that their business will be a high growth business such that it will likely go public in the future, then, if not initially, the founders will in most cases ultimately rely on equity financing, including in some cases financing from venture capitalists. Typically, equity financing is more expensive than debt financing.
Venture capitalist firms can be instrumental in the success of a start-up business, not only by providing the required capital, but also due to their expertise in providing strategic assistance such as introducing key partners, employees, and customers to the business, as well as facilitating strategic alliances. However, such financing arrangements are not easy to obtain, since venture capitalists are very selective in their investments, focusing on criteria such as certain specific industry sectors, the stage of the start-up company (i.e., is it in its early stage seed round, at a point where it has shown progress in building its business model and demonstrating its potential to grow and generate revenue, or at a later stage where the company has achieved meaningful revenues and traction). Venture capitalists will typically want to invest in start-ups that have already shown some meaningful traction, such as by having working product prototypes, early customer adoption, or significant revenue.
In the case of the start-up of a business by foreign founders, in addition to the required business and estate planning, proper pre-planning must be implemented to lay the groundwork for potential debt financing. By planning in advance and taking steps such as opening a U.S. bank account or financing the purchase of a home or an automobile in the U.S., the individual founders can establish their credit and increase their ability to obtain a loan from a bank for the start-up of their business. If the foreign founders have not established credit in the U.S., they might not be able to qualify for a loan on favorable terms, and their options may be limited to obtaining a small loan at a high interest rate or a small business credit card at a high interest rate. In such cases, better options should be explored such as the founders using more of their available cash reserves to fund, at least in part, the start-up of their business, or using U.S. real estate or other assets in the U.S. as collateral for a loan on more favorable terms.
A specific debt financing option that founders starting up a small business might consider is a Small Business Administration (SBA) loan, in amounts ranging from $30,000.00 to $5,000,000.00. Although the requirements are strict and the approval process is time consuming, SBA loans are specifically designed for small businesses to succeed and thus are more flexible on aspects such as the required borrower’s equity investment, making funds available for working capital, and the length of time allowed for repayment of the loan. An SBA microloan is another debt financing option for small business founders. The microloan program offers short term loans of up to $50,000.00 in working capital that can be used to start or grow a business.
SBA loans are available for small businesses owned by U.S. citizens and legal permanent residents, as well as by non-residents. According to the SBA, financing is available for businesses that are 51% owned and controlled by non-citizens, provided that such persons are lawfully in the U.S. However, each lender has the discretion to determine whether or not to lend to a non-citizen.
In the case of a business which requires the special expertise of an individual in order for the business to succeed, one equity financing option is for the founders to invite such an individual to be an equity owner of the business in exchange for the in-kind contribution of the individual’s special expertise. For this option, proper planning of the structure of the capital contributions from each investor should be done. Depending on the income tax impact to the individual contributing the services, perhaps a combination of capital contributions and loans from the principal founders would be an appropriate strategy.
If targeted debt financing is not available to founders starting up a small business who prefer debt financing, even though equity financing may not be their first choice, certain possibly viable equity financing options should be explored. One such equity financing option is to seek out high net worth individuals, referred to as angel investors, who are willing to fund small start-ups in exchange for equity ownership. Such potential investors could be family or friends, keeping in mind that leads for such investors can be obtained from others such as entrepreneurs, accountants, attorneys, angel investor networks, or venture capitalists.
In the case of U.S. companies, whether large or small, that already have an established business and desire to expand their operations, more options are available for the financing of such expansion such as accounts receivable financing, working capital loans, small business term loans, and equipment loans.
As of January 1, 2022, the State of Nuevo Leon established environmental or green taxes, which companies with operations in Nuevo León must pay when they file a monthly statement of emissions and/or polluting discharges. The applicable legislation establishes specific parameters and the obligation to pay said taxes in cases where the companies exceed certain parameters.
Now, regardless of whether a company exceeds the parameters established by law, a monthly statement must be filed, as is the case with Mexican federal taxes or local payroll taxes. Therefore, depending on the activity, companies may be required to register, file statements, measurements and/or estimates based on which, if applicable, green or environmental taxes will be calculated and paid.
Recently, Nuevo Leon´s Finance and Treasury Department has started processing reviews of taxpayers registered in the state’s Taxpayers Registry who, in the monthly tax statements they filed, reflected zero Water Polluting Emissions Tax to be due (the “Environmental Water Tax”).
The authority is seeking to have taxpayers clarify and justify their statements; hence, taxpayers are asked to provide documentary support corresponding to their monthly tax statements with respect to the Environmental Water Tax, such as laboratory certifications, reports, discharge measurement results, as well as their discharge permit and discharge log.
The authority is requiring such information to validate the taxpayers’ returns and, if applicable, make corrected tax determinations as to their respective surcharge and fine.
It is prudent for companies to review in advance their compliance with this new tax and a assess whether it is necessary to file any voluntary amendments.
It is probable that government authorities will continue to initiate audit processes in the next few weeks and may also focus on taxes applicable to Air Pollution Emissions and on the Subsoil and Surface Polluting Emissions taxes. It is important to consider that taxpayers self-determine these taxes with their own estimates or measurements. Accordingly, it is important to review compliance on these measurements, and any other estimates used to file monthly statements for such tax purposes.
CCN is available to assist with a review of compliance with these requirements and recommend any available legal options.
On April 20, 2022, the Mexican Congress passed an amendment to the Mining Law, providing that lithium will now be considered as owned by the Mexican government and that the rights to such substance may no longer be the subject of concessions, contracts, or administrative acts for the benefit of private parties. For this reason, it was determined that the exploration, exploitation, benefit, and use of lithium would correspond exclusively to the Mexican State, through the decentralized public entity to be created for this purpose.
To comply with the foregoing, on August 23rd, the President of the Republic published a Decree creating the decentralized public entity named Litio para México (Lithium for Mexico, in English) (the “Decree”). Said entity must begin its functions no later than January 30, 2023.
The specific purposes of Litio para México include the exploration, exploitation, benefit, and use of lithium which is located within the national territory, as well as the administration and control of the economic value chains of said mineral. The foregoing will be coordinated by the Deputy Department of Planning and Energy Transition of the Department of Energy.
The principal powers of this public entity are as follows:
- Develop and execute engineering projects, research, geological activities, and all those in connection with the purpose of the organization.
- Research and develop the technology required in the lithium industry.
- Locate and designate the geological areas in which there are probable lithium reserves, as well as to generate basic geological information on lithium located within Mexican territory.
- Promote sustainable use of lithium for the energy transition, for the benefit of the population in general.
- Manage and control the necessary activities for the production, transformation and distribution of lithium derivative products, for which it may associate with other public and private institutions.
In relation to this last activity, the possibility of the participation of the private sector seems to be left open. José María Lujambio, partner and director of the energy practice at CCN, was quoted in an article in the newspaper El País commenting on the matter, where he considered that the Decree is ambiguous, given that the words “company” or “organizations” are not mentioned, but only “public and private institutions”.
CCN will follow up on the implementation of the Decree and will publish further updates on this topic as such become available.