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© 2016 Baker & McKenzie LLP
Potential Impact of the Trump
Administration and Recent Legal
Developments in Mexico
Hugo Dubovoy
U.S.-Mexico Chamber of Commerce
Mexico Tax and Legal Update, and Economic Outlook for 2017
February 9, 2017

© 2017 Baker & McKenzie
Protectionist Measures Promised
2
 NAFTA overhaul (or withdrawal)
 Renegotiation: Mexico willing to consider
 Improving working conditions and environmental
standards.
 Rules of origin to require more North American content
 Investor-State arbitration system.
 Import duties (35%, 20%)
 TPP
 Not the case of NAFTA.

Protectionist Measures Promised
3
 WTO membership under review.
 Withdrawal might require Congress approval.
 Withdrawal might also trigger a global trade war.
 The President has also promised to bring more anti-
dumping and countervailing duty actions against other
countries under the WTO rules.

Dismantling NAFTA Without Congress
4
 Withdrawal
 6-month notice for withdrawal.
 Presidential authority to withdraw.
 Tariffs - Inside the Box
 Trade Act of 1974
 NAFTA tariff rates to continue for one year
 Can the President avoid?
 Can Congress override?

5
 NAFTA Implementing Act
 Does withdrawal trigger repeal?
 Recourse to US federal courts.
 Recourse to WTO.
 “Most Favored Nation” (MFN) rates
 Generally capped at approximately 3.5% (for the U.S.).
 Carrier example – 1% - 2.2%.
 Discriminatory application to one country would violate WTO principles.
 Exchange rate

6
 Tariffs - Outside the Box
 Trade Act of 1974 (e.g., 15% import duty for up to 150 days without
investigation).
 Tariff Act of 1930 (“discrimination in fact”).
 Trading with the Enemy Act of 1917 (“time of war”).
 International Emergency Economic Powers Act of 1977 (“threat to
national security”).
 Trade Expansion Act of 1962 (imports constituting “a threat to
national security”).
 All prior to the creation of the WTO in 1994.
 "Border Tax Adjustment”
 Would be part of corporate tax reform.
 Congressional approval.

7
 Example
 Assume 20% corporate income tax rate.
 Corporate income tax would apply to domestic income only (not
export sales).
 Only domestic costs deductible (not costs of imports).
Company A Company B Company C
Domestic Sales $100 Domestic Sales $100 Export Sales $100 (0)
Domestic Costs $ 80 Import Costs $ 80 (0) Costs $ 80
Taxable Income $ 20 Taxable Income $100 Taxable Income $ 0
20% Tax $ 4 20% Tax $ 20

8
 A BTA could violate WTO rules.
 Also, Mexico has indicated that, should a BTA be implemented, it could provide
tax relief to the affected companies with the purpose of minimizing the BTA’S
effect.
 Traditional Trade Remedies
 Anti-dumping and countervailing duty orders.
 Additional duties in excess of 200%.
 When unfair trade practices.

Mexico’s Network of International Agreements
9
 12 Free Trade Agreements with 46 countries, including the European
Union, and Japan.
 More to come: UK, TPP countries (Australia, New Zealand, Singapore,
Malaysia, and possibly Vietnam).
 Other 9 partial scope agreements.
 30+ Investment Protection Treaties.
 55+ Tax Treaties (prevention of double taxation, preferential or 0%
tax rates).
 Multiple Opportunities.

Mexican Anti-Corruption Reform
10
 Latest component of the Mexican structural legal reforms (e.g., energy,
financial, telecomm, and education).
 It is another indication of Mexico’s interest in having a solid legal
structure that can withstand changes in Presidential administrations.
 Preceded by Constitutional reform in May of 2015 (the opposite extreme
of Executive Orders).
 In June and July of 2016, new laws or significant amendments to various
laws, including the Law for the National Anti-Corruption System, the
Federal Criminal Code, and the Administrative Liability Law were
published.
 The Law for the National Anti-Corruption System: (i) Sets forth the bases
for coordination among the Federal, State and Municipal levels of
government to fight corruption; and (ii) Provides for the participation of
the citizenship to help the government fight corruption.

11
 The Federal Criminal Code: now establishes criminal liability for
companies for over thirty crimes, including bribery of public officials,
fraud, influence trafficking, health crimes, obstruction of justice, money
laundering, bankruptcy fraud and tax fraud. This is a major change in
the Mexican legal system.
 Penalties include fines, seizure of property, suspension of activities
(for up to 6 years), foreclosure (6 years), prohibition to bid in
government procurement projects (6 years), and even dissolution of
the entity.
 Reduction of penalties if the company has a compliance program.

12
 The Administrative Liability Law: The new law applies to governmental
officials, and, unlike the law that preceded it, also to non-governmental
entities and their executives.
 It will enter into effect on July 18. Until then, the current law will
continue to be in effect.
 Now, to reign in corruption, all government officials will be required to
file 3 documents: these are a statement of their personal assets, a
statement of interests to verify whether conflicts of interest exist, and
even their personal tax return.
 Annual filing. The first two will be made public.

13
 Penalties applicable to legal entities will include (i) fines as high as
twice the economic benefit they obtained, or, absent an economic
benefit, approximately $6M; (ii) ineligibility to participate in
government procurement projects, for up to 10 years; (iv) suspension
of activities for up to 3 years; (v) dissolution of the entity; and (vi)
payment for damages.
 There will be some mitigating factors, like having a compliance
program and cooperating with the investigations. Another noteworthy
aspect of this law is that it introduces the concept of the
whistleblower.

Potential need for Companies with Shelter
Operations to Restructure in 2018
14
 Shelter operations.
 Exception to rule of having a taxable presence.
 As of January 1, 2014 operations of non-Mexican companies
through shelter companies started being subject to a term of 4 years
from the (i) date of the Shelter Agreement, or (ii) January 1, 2014 for
contracts of an earlier date.
 So, all non-Mexican companies with Shelter Agreements entered
into prior to January 1, 2014 need to consider what to do starting on
January 1 of next year.
 Otherwise, the non-Mexican company will be considered to have a
taxable presence (a “permanent establishment”) in Mexico.

15
 Transition
 Review Shelter Agreement and plan for transition.
 Was a special purpose vehicle organized for the shelter
operations?
 Does the Shelter Agreement provide for the transfer of
operations?
 Mexican entity
 IMMEX/maquila program
 Facility lease (third-party consent?)

16
 M&E
 Inventory
 Personnel
 Termination of employees with payment of severance and re-hire.
 Resignations by employees and simultaneous re-hire.
 Employer substitution (same terms and conditions of employment).
 Personnel that provides services to various companies.

17
 Per rules that took effect on January 1, 2016, after the initial 4-year term
of a Shelter Agreement, those non-Mexican companies, if they wish to
continue operating through shelter companies, may comply with their
Mexican tax obligations through the shelter company.
 They will become subject to Mexican income tax, but will not be required
to register as Mexican taxpayers for an additional period of 4 years,
provided, among other requirements:
 Tax residency in country with which Mexico has an information
exchange agreement.
 Filing a notice.
 Shelter company will determine and pay tax (joint liability);

18
 Shelter company must contract a multinational firm to certify key
components of the tax determination.
 The shelter company must comply with its tax obligations and be certified
for VAT and IEPS purposes (highest certification level).
 The shelter company’s revenue must come from shelter services
provided to non-residents in its entirety (no revenue for sales or
distribution of products into Mexico).

Worst Case Scenario-
Should It Be Necessary to Shut Down U.S.
Export Operations in Mexico
19
 So far, in spite of the uncertainty, we’ve seen that:
 Various companies have confirmed their plans for Mexico (e.g.,
Toyota, Daimler, BMW, Mazda).
 Others stated that they will create jobs in the U.S., but they will also
continue manufacturing in Mexico (U.S. auto manufacturers).
 Some American companies continue investing heavily in Mexico.
 Export markets other than the U.S.
 But there might be some companies that need to consider the possibility
of shutting down their U.S. export operations in Mexico, and to have an
idea of how that could look like.

20
 Shelter Operations
 Review terms of Shelter Agreement
 Term.
 Termination rights (e.g., notice).
 Termination obligations (e.g., early termination fees, severance
pay for employment terminations).
 3 months of total compensation plus an additional 20 days of
total compensation per year of services.
 M&E and Inventory.
 Real Estate.
 Might delay the reorganization of operations discussed before
 Calculate Mexican income tax liability.
 Review in the context of company’s global tax position.

21
 Wholly-Owned Operations
 Corporate resolutions including the appointment of a liquidator (usually a
CPA resident of Mexico). Need to be notarized and recorded with the
Commercial Registry.
 The liquidator must conclude any pending business of the Company,
such as:
 collecting accounts receivable
 paying accounts payable
 selling any assets
 prepare the final balance sheet
 The Company’s final balance sheet prepared by the liquidator must be
published in the Mexican Official Gazette three times, in ten-day
intervals.

22
 The final balance sheet for the Company must be approved at a
shareholders meeting (the “Liquidation Meeting”). The minutes of the
Liquidation Meeting must be notarized in a notarial deed.
 The notarial deed that formalizes the Liquidation Meeting, together with
evidence of publication of the balance sheet, must be registered with the
Commercial Registry, and the Company’s registration must be cancelled.
 The Company must notify the Foreign Investment Registry of its
liquidation.
 The liquidator will be required to keep the corporate records of the
Company for ten years after the liquidation process concludes.
 The liquidator will be required to make various tax filings, including (i)
notice of initiation of liquidation process, (ii) tax returns, (iii) notice of
termination of liquidation process, and (iv) cancellation of tax ID number.

SUMMING IT UP
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 There are some measures that the President can take on his own, and others
that would require Congressional approval.
 Simply withdrawing from NAFTA would not significantly affect Mexico.
 A renegotiation of NAFTA might be beneficial for all NAFTA countries.
 Other more drastic measures could violate WTO principles or even US law.
 Withdrawal from the WTO might require Congressional approval and could
trigger a global trade war.
 Mexico’s network of international agreements, both current and future, and its
solid structural reforms, would still make it an attractive country, even without
NAFTA or with a renegotiated NAFTA.

© 2017 Baker & McKenzie 24
Hugo Dubovoy
Partner, International/Commercial
Baker & McKenzie LLP
300 East Randolph Street
Suite 5000
Chicago, IL 60601, USA
Tel: 312-861-7970
Fax: 312-698-2141
hugo.dubovoy@bakermckenzie.

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