Global Fastener News

1994 FIN – Mexico Now Welcomes Investment; NAFTA Adds Security

May 06
00:00 2013

July 6, 1994 FIN – Doing business in Mexico is now safer and more welcome with changes in investment policy and the passage of the North American Free Trade Agreement (NAFTA), the Southwestern Fastener Association was told June 22 at its meeting in Keystone, Colorado.

“On December 27, 1993, Mexico’s new foreign investment law came into effect,” attorney Mark J, Hulings told the SFA members. “This new law establishes the general principle that 100% foreign ownership is allowed in all business activities unless a specific provision of the law limits the amount of foreign ownership.”
Hulings, an attorney in the Austin, TX office of Matthews & Branscomb, said NAFTA symbolizes “an extraordinary change in Mexico. In the 1970s the government believed the economy could flourish without the world.”
“By 1982 the Mexican economy was in shambles,” Hulings said. The government needed to bring foreign capitol into the country.
Today 100% foreign ownership is permitted except in specific circumstances representing about 20% of Mexican business, such as oil and gas, Hulings said. “Fastener manufacturers and distributors do not fall in any of those categories.”
The legal steps aren’t the only challenge in setting up business in Mexico, Hulings emphasized. “To be successful in Mexico, you will need to develop a feel for the way Mexican business people approach business and contracts.”
Jeffrey S. Dickerson, of the Matthews & Branscomb office in Corpus Christi, TX, described business as more “social” and involving “many face-to-face meetings.”
Dickerson noted that the U.S. business style is more systematic and “business to business.”

Closing of a transaction is the goal. The Mexican business style is a more “diffuse approach” where “individuals are the business and closing is just the beginning. Documents are just the framework.”
“Compromise is important in the Mexican style of business. Compromise is important, but know your limits,” he advised.
NAFTA will begin to phase out tariffs between Mexico, Canada and the U.S., Hulings said.
When asked if NAFTA was a “win-win” for Mexico and “win-lose” for the U.S., Dickerson replied, “Mexico is about to become the U.S.’s second biggest export market. There is some win side to NAFTA for the U.S.”
Mexico has a population of 80 million people, he pointed out.
Hulings added that NAFTA helps smaller U.S. firms do business in Mexico. “The larger companies are down there anyway,” Hulings explained. “Now this gives additional stability for smaller companies to get into the market. It adds permanence to changes in foreign investment down there.”
Even if a new government is elected, Mexico would have to back out of NAFTA to change many trade and investment rules, he explained.
“There is still some risk there,” Hulings acknowledged.

Tariff Changes
NAFTA is expected to increase trade because of the phased elimination of U.S., Canadian and Mexican tariffs on goods traded between those countries.
Prior to NAFTA, Mexico’s average duty was 2.5 times greater than that of the U.S. and many Mexican duties far exceeded the average rate.
Most tariffs will be phased out through immediate elimination, five cuts of 20% per year, ten cuts of 10% per year or 15 cuts of 6.67% per year.
Among the fastener tariffs eliminated this year are nuts, washers, cotter pins and rivets for aircraft.
Tariffs dropping 10% per year through January 1, 2003, include: Coach screws, wood screws, screw hooks and screw rings, self-tapping screws, anchors and cement bolts, galvanized nuts, retaining washers, spring washers and other lock washers.

Opening in Mexico
Hulings offered a list of steps to forming a 100% foreign-owned company in Mexico, including:
• U.S. firms will need to hire a Mexican lawyer to work with the U.S. counterpart.
• Determine name availability and obtain permission from the Foreign Ministry to use the name to incorporate.
• Execute special powers of attorney for your Mexican lawyer to take administrative steps to set up company.
• Minimum investment capital is $50,000.
• Select type of entity and prepare articles of incorporation. Name directors, officers and statutory auditor.
The articles must be notarized by a Mexican notary public. Notaries in Mexico are lawyers who make independent determinations that all documents meet legal requirements, Hulings noted.
The company must be registered with the Public Registry of Commerce in the city where the corporation’s operations will be and with the National Registry of Foreign Investment in Mexico City and Treasury Ministry.

Mexican subsidiaries of U.S. corporations pay a 34% income tax. Capitol gain and loss is taxed as ordinary income and deductions. Dividends are not deductible, but not taxable to U.S. shareholders.
A value-added tax is imposed at each stage of manufacturing and generally is 10%. There is a 2% tax on business assets imposed on Mexico companies and foreign companies with permanent establishments.
Mexican taxes are generally creditable against U.S. income tax, but only to the extent of U.S. income tax on the same income, so watch out for the withholding tax.

Labor Laws
A tourist visa is insufficient for doing business in Mexico.
“An individual who enters the country on a tourist visa and conducts business is subject to fines,” Hulings said. “Contracts or board resolutions may be subsequently challenged on the grounds that the individual who contracted with the Mexican party or served on the board lacked the proper authority to conduct business in Mexico.”
There are visas for visitors or directors, which permit conducting business.
Unions remain powerful in Mexico and negotiate most employment contracts, Hulings said.
Hulings said Mexican labor laws “present, perhaps, the most challenging aspect to U.S. businesses’ attempts to conduct businesses’ attempts to conduct business within that country.”
Federal Labor Law sets the legal working age at 14 with parental consent and 16 on the individual’s own. ©1994/2013 Fastener Industry News.
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