USMCA-Pushed North American Auto Business Consolidation: Mexico’s Position

It’s the beginning of a new year! 2020 is over, COVID-19 vaccines are being administered, the USMCA is in effect, and there is an obvious unofficial understanding that the auto industry is essential in North America (Mexico, US, and Canada).

Building on the results of Foley’s Global Survey Chain Disruption and Future Strategies Survey Report from September 2020, it is clear that supplier relationships will be strengthened, likely by increasing the transparency of both OEM needs and the ability of suppliers to meet them, which strengthens the supplier’s reliability against lean stocks and prior approval of alternative suppliers in the race for the most cost-effective option.

In this context, we should not lose sight of how Mexico is helping to strengthen the North American auto industry: (i) quality results at the lowest cost in the region, (ii) free trade agreements with more than 60% of the world’s GDP (52 countries); (iii) near-shoring benefits, (iv) skilled labor with low absenteeism and greater availability as the Mexican population ages, and (v) between a pandemic and ongoing trade wars, translated into predictable access in the North American market under a solid foundation.

Since your company is either already doing business in Mexico or is considering doing business in the country, there are a number of relevant points you should consider in 2021:

I. COVID-19 vaccines

As with work (that is, identifying essential or non-essential business activities) and mandatory health measures (that is, making hygiene records on site), both the federal government and states of Mexico are responsible for vaccinations at the same time.

As of the date of this writing, the federal government has issued a national vaccination guideline under which the government plans to immunize the entire population within 18 months, starting late last year (2020) with health care workers on the front lines, followed by those 60 and older, then those in their 50s, 40s and finally those 18 and older. (Progress to date casts doubt on whether this is achievable.)

On January 25, 2021, the Mexican Ministry of Health issued high-level guidelines for individual Mexican states. as well as private institutionsTo acquire and administer vaccines as long as they comply with and contribute to national vaccination guidelines, with further details likely to be available shortly.

In addition, compliance with changing health and labor regulations in manufacturing facilities will continue to be an important issue, both in terms of continuing production and preventing litigation based on real or imaginary risks.

II. Outsourcing / Insourcing Prohibition

On November 11, 2020, the Mexican president presented an initiative to practical bans the current practice of outsourcing and insourcing in Mexico, through which companies avoid their 10% profit-sharing obligations by distancing themselves from their workforce through separate or related measures.

In short, the initiative would only allow the outsourcing of “specialized services”, ie those that are not part of the economic activity of the intended beneficiary. The Mexican Ministry of Labor would have to give specialized service providers in Mexico a renewable permit. In addition, simulated provision of specialized services would be elements of evidence for the commission of tax fraud.

This initiative is likely to be passed in early 2021 as the President’s political party (MORENA) controls both houses of the Mexican Congress. A number of hypotheses are discussed as to how companies will change the way they do business to accommodate this initiative.

Most of the auto companies in Mexico use outsourcing activities to manufacture in the country. The new outsourcing rules require a re-evaluation and reorganization of a number of work, corporate and tax structures, as well as short-term strategies.

III. VAT Certified Maquila Benefits Diluted & Maquilas Spotlight

Maquila companies (also known as IMMEX) in Mexico operate under a government license that includes both operational and tax preferential terms. Maquila companies that are VAT certified are granted the highest level of preferential treatment, which allows them to avoid paying otherwise applicable VAT on imports of goods used in their manufacturing operations (either raw materials or machinery and equipment) . .

This preferential treatment changes automatically as soon as each individual maquila company renews its VAT certification, which takes place every one to three years depending on the number of employees and the machines and devices involved.

After the renewal of VAT certification, companies will have the following options, among others: (i) They will no longer have the option of receiving expedited refunds of 16% VAT on their business compensation (however, the ability to continue to import temporarily without paying VAT will remain) . (ii) have a shorter timeframe for the use of most temporarily imported goods (from 36 months to 18 months), although longer periods apply to certain products such as containers, machinery and equipment; (iii) are no longer automatically included in sectoral import programs (steel, motor vehicles, textiles, others); (iv) must submit weekly Pedimento submissions instead of monthly and cannot temporarily import products without providing serial numbers.

IV. Compulsory Technical Standards (NOMs) no longer excluded

Before October 1, 2020, the import of certain materials that were intended to be used in production processes or that would not be sold to the public in the same form or form as the import could be registered under “exception letters” that allowed this without proof of the NOM -Conformity are imported (not all imports are subject to NOM conformity according to the corresponding import tariff numbers).

As a result, importers are no longer allowed to use such exemption letters from this date and must prove compliance with the relevant NOM either before or after the import procedure.

A number of procedural rules apply to each of the above options, and some other requirements must be met beforehand in order to benefit from them. In addition, the Mexican authorities have adopted and continue to issue administrative criteria to clarify their practical application of this measure.

V. Enforcement of USMCA Obligations

Mexico has amended its relevant labor laws to comply with the USMCA, primarily to ensure fundamental rights to freedom of association and collective bargaining, with the undeclared aim of raising wages in the country.

There are direct and medium-term obligations for employers electricity Collective agreements. In relation to the former, (i) ie as of today, such contracts must be free of “interference” by employers (it is considered interference to encourage the formation of workers ‘unions dominated by an employer or employers’ organization, and in order to economically or otherwise trade unions to bring them under the control of an employer or employers’ organization). With regard to the latter, (ii) employment contracts must be “legitimized” by May 1, 2023 at the latest in accordance with the procedure already adopted by the Mexican Minister of Labor

Because of the foregoing, there will be real unions, which means that collective agreements with employer-friendly unions (commonly known as “protection” or “white” union contracts) will soon be abolished, which is likely to bring new leadership and more than one union to a company .

The determination of denial of freedom of association and collective bargaining rights can be done through an agency-specific rapid reaction work mechanism. If such a determination of denial of rights is made, the goods or services of the insured entity could face a suspension of preferential tariff treatment or the imposition of penalties. It would be useful for employers to vaccinate themselves (in good time) against possible arguments from competitors that such basic labor rights are denied in their production facilities in Mexico.

VI. Tax regulations for permanent establishments

Recent tax reforms have broadened the scope of the rules for permanent establishment in Mexico. This is a sensitive issue as foreign companies believed to have a permanent establishment in the country for tax reasons impose levies (on the income attributable to that permanent establishment). Therefore, companies already doing business or considering doing business in Mexico should evaluate these changes in Mexican tax law to assess the potential risk of a local taxable presence.

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1 See the Official Gazette of the Federation of July 31, 2019.