Investing in Mexico Memorandum

Running Head: MEMORANDUM

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MEMORANDUM

Memorandum

In Brief

It is important to note, from the onset, that there are many commercial benefits that our company could reap by expanding internationally. Thus, the expansion into Mexico is not only timely, but also well considered. However, in engaging in the said expansion, the company ought to be aware of the pertinent aspects of both the U.S. and Mexican law. It is with this in mind that this memo highlights the most likely compliance issues or concerns in as far as the various aspects of law and ethics specific to Mexico are concerned.

Pertinent Aspects of U.S. Law

There are a number of laws and certain legal provisions specific to our expansion into Mexico. Key amongst these include, but they are not limited to; USMCA (which replaced NAFTA a month ago), Customs and Border Protection (CBP) laws, and laws relating to engagement in corrupt practices and money laundering.

For a long time, 26 years to be specific, businesses have had to comply with the specific requirements of the North American Free Trade Agreement (NAFTA). However, beginning 1st of July this year, NAFTA was replaced by the United States-Mexico-Canada Agreement (USMCA). Failure to comply with the various provisions of the USMCA could have a negative impact on our operations as well as reputation. Towards this end, it would be prudent on our part to ensure that we are aware of (and comply with) not only the rules of origin, but also prepare the company for the relevant audits and ensure that our compliance programs are modified accordingly. There are, however, various obligations of NAFTA that will survive under the new dispensation. Examples of the various provisions of the USMCA that we should be aware of include customs administration as well as trade facilitation, rules of origin and origin procedures, labor, intellectual property, investment, etc. For instance, with regard to labor, employers have specific obligations especially as it relates to discrimination and coercion avoidance. Further, when it comes to the certification of origin, we should have templates of certification of origin.

With regard to custom and border protection, it is important to note that the company ought to be aware of the various laws enforced by CBP on behalf of the government’s various agencies. For instance, there are specific restrictions on goods that must not be permitted to find their way into the US. Some of the said items include, but they are not limited to, those items likely to threaten public safety or occasion harm to the nation’s flora and fauna. More specifically, some of the CBP policies that we ought to be aware of relate to; the flow of various cargo via the various POEs of the country and the enforcement of custom as well as trade laws.

Yet another law we ought to be aware of is the U.S. Foreign Corrupt Practices Act. This is particularly important given that concerns have been raised over the level of corruption in Mexico. The law was enacted with an aim of “making it unlawful for certain classes of persons and entities to make payments to foreign government officials to assist in obtaining or retaining business” (Department of Justice, 2020). We also ought to be aware of the money laundering laws in place at present. This is a key consideration as it would ordinarily relate to the transfer of financial assets within the two countries. For instance, we would be expected to take all precautions to ensure that suspicious financial transactions are reported. Some of the rules still in effect include the “know your customer” regulations.

Legal Implications

From a legal perspective, the decision to launch operations in Mexico has upsides and downsides. To begin with it should be noted that ‘employment at will’ is not recognized in Mexico (Gomez, 2018). In basic terms, employment at will means that “employer does not need good cause to fire” (Gomez, 2018, p. 173). It therefore follows that in establishing operations in Mexico, our company will be losing on this front. For instance, it would be challenging for us to fire workers who perform poorly at the workplace. This is more so the case given that we cannot terminate or end the employment relationship without giving an explanation – which is in some cases potentially litigious because ‘just cause’ is subject to diverse interpretations.

We could, however, benefit from a favorable tax regime in Mexico. For instance, thanks to FIBRA E, there are quite a number of benefits that the company could gain access to in as far as taxation is concerned. For instance, according to Deloitte (2019), “dividends from operating companies to shareholders are not subject to certain provisions in the Income Tax Law (ITL) and can be paid free of Mexican dividend withholding tax” (05). Further, as an operating enterprise, we would not be obligated to make income tax settlements (provisional) on a monthly basis (Deloitte, 05).

In as far as foreign investment is concerned, Mexico does not have sweeping limitations or restrictions relating to capital repatriation or dividends remittance. This is definitely of great relevance to us. We could also seek to set up operations in special economic zones so as to access a wide range of benefits in relation to regulation, customs duty, and tax. The said special zones were created in 2016 in an attempt to attract investment and alleviate poverty, amongst other things, within the identified regions – which were categorized as underdeveloped. For instance, imports into the identified zones attract a 0% value added tax rate. It should also be noted that there is a tax exemption for export goods from the special economic zones.

To ensure that we are in full compliance with Mexican laws, we should consider hiring a Mexican law firm to help us navigate the legal maze. To a large extent, this could be an additional cost on our part.

Ethical Implications

Although it makes great economic sense to expand into Mexico, we ought to be alive to the ethical implications of such a move. This is more so the case given that as a company, we are not driven by profits alone but by the impact we have on the community as well. To begin with, according to the Human Rights Watch (2019), human rights violations are rampant in Mexico. This is despite the high hopes for change following the election of the incumbent president. Indeed, in the words of Human Rights Watch, “human rights violations committed by security forces—including torture, enforced disappearances, and abuses against migrants—have continued under the administration of President Andrés Manuel López Obrador, who took office in December 2018.” Would our expansion into Mexico be interpreted to mean that we are in support of the goings on in the country with regard to lack of respect to basic human rights? Would we appear to be in support of a regime that brutalizes its own people? Despite these questions, we ought to also consider whether there is something that we can do upon setting up operations in the country to inform change.

Yet another ethical concern we ought to be aware of relates to corruption. According to Graycar (2020), one of the main concerns that foreign corporations have to contend with upon moving into Mexico is corruption. In the words of the authors, “bribery is widespread in the country’s judiciary and police… business registration processes, including getting construction permits and licenses, are negatively influenced by corruption” (Graycar, 2020). This is a serious concern. It therefore follows that some of the questions we ought to ask ourselves in this case is whether we shall be required to, at any point, make any payment so as to get things done. As I have pointed out elsewhere in this text, being a US business, we are bound by the U.S. Foreign Corrupt Practices Act – effectively meaning that the company cannot pay to access favors that it would not have otherwise accessed were it not for the said payments.