mexico – bahamas or… how to mix tequila & rum abel mejía cosenza

Mexico – Bahamas or…How to mix Tequila & Rum

Abel Mejía Cosenza

Mexico- Bahamas:the potential for a new relationship

In the beginning of times… Tequila and Rum did not get along very well:

Bahamas generally considered a tax haven.

Bahamas (and the Caribbean in general) had a misunderstood reputation in Mexico.

Competing jurisdiction for private equity.

Little or no exchange of information.

Any offshore investment was frowned upon by Mexican society and government.


However times have changed… we have learned that Tequila and Rum can and should mix!

Bahamas no longer a tax haven for Mexican tax purposes.

Bahamas and Mexico have signed an information exchange treaty.

Mexico recognizes the use of offshore financial centers for private equity and fund investment both inbound and outbound.

Mexico now counts with many information exchange mechanisms (FATCA Agreements, OECD Multilateral Agreements, 50+ double taxation treaties and 40+ information exchange agreements).

The Caipirinha factor: We like Brasil doing progress… but we don´t want to fall too far behind!


Major cultural and legal changes in Mexico:

Mexico recognizes tax transparency in certain scenarios.

Mexico recognizes and allows legitimate income tax deferral in certain scenarios.

There is a growing culture of private wealth planning and family wealth management and succession planning.

There is a higher mobility of high-net worth individuals and families that require more flexible vehicles and instruments.

There is a higher perception for tax compliance, largely derived from the more efficient tools now available to the Mexican tax authorities.


Potential areas of opportunities:

Mexico recognizes tax transparency in certain scenarios.

Mexico recognizes and allows legitimate income tax deferral in certain scenarios.

There is a growing culture of private wealth planning and family wealth management and succession planning.

There is a higher mobility of high-net worth individuals and families that require more flexible vehicles and instruments.

There is a higher perception for tax compliance, largely derived from the more efficient tools now available to the Mexican tax authorities.


Specific areas of opportunities for Mexico and Bahamas:

Private Wealth Investment, Management and Conservation structures:

- Bahamas Trusts.- Bahamas Private Trust Companies.- Bahamas Foundations.- Bahamas life insurance.

Primary Objectives:

- Confidentiality and efficient taxation.- Legitimate tax deferral: Lack of effective control by beneficiaries to

determine timing of distributions.- Flexibility of investment choices and management.- Simple and comprehensive succession planning.- Compliance with Mexican (and many times U.S. tax laws).



Private Equity Investment:

- ICON fund.- SMART fund.

Primary Objectives:

- Transparency for tax purposes.- Avoidance of second level of tax (new Mexican dividends tax).- Reasonable costs for setup and maintenance.- Clear identification of initial capital and of future income (including by

timing and type).- Clear corporate governance rules and solid judicial system for

controversies.- Confidentiality.



Energy Driven New Opportunities:

- Captive Insurance.- Intellectual Property Regimes.- Private Equity.

Primary Objectives:

- Tax efficiency in Mexican source income.- Platform for big energy players to participate in Mexico.- Vehicles that allow joint Mexico/foreign investment.- Holding and treasury structures for use of resources and assets in Mexico

and Latam.

Traditional deferral structures used by Mexicans

Tax information exchange, structuring for a new normal for Mexican individuals

PIC(Singapore, Scottish

Partnership, etc.

RevocableTrust/

preferred equity

IrrevocableTrust/

ordinary equity

Settlor

$

$ stock stock dividend

Beneficiaries

$

Split trust / PIC Canadian Partnership

Canadian Partnership

(U.S. Check the Box)

Individual

Mexican Stock Exchange

Mexican Issuers or SICOthers

Mutual Fund / Umbrella Fund(U.S. Check the Box)


Unit Trust

Unit Trust / Forward Mutual Fund / Umbrella Fund

IndividualIndividual Forward

Segregated cel

Segregated cel

Segregated cel

Segregated cel


Insurance Company


Insurance Wrapper

Individual

Segregated cel

Segregated cel

Segregated cel

Segregated cel

Policymultiple lives

assuredBeneficiaries



Mexican Fideicomiso

Settlor

$ & assets

Tailored Structure: personalized to address client’s needs

Mexican Entity(U.S. Check the Box eligible, if required )

Mexican Stock Exchange

Mexican Issuers or SICOthers

Deferral structure?

Beneficiaries


SDE Decision making matrix©Key concern

/ProductInsurance

wrapper / w or w/o trust

Canadian or other

Partnership

Split Trust / PICTrust / PIC / PTC

Unit Trust w/ Forward

Mutual Funds / Umbrella Fund

Tailored structure

Estate security (inheritance plan)

Confidentiality

Estate Tax Protection

Simplicity / investment agility

10% capital gain MXSE (aka BMV)

Deduction of expenses

Control Financial Adv. Client Financial Adv. Financial Adv. Financial Adv. Client

Tax deferral 35% 10% BMV & SIC

or 30% CFC

Dividend 35%

+ 10% dividend

@35% @35% Mexican

fund 10% if BMV

10% BMV& SIC

30% CFC 35% other


GENERAL FACTS ON MEXICO

Mexico Macroeconomics

- Population 113 million

- GDP 1,274 USD billions

- Banked Population 30% (Low)

- Economically Active population 42% (Moderate)

- Main banks Bancomer, Banamex, Santander, Banorte, HSBC.

- Mexico’s banking sector is mainly dominated by foreign banks.

Mexico Macroeconomics

There are approximately $145,000 millionaires in Mexico.

- Their consolidated fortune is around $736 billion USD.- This equals around 50% of the Mexico´s total wealth.- There are 2,540 multimillionaires with assets over $30 million USD.- There are 16 billionaires.

- Manufacturing is the most important industry for multi-millionaires in

Mexico, with 17.4% of them having this as their primary source for wealth. 70% of Mexican exports are driven by manufacturing followed by fuel and mining (15%). The US is Mexico's main export partner.

MEXICAN LEGAL FRAMEWORK

Mexican Legal Framework

- Federal Constitutional System.

- Three levels of government: Federal, State and Local.- Three branches of government : Executive, Legislative and Judicial.- Three levels of laws: Federal, State and Local.

- Commercial entities regulated at federal level for the most part.

- There is a robust and sophisticated legal framework.- Fairly modern tax, financial and regulatory laws and government

bodies.- Part of major trade and tax treaties.- High integration in worldwide economy.- Major trading partners: U.S., Canada and China.

Mexican Legal Framework

- Hierarchy of Laws.

- Federal Constitution and International Treaties.- Federal laws.- State laws.- Local laws.

- Primary taxes:

- Federal income tax.- Federal dividends tax.- Federal value added tax.- Federal special products and services tax.- Federal social security dues.- Import duties.- State payroll tax.

Mexico’s recent reform packages

Overview of Mexico, a global contender

Since 2013, a series of key reforms were approved in order to promote Foreign Investment and provide economic stability.

The major reforms were the following:

Financial reform Labor reform Education reform Energy reform Tax Reform Telecommunications reform

A quick view to the Energy reform


This reform constitutes the opening up of the energy sector to private capital and private companies, including in the oil and natural gas fields.

Mexico’s oil was nationalized on 1938, crating the national oil company PEMEX.

The oil production in Mexico has been behind world standards due to the lack of development of new sources of oil, including shale.

The introduction of foreign capital and enterprise should improve the underperforming sector that could greatly raises Mexico’s production of oil and natural gas.

A quick view to the Tax reform


BEPS-type legislation for related parties.

New dividends tax.

Amendments to the Maquila Regime.

Additional formal requirements for the application of Tax Treaty Benefits.

Elimination of Diverse Tax Incentives

A quick view to the Labor reform


The Labor reform permits employers to enter into limited duration contracts with employees for seasonal work and for initial training agreement.

The amended Federal Labor Law regulates the outsourcing of jobs. The major outsourcing regulation indicates that outsourced employees must only perform work of a specialized character and not a general kind of labor.

The recent reform permits employers to terminate employment at any time for "just cause”, prior notice of termination.

The reform outlaws discrimination based on ethnicity, national origin, age, disability, socioeconomic status, health, religion, immigration status, political opinion, sexual orientation, or marital status

Critical factors influencing a decision to invest in Mexico


Political risk.

Currency risk.

Foreign regulation and tax policy.

Clear regulatory framework.

Local experts and lobbying.

Infrastructure (Transportation, technology, resources, etc).

Critical factors influencing a decision to invest in Mexico


Permits and authorizations.

Performing due diligence.

Corporate regime and corporate culture.

Integration.

Retaining qualified management.

Energy Reform


The Hydrocarbons Reform . Underground hydrocarbons located in national territory continue to be national property, and the

granting of concessions on them is still prohibited. (Art. 28 designates the exploration and extraction of petroleum and other hydrocarbons as strategic areas).

. However, the Federal Government will have the ability to engage in hydrocarbon exploration and extraction activities through assignments to “for-profit State companies” (for-profit within market terms enterprises owned by the state) or through agreements with those enterprises or with private parties. The model agreements will include:Services agreements. Shared profit agreements. Shared production agreements. Licenses.

. For the above purposes, Petróleos Mexicanos (Pemex) will be transformed into a for-profit State company within two years, with the capability to enter into agreements with private parties to explore and exploit. In any case, Pemex will have preference to carry out certain projects known as “Round Zero.”

Energy Reform


The Energy Secretariat (SENER) will be in charge of establishing, conducting, and coordinating energy policy, the adjudication of assignments and the selection of the areas subject to contract, the design of the contracts, and the technical guidelines of the bidding processes, as well as the granting of permits for the treatment and refining of oil and the processing of natural gas.

The National Hydrocarbons Commission (CNH) will be in charge of activities including the carrying out of the bidding processes, the appointment of winners and the entering into the exploration and extraction contracts, the technical administration of assignations and contracts, and the supervision of the extraction plans to maximize productivity.

The Energy Regulation Commission (CRE) will be in charge of granting permits for the storage, transportation, and distribution through oil, gas, and petrochemical pipelines; of regulating access to the ducts by third parties; and of regulating the first hand sale of such products.

The Union of Oil Workers of the Mexican Republic will not have any seats in the Board of Pemex anymore, and the Board will now be formed by five members of the Federal Administration and five independent members.

Energy Reform


Electricity Reform:

1. The Federal Electricity Commission (CFE) will be transformed into a for-profit State company. 2. The National Electricity System, the transmission and distribution networks, will continue to be controlled by the State through a National Center for the Control of Energy (CENACE), which will be a decentralized public body (Art. 28 designates the areas of plannig and control of the national electrical system, as well as the public service of electricity transmission and distribution, as strategic areas). The government will have 12 months from the effectiveness of the secondary legislation to decentralize the CENACE.

3. Private parties will be able to generate and commercialize electricity, and to enter into agreements for the transmission and distribution with CENACE.

4. The CRE will be in charge of the regulation and granting of the permits for the generation of electricity and the establishment of the tariffs for the transmission and distribution of electricity.

Energy Reform


Business Opportunities for Foreign Investors:

1. During a first phase, the Electric Energy Sector because it is now open and more developed.

2. Obviously, the Exploration and Production of Petroleum, although this will be in later years.

3. Providers of Services Ancillary to the industry (including food, uniforms, platforms, legal, accounting, financial, machinery and equipment, etc.)

4. Mergers and Acquistions: Many of the players will enter Mexico through the acquistion of, or association with, Mexican companies.

5. Financial Sector: All transactions will require financing. Financing will have to come from Mexico and abroad.

ESSENTIAL LABOR ISSUES WHEN

DOING BUSINESS IN MEXICO

Mexico

Federal Labor Law was reformed late 2012;

Outsourcing services need to meet several requirements, sending obligations to the beneficiaries of the services;

Inclusion of probation periods, initial training, payment by the hour, etc.

General Overview

Mexico

Collective Matters

In most parts of Mexico, it is necessary to be unionized.

Radical unions: Mining, Electricity, Railway, amongst others.

ESSENTIAL TAX ISSUES WHEN

DOING BUSINESS IN MEXICO

Mexican federal tax overview


Taxes at the Federal Level:

Corporate Income Tax 30%, plus 10% tax on dividends

Resident individual’s Income Tax, progressive up to 35%

Value Added Tax (exempt, 0% or 16%, repeal reduced border rate)

Federal Duties Law, applies to mining operations among others

Special Goods & Services Tax (range from exempt up to 110% of the value of the merchandise sold or service provided)

Mexican local tax overview


Taxes at Local and State :

Payroll Tax (generally 2% to 3%)

Real Estate Acquisition Tax (range from 1% to 3%)

Real Estate Property Tax

Local Income Tax on Individual’s income from professional and business activities, leasing income and capital gain (2% to 5%)

Taxes eliminated in 2014


The Tax Reform of 2014 contained several amendments to the most important tax laws including the elimination of the following taxes:

Flat Business Tax (Impuesto Empresarial a Tasa Unica);

Tax on Cash Deposits (Impuesto a los Depositos en Efectivo).

Unless business activities are limited, deemed permanent establishment.

Subject to corporate income tax & branch profits tax (dividends equivalent) as well as ordinary informative tax returns

Can deduct general administrative expenses incurred by home office.

Can not deduct payments made to home office for royalties, commissions or interest. Tax treaties allow for deduction, but only when they constitute reimbursements.

Force of attraction concern, tax liability exposure for principal.

Investing in Mexico through a Branch


All legal entities are taxed alike (30% corporate rate). Except for S.A. entities (including S.A.PI.) all other types of legal entities are check-the-box eligible for U.S. pass through treatment.

For 2014 and future profits, classical double taxation system for dividend income (10% on net distributed dividends).

Due regard must be given to tax treaties (Netherlands/England)

Dividends paid from CUFIN (pre-taxed earning account) to other Mexican companies are not taxed.

Income determined on accrual basis (exception AC and SC, cash basis).

Investing in Mexico through a Subsidiary


Mexican income tax highlights


Interest is subject to withholding if (i) paid by Mexican borrowers or (ii) principal was invested in Mexico.

Applicable rates are: 4.9%,10%, 15%, 21%, 30% and 40%. They vary per nature of loan, payor, beneficiary, treaty, guarantor, etc.

Thin capitalization/earning stripping rules apply to related party financing.

Royalty licensing and technical assistance are subject to rates from 5% to 25%.

Applicable rates depend on the type of royalty or assistance. Tax treaties typically provide reduced rates.

10% tax on dividends introduced in the 2014 tax reform. Does not apply to e&p from prior years. Does not apply to intercompany dividends.

International Treaties


Mexico has a very large tax treaty network.

In order to apply the benefits of the treaty foreign taxpayers must comply with the following:

Prove being a resident of a the country of which seeking the benefits of the treaty;

Prove the existence of prove the existence of double taxation in case of operations between related parties;

Comply with the filling of applicable informative tax return (declaración informativa);

Comply with the additional requirements stated on the treaty, if any.

The withholding tax certificate issued by the paying entity may be tax creditable for the beneficiary entity.

BEPS: Base Erosion and Profit Sharing.

With the tax reform of 2014 Mexico accelerated the implementation of BEPS.

Limitation of tax treaty benefits: The tax authority reserves the right to request that foreign residents prove the existence of double taxation when claiming treaty benefits.

Interest, technical assistance and royalty payments to a related party will be not deductible if either party has control over the other and:

Foreign party recipient is a pass-through entity (exception if partners of the pass through accrue income and pay tax thereon)

Payment is disregarded in the foreign jurisdiction Payment is not considered as taxable income Payment is also deductible for a related party, unless it accrues such

income

BEPS The Tequila Version


Maquila: Special manufacturing regime that allows foreign companies to manufacture goods in Mexico for their future export with special customs and income tax treatment.

The Maquila Regime provides permanent establishment relief for the manufacturing operations, if they comply with Mexican transfer pricing provisions.

Permanent establishment exemption benefit is limited to foreign principals that reside in a country that has Tax Treaty with Mexico.

New regime for VAT caused on temporary import of raw materials and parts.

Automatic exemption has been eliminated. New certification procedure is required to access a VAT credit.

Maquila regime


Maquiladora companies comply with Mexico’s transfer pricing statutes if any of the options below are met:

Safe harbor alternatives require reporting a tax profit of not less than the higher of the following: 6.9% of the value of the assets used in the IMMEX operation

(whether owned by the IMMEX, its related parties or by foreign residents); or

6.5% of the costs and expenses associated with IMMEX operation

An advanced transfer pricing agreement is requested and obtained. New requirements were introduced to avoid permament establishment

in Mexico. 100% of the income of Maquila company must come from

“maquila” operations. Minimum percentage of assets used by Maquila company must be

the property of the foreign principal.

Maquila regime


ESSENTIAL DISPUTE RESOLUTION CHALLENGES

WHEN DOING BUSINESS IN

MEXICO

Dispute resolution issues faced by foreign investors


In general terms, foreign companies that execute commercial agreements and/or do business in Mexico, are commonly involved in different kinds of disputes, among which, the most frequent derive from the following:

Payment defaults / non-compliance of commercial agreements. Delays in delivery of goods or defective performance of services. Enforcement of guarantees. Enforcement in Mexico of judgments issued abroad.

Delays in delivery and defective performance


In case of facing delays in the delivery of purchased goods or defective performance of services, the affected party may bring an action before the Court, seeking for:

(i) a judicial resolution that orders the immediate delivery of the purchased goods or the compliance of the services agreed, if possible;

(ii) an indemnification for the impossibility to deliver the goods or to perform the services as agreed; or

(iii) the rescission of the purchase and/or services agreement, with the corresponding refund of the price paid for such goods or services.

Enforcement of Guarantees


In Mexico the instruments most commonly used to guarantee obligations are:

Surety Bond.- The creditor is entitled to be paid by the Surety Company instead of the debtor, if the latter does not pay the secured amount. This sort of guaranty is frequently used in judicial and/or administrative matters (i.e. public works).

Pledge.- It constitutes a preferential right on debtor’s movable assets over other creditors, in order to guarantee compliance of particular obligations and a better position for collection. (i.e. machinery, shares, merchandise, etc.)

Mortgage.- The guarantor may be the same debtor or a third party, and grants a right in rem, generally on real estate properties, boats, aircrafts or industrial plants, which will remain under debtor’s possession. The enforcement of such guaranty may be commenced, regardless whom is in possession of the assets.

Enforcement of Guarantees


Guaranty Trust.- By executing a trust agreement, the trustor (regularly the debtor) transfers the ownership of an asset or right in favor of the trustee (generally a financial institution), for the purpose of guarantee the compliance of an obligation to the beneficiary under the trust. It is frequently used in infrastructure projects.

Personal guarantees.- Promissory notes, joint obligations, etc.

Enforcement in Mexico of judgments issued abroad


Judgments issued abroad are recognized and are legally effective in Mexico, and are subject to enforcement procedures, provided that:

They were issued by competent courts of the country of origin. The defendant was properly served and could oppose a defense in

trial. That the resolution is irrevocable and final. That the resolution is not contrary to public order provisions under

Mexican Law.

Other recommendations for foreign companies


1. It is highly advisable to run a search of real estate assets of the debtor before the Public Registry of Property, as well as before the Guaranties Registry (RUG), prior to commencing judicial actions, since the final collection will always depend on the existence of assets on the debtor’s patrimony.

2. Under Mexican Commercial Laws, each party must prove their statements in trial, thus, judicial procedures are based on evidences, and one of the most important is the documentary evidence. Therefore, it is highly recommended to foreign companies to consult a local lawyer before starting business in Mexico, in order to gather all the necessary information for the documentation of agreements, certify delivery of goods, performance of services, and granting of guaranties.



3. It is also important to investigate the backgrounds and reputation of the company or individual with whom business will be conducted, due to in some cases, such companies have no assets to respond in an eventual dispute or against which a final judgment could be enforced.

4. According to Mexican Legislation, it is expressly forbidden to run general searches of movable assets or to have access to general accounting records of debtor companies, because it is necessary that the creditor appoints with all accuracy which documents will be subject to a review and it must be ordered by a judicial authority.



5. Election of jurisdiction in agreements to be interpreted or enforced in Mexico should be made in accordance with the applicable Law established in the agreement, since Mexican Courts are not used to applying foreign legal provisions instead of Mexican Law. In such cases, the plaintiff must prove the existence and validity of the foreign provisions that intend to be applied in trial.

6. When a foreign company opens a branch in Mexico, it is important that a lawyer or Law Firm reviews the compliance to State and Municipal administrative regulations, in order to start operations as a commercial establishment, and avoid the risk of closings or the imposition of fines.

7. An important preventive measure that foreign companies must take into consideration, is to limit the credit line of debtors and to avoid increasing the principal beyond the economic capacities of the debtor.

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mexico – bahamas or… how to mix tequila & rum abel mejía cosenza

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