U.S. Company Expansion into Mexico: Legal and Ethical Issues

In Brief

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 pursuing this expansion, the company ought to be aware of the pertinent aspects of both U.S. and Mexican law. It is with this in mind that this memo highlights the most likely compliance issues and concerns with respect to the various aspects of law and ethics specific to Mexico.

Pertinent Aspects of U.S. Law

There are a number of laws and legal provisions specifically relevant to our expansion into Mexico. Key among these include, but are not limited to, the USMCA (which replaced NAFTA), Customs and Border Protection (CBP) laws, and laws relating to corrupt practices and money laundering.

For 26 years, businesses operating across North American borders had to comply with the specific requirements of the North American Free Trade Agreement (NAFTA). However, beginning July 1st, 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 our reputation. Accordingly, it would be prudent to ensure that we are aware of — and compliant with — not only the rules of origin, but also to prepare the company for relevant audits and to modify our compliance programs accordingly. Notably, various obligations under NAFTA will survive under the new agreement. Examples of USMCA provisions we should be aware of include customs administration and trade facilitation, rules of origin and origin procedures, labor, intellectual property, and investment. With regard to labor, for instance, employers have specific obligations especially as they relate to discrimination and coercion avoidance. Additionally, when it comes to the certification of origin, we should maintain templates of certification of origin on file.

With regard to customs and border protection, the company ought to be aware of the various laws enforced by CBP on behalf of the government's agencies. There are specific restrictions on goods that must not be permitted to enter the United States. Some of these items include those likely to threaten public safety or occasion harm to the nation's flora and fauna. More specifically, some of the CBP policies we ought to be aware of relate to the flow of cargo through the country's ports of entry (POEs) and the enforcement of customs and trade laws.

Another critical law we must be aware of is the U.S. Foreign Corrupt Practices Act (FCPA). This is particularly important given that concerns have been raised over the level of corruption in Mexico. The law was enacted with the 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 must also be aware of the money laundering laws currently in effect. This is a key consideration as it relates to the transfer of financial assets between 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 both 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 an "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 constrained on this front. For instance, it would be challenging to dismiss workers who perform poorly, since we cannot terminate an employment relationship without providing 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 tax benefits the company could access. 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" (p. 05). Further, as an operating enterprise, we would not be obligated to make provisional income tax settlements on a monthly basis (Deloitte, p. 05).

With regard to foreign investment, Mexico does not impose sweeping limitations or restrictions relating to capital repatriation or dividend remittance — a development of great relevance to our operations. We could also seek to set up operations in special economic zones in order to access a wide range of benefits relating to regulation, customs duty, and taxation. These special zones were created in 2016 in an attempt to attract investment and alleviate poverty within identified underdeveloped regions. For instance, imports into these zones attract a 0% value-added tax rate, and there is also a tax exemption for export goods originating from the special economic zones.

To ensure full compliance with Mexican laws, we should consider retaining a Mexican law firm to help us navigate the legal landscape. To a large extent, this would represent an additional cost to the company.

References

Deloitte (2019). 1.0 Investment Climate. Retrieved from

Department of Justice (2020). Foreign Corrupt Practices Act. Retrieved from https://www.justice.gov/criminal-fraud/foreign-corrupt-practices-act

Gomez, O. D. (2018). Labour and Employment Compliance in Mexico. New York, NY: Wolters Kluwer.

Graycar, A. (2020). Handbook on Corruption, Ethics and Integrity in Public Administration. Northampton, MA: Edward Elgar Publishing.

Human Rights Watch (2020). Mexico Events of 2019. Retrieved from

Stuart, O. (2018). How Will the Shift from NAFTA to USMCA Affect the Auto Industry? Retrieved from https://www.industryweek.com/the-economy/article/22026500/how-will-the-shift-from-nafta-to-usmca-affect-the-auto-industry