Amílcar Peredo Rivera, Partner, Basham, Ringe y Correa, on what to expect from the recent, wide-ranging legal reforms

Amílcar Peredo Rivera, Partner, Basham, Ringe y Correa

Structural reforms were the major legal event in Mexico in 2013, affecting three main areas: increasing competitiveness, strengthening the institutional system and expanding social rights.

Under the Pact for Mexico (Pacto por Mexico), which was established in 2012 by the leaders of the three major political parties and the presidency in order to work together on shared priorities, the Mexican Congress has produced a reform package with the potential to revitalise the country’s crucial energy sector. Despite some opposition, the energy reform was passed due to the need to expand investment in the exploration and production of oil and gas in the country. Besides creating benefits for private investors, the energy reform should have a broad, positive impact on the national economy.

The introduction of foreign capital and enterprise should help improve the performance of the energy sector, which could enhance the production of oil and natural gas and ultimately promote greater economic growth. This would also most likely strengthen relations with Mexico’s northern neighbours by reducing emigration, as well as helping to boost North American Free Trade Agreement ties.

Meanwhile, the tax reform has offered “goodwill” signals to Mexicans, specifically with the repeal of the single rate business tax and the tax on cash deposits. This is in addition to the possibility of citizens establishing “conclusive agreements” with the tax authorities as a way of resolving disputes.

At the same time, special new taxes have been placed on soft drinks and high carbohydrate foods, while the income tax rate for individuals has jumped to a maximum of 35% and limits have been placed on deductions by individuals. Corporations were also the target of the reforms, with the corporate tax rate rising to an effective tax rate of 37%.

Furthermore, the consolidation tax regime was repealed and replaced by one that is similar, but simpler. In addition, the sale of shares by individuals on the stock market will be taxed at 10% of the gain. All of these tax amendments are predominantly aimed at increasing tax collection in order to enable the government to boost public expenditure and drive the economy forward.

In order to promote economic growth, key reforms to help develop the banking and financial system have also taken place. The onset of lower interests rates, for example, should, in theory result in more loans (including a higher amount), which in turn could encourage greater investment.

Another key reform has been to strengthen competition in certain Mexican markets. To this end, the Federal Competition Commission (Comisión Federal de Competencia, CFC) was reorganised to create a new autonomous constitutional entity.

As for structural changes, the number of commissioners was increased from five to seven, and radio and telecommunications responsibilities were transferred from the jurisdiction of the CFC to a different authority, namely the newly-created Federal Institute of Telecommunications.

This new entity will have the role of introducing more competition into the telecommunications industry, a highly concentrated market. The reform is essentially centred on promoting competition by encouraging the entry of other operators. This in turn is expected to reduce the cost of telecommunications and broadcasting services.

The announced changes have very promising implications for business, with clear prospects for a reduction in entry barriers, greater opportunities for more foreign investment and an estimated economic growth rate of between 5% and 6% per year.

The structural reform provides increased hope that Mexico will move toward a faster rate of growth in aggregate income and higher earnings for citizens at the lower end of the income spectrum. This could eventually go a ways to accelerating Mexico’s transition from a developing to a developed country.

Anchor text: 
Amílcar Peredo Rivera

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The Report: Mexico 2014

Legal Framework chapter from The Report: Mexico 2014

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