MEXICO

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP98-01394R000200010003-4
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 37
• Document Creation Date: January 4, 2017
• Document Release Date: July 30, 2013
• Sequence Number: 3
• Publication Date: June 1, 1987
• Content Type: REPORT

Declassified and Approved For Release 2013/07/30: CIA-RDP98-01394R000200010003-4
MEXICO
RELEASED JUNE 1987
MEr
CURRENCY The peso, with a controlled exchange rate. ot P1,305:$1 and a free rate of
P1,306:$1 on. lune /5, 1987.-
SEE ALSO Latin America Introduction for LAIA-wide Rules, Basic Market Statistics and Com-
parative Taxation.
In the Past Twelve Months
'In October 1986, Mexico's creditors put together a debt rescue package that included a
rescheduling of half of the country's $100 billion foreign debt. The deal also includes
some $12-13 billion in new money from official, private and government lenders.
Disbursement of some $6 billion in new commercial bank money began in April 1987,
after a protracted delay (1.03).
*The sharp drop in oil prices over the first half of 1986 sent the economy into a deep
recession, with real GDP growth dropping by 3.8% (1.03).
*Mexico introduced a sweeping and enormously complicated new income tax system
designed to counter the distorting effects of inflation on corporate tax bases. The plan
will be phased in over five years, beginning in 1987 (8.02).
*Mexico enacted changes in its patents and trademark regulations. A major disappoint-
ment was its decision to put off considering product patents for chemicals and pharma-
ceuticals for a period of 10 years (6.02).
'The country entered GATT in August 1986 under favorable terms and immediately
began to phase in key features of its accession pact (13.01).
In the Next Twelve Months
'President Miguel de la Madrid will select the PRI candidate for president in October.
The candidate will be assured victory in the 1988 elections (1.01).
?The economy. will grow at an extremely sluggish clip of around 1-2%, with inflation ap-
proaching 150% (1.03).
*Mexico will likely make further modifications to its income tax law in December 1987
(8.02).
'In August 1987, Mexico and the US are expected to sign a bilateral accord providing a
framework for improving trade and investme'nt relations (13.01).
'By the close of 1987, Mexico will have eliminated all remaining reference prices (13.01).
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1.00 INTRODUCTION
1.01 Political forecast. Mexico has enjoyed more than half a
century of political stability, a record almost unequaled in Latin
'America and often cited as the chief reason for the country's
success in developing its economy and attracting foreign invest-
ment. At the heart of this stability is a unique one-party system
centered around the Partido Revolucionario Institutional (PRI),
founded in 1929.
The PRI dominates Mexican political life. Its wide power base
encompasses labor, the peasantry and the lower classes, and it
has strong links with industrial and financial interests. The party
hammers out policy consensus by using a time-honored system
of private consultation and reciprocity among political groups.
It has no single party line and often experiences strong pulls be-
tween its liberal and conservative factions. Opposition is nor-
mally squelched through outright repression or, more common-
ly, cooptat ion.
Mexico's political future, however, hinges to a large extent on
the PRI's ability to adapt to the nation's changing economic,
political and social realities. In many crucial respects, the party
has resisted those changes. If it continues to do so, its integrity
will be eroded and the stability of Mexico's political system will
be seriously threatened.
Discontent is most evident among the middle class, whose
fortunes fell drastically when the boom years ended. Many have
joined the opposing National Action Party (PAN), which has
developed a significant following in the northern states. Discon-
tent among the middle class has also given rise to independent
grass roots organizations in the ecology movement, and in the
reconstruction efforts following the September 1985 earth-
quakes. Independent leftist unions have also been gaining in-
fluence on the periphery of the official labor sector and repre-
sent the only left-wing force with any power base.
But the PRI's .political hegemony will not be seriously
challenged in the near term. It is a foregone conclusion that the
PRI will win the 1988 presidential election and retain control of
the legislature and all governorships.
Early 1987 finds Mexico engrossed in preparations?political
and economic?for the announcement of the PRI presidential
candidate in October. The government's objective is to gradual-
ly restore growth while controlling inflation and keeping
balance-of-payments problems at bay.
The chief preoccupation at the moment is obtaining econom-
ic growth and reducing political discontent and tensions so as to
allow for a smooth election of the next president. The resolu-
tion of a potentially troublesome student strike at the National
Autonomous University and the move of Pemex Director
Ramon Beteta out of the oil company to campaign for governor
of the state of Mexico has relieved two crucial areas of political
tensions. In recent months, the cabinet has taken a tough line in
dealing with labor over parastate wage increases. Its declaring
illegal an electrical workers strike and tough maneuvering with
the telephone workers have strained labor relations somewhat.
Labor will have to receive something in coming months to
assure full cooperation in the electoral process. This could
come in the form of higher wage increases in July and October
2 IL&T MEXICO .0 June 1987 Business International Corp
or other legislative tradeoffs. De la Madrid hopes to announce
his choice of the PRI presidential candidate in an atmosphere of
relative calm.
Three cabinet members are considered the top contenders
for the presidential post: Planning and Budget Secretary Carlos
Salinas Gonad; Energy, Mines and Parastate Secretary Alfredo
Del Mazo and Interior Secretary Manuel Bartlett. All three are
likely to provide some continuity to the de la Madrid adminis-
tration's shift to export-oriented growth and reduction in the
size of the parastate sector. Of the three, Salinas Gortari, who
has been the major economic thinker, would be most likely to
continue the current policy focus. Del Mazo would perhaps be
the most tempted to try to rule through populism, and Bartlett
would perhaps be more conservative than de la Madrid. None
of the potential candidates is expected to break new ground on
the political front unless a crisis develops. One major challenge
will be dealing with a post-Fidel Velazquez labor movement,
which might not be as susceptible to government control as in
the past.
On the economic front, the administration is facing an in-
creasingly difficult choice between allowing continued three-
digit inflation and obtaining some positive growth in the
economy this year. Its commitment to labor to do more to stem
the drop in real wages has also pushed it into a quasi-indexation
of salaries, albeit indexation below the actual CPI. Delay in the
arrival of foreign financing (until late April 1987) has further
pushed back Mexico's grovylh prospects for 1987.
1.02 Attitude toward free enterprise. Mexico's official
economic policy centers on a mixed economy, a blend of state
control and conventional capitalism, to bring about social im-
provements. The nationalization of the banking system in 1982
put extra weight on the already heavy public sector. While
maintaining a major government role in the economy, de la
Madrid has moved, albeit slowly, to sell off unproductive firms.
Those firms that are being kept are operating under tighter
financial controls. While a shortage of funds has prevented it to
date, the government plans to improve the technology of the
core firms that will be maintained. Scarcity of resources will
likely lead to a continuing reduction of the parastate sector. The
government, however, will continue to be the dominant eco-
nomic decisionmaker in the years ahead.
The administration will continue to exercise control over
private companies through increased regulation, particularly of
priority industrial sectors. Free enterprise and foreign invest-
ment are permitted as long as they do not interfere with govern-
ment development goals or dominate ownership of productive
resources. Competition from state-owned enterprises can be in-
tense and often takes place on unfair terms (2.00).
1.03 Market forecast. In 1986, Mexico weathered the com-
bined ills of the steep drop in oil prices and the lack of any com-
pensating foreign funding, except for a $1.1 billion bridge loan,
surprisingly well. Tight credit policies, rapid devaluation and
high interest rates prevented a full-blown economic break-
down. Lack of financing and high real interest rates also caused
a return of nearly $2 billion in offshore funds during the year,
helping to maintain necessary reserve levels. Nevertheless, the
cost has been high in the area of inflation, which ended the year
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in three digits, a burgeoning unemployment rate and sharp eco-
nomic recession. The economy declined by 3.8% in terms of
GDP; the nominal budget deficit hit 16.2% of GDP; and infla-
tion rose to 105.7%.
The de la Madrid administration will complete its term with
the lowest average GDP growth rates in modern Mexican
history. This comes at a time of massive growth in the labor
market. As a result, the pressure for stimulative policies will be
intense over the next two years. Growth will continue to be a
priority concern of the next administration. Mexico contends
that it must be allowed to grow in order to service its debt.
Mexico's success in winning renegotiation of $44 billion in
previously restructured credits (including a drop in interest rates
from LIBOR plus 1.13 to 0.813) and some $12 billion dollars in
new money over the next 15 months will provide balance-of-
payments stability through the 1988 presidential succession.
Mexico's current account will also be aided by a moderate im-
provement in international petroleum prices. The only major
external downside risk in 1987 will be the potential for a rise in
the US prime rate later in the year.
However, delay in receiving the credits?some $3 billion was
originally to have been disbursed in 1986?has pushed back
growth prospects for the economy in 1987. Also, without an im-
provement in financing availability, growth will continue to be
slow. Inflation will likely remain in the three-digit range through
the end of 1988. The crucial period for balance-of-payments
sensitivity will be between April 1988, when the agreement
with foreign creditors expires, and December 1988, when the
new president takes office. Capital flight will increase during
this period as part of the historic election-year cycle.
Liquidity has been tight since July 1985 when Banco de Mex-
ico, the central bank, significantly tightened restrictions on the
amount of new bank funds available for lending to the private
sector. The move was originally billed as a three-month tem-
porary measure, but has been continued into 1987. This means
that when mandatory reserves and specially earmarked funds
are calculated in, some 93% of all bank resources are con-
trolled by the government. In 1986, financing to the private sec-
tor totalled P8.1 trillion?a drop from 11.2% of GDP in 1985 to
9.9% of GDP in 1987.
During 1986, gross fixed investment fell 12.7%, vs growth of
5.5% in 1985. Private investment fell 12.8%, and government
investment fell 19%. Investment in machinery and equipment
fell 12.6%, after increasing 13.8% in 1985. Construction invest-
ment fell 12.6%, following 2.6% growth in 1985.
Mexico's in-bond assembly, or maquiladora, industry showed
strong growth in 1986, with the number of plants reaching 925.
1 he in-bond industry is now the nation's second-largest source
of foreign exchange earnings, but rapid devaluation of the peso
cut the growth in valued-added to just 1%, or $1.28 billion, in
1986, vs 10 and 41% respectively in 1985 and 1984. Growth
should remain strong in 1987, with the number of plants rising
to 1,100 and value-added increasing 15%, to $1.5 billion.
Mexico will enjoy a temporary balance-of-payments cushion
in 1987 given nev?, foreign creditor financing. Pressure will
mount again in the second half of 1988 as capital flight picks up
and the latest financing package expires.The current account
deficit, after falling to $1.27 billion in 1986, will improve to $1
billion in 1987 but then worsen in 1988. '
Pressure for increased government spending in preparation
for the presidential elections will continue to push up inflation.
The CPI will jump from 105.7% in 1985 to around 140% in
1987, unless the government opts to wait until 1988 for eco-
nomic reactivation. Push-back of the presidential elections from
June to September gives the administration a bit more room to
maneuver, but' pressure for some growth this year will be in-
tense. The cumulative CPI rise for first-quarter 1987 was 21.9%,
virtually eliminating the government's hope of reaching its origi-
nal year-end target of 80-90%. Ultimately, officials may have to
go the route chosen by Argentina and more recently Brazil in
freezing wages and prices. Such a move will probably not come
until the new president takes office in December 1988.
1.04 Currency outlook. Since December 1982, a two-tiered
exchange rate has been in force. The controlled rate, which
stood at P1,305:$1 in June 1987, is essentially used for all im-
ports and foreign debt payments and to convert export pro-
ceeds. The free market rate, P1,306:$1 on June 15, 1987, ap-
plies to all other transactions. The minuscule difference be-
tween the two rates in recent months has lead to widespread
use of the free rate for most transactions as there is less paper-
work involved. During 1986, Mexico employed a rapid
devaluation of the controlled peso-148%?to attenuate the
balance-of-payments pressures and provide effective protection
to domestic producers as the GATT trade opening was im-
plemented. The free rate fell a less dramatic 104.4%, leading to
brief equality in the rates in December. Officials have become
adept at maintaining a realistic exchange rate through small dai-
ly slippages. Also, high interest rates in 1986 led to a return of
flight capital to Mexico, which helped steady the free rate.
Devaluation during the first quarter of 1987 has basically
been in line with inflation after lagging inflation the first two
months and catching up in March. The free peso fell 22%, while
the controlled rate fell 20%, vs first-quarter inflation of 21.90/o.
Peso volatility will likely pick up in the third and fourth quarters,
however, as political jitters increase with the naming of the
presidential candidate. The spread between the free and con-
trolled rates could easily widen again as the free rate is allowed
to run up to discourage dollar buying.
As inflation picks up devaluation will be increased. The peso
should fall sharply to a P2,400:$1 free rate and a P2,200:$1 con-
trolled against a 1400/o rise in the CPI. The differential between
the rates could rise to 10% by year-end.
1.05 Attitude toward foreign investment. Economic nation-
alism has become a permanent fixture in Mexican politics, and
many controls on foreign equity, technology transfers and
patents and trademarks have been introduced in recent years
(3.00, 6.00). Foreign investment in Mexico is regulated by the
1973 Law to Promote Mexican Investment and Regulate For-
eign Investment (3.00, 6.00).
Officials acknowledge the need for foreign investment in
selected areas?mainly those with high technical and capital re-
quirements. However, because of the sensitive political nature
of foreign investment in Mexico, officials have repeatedly
stressed that the restrictive law will not be changed.
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Despite this stance, some substantive changes have been tak-
ing place through specific industry regulations. Mexico issued
two new foreign investment regulations in 1986?Resolution
14, making multilateral and government development bank
capital neutral, and Resolution 15, which makes foreign majori-
ty investment by small and -medium-sized foreign companies
easier. Mexico did not follow through with a change in foreign
equity requirements in the autoparts and secondary chemical
industries as expected.
Minor modifications were made in foreign investment resolu-
tions in 1984 and 1985, and in 1984 the authorities took the un-
precedented step of spelling out conditions under which of-
ficials may authorize majority foreign ownership of new or ex-
isting ventures. Approval from the Foreign Investment Commis-
sion (FIC?comprising seven cabinet secretaries) is needed for
new investments with more than 49% foreign ownership. Re-
cently modified resolutions extended the decision making pow-
er of the FIC's executive secretary, who is now authorized to
approve foreign purchases of stocks, and will do so as long as
the purchase does not increase foreign ownership to over 49%.
The 1985 rules also stated that certain new establishments?
including administrative offices, job-training centers and park-
ing lots?may be added without FIC approval, and relocations
to priority zones that involve an expansion of up to 1000/0 also
do not require approval. In both these cases, companies must
notify the executive secretary within 30 days. The executive
secretary also has broad leeway to rule in cases that involve
"significant exports," but sensitive decisions still must go to the
full commission.
The commission staff and its executive secretary form part of
the Under Secretariat of Foreign Investment Regulation and
Technology Transfer, which, in turn, falls under the authority of
the Secretariat of Commerce and Industrial Development
(Secofi).
1.06 Amount of foreign investment. Accumulated direct
foreign investment more than doubled from $5.3 billion in 1976
to $10.7 billion by the end of 1982. Officials authorized $1.6
'billion in majority foreign-owned investment in 1986, bringing
total foreign investment to $16.9 billion. Existing companies
with foreign participation received approval to hike investments
by $700 million last year, for a total of $2.3 billion in new
foreign investment. A considerable portion of these investments
includes debt-equity conversions and authorization for new
product lines, most of which were financed with internally
generated funds. The authorizations also cover investments ap-
proved but to be paid in over a period of several years.
Because of a drop in investment by Mexican public and pri-
vate sectors by end-1986, foreign investment had risen to 9.6% of
total investment in both the public and private sectors, com-
pared with 4.5% the previous year. Of the 7,191 companies with
foreign capital participation, 4,283 involve minority foreign
equity, while 2,908 are majority foreign-owned. Foreign invest-
ment is concentrated in the economy's most dynamic areas,
such as the automotive and farm machinery industries, second-
ary petrochemicals, electronics, metals, pharmaceuticals, and
paper- and food-processing. As of late 1986, some 77.4% of
foreign investment was in manufacturing, 11.5% in the trade
4 IL&T MEXICO w' June 1987 Business International Corp
sector, 11.1% in services, 4% in mining and 0.3% in agriculture.
The US supplied the biggest share of foreign investment,
66.8%, in 1986; Japan, 12.5%; the UK, 4.4%; Germany, 3.4?/0;
and Switzerland, 3%.
1.07 Examples of foreign investment. Debt-to-equity con-
versions have become the most important new vehicle for
foreign investment in Mexico. All of the major automakers have
made such deals in recent months, including Nissan ($95 mil-
lion), Chrysler ($70 million), Ford ($50 million), Renault ($15
million), Daimler-Benz ($4 million) and Volkswagen ($30 mil-
lion.). Other industrial companies that have capitalized via debt
swaps include Kobe Steel, Singer, Corning and Purina.
During the year, the FIC also approved 65 out of 66 applica-
tions to move from minority to majority foreign investment.
SKF, for instance, has taken a majority position in Puebla-based
lbisa to manufacture ball bearings in return for a strong export
commitment. Hewlett Packard won approval for 100% owner-
ship of its personal computer manufacturing operations. Apple
Computers also won approval to go to 100%.
Other investments include $250 million invested by Nippon
Steel, Mitsubishi and Mitsui in the Lazar? Cardenas-Las Truchas
steel complex. Nestle won approval for an investment of $12.2
million over three years to expand instant coffee production,
new product development and installation of waste water treat-
ment facilities. Club Med invested $40 million through a debt
swap to finance completion of a vacation village in Bahias
Huatulco. Other tourism investments included the following:
Banco Arabe Espanol (ARESB) invested $93.4 million through a
debt swap for four hotels in 1986?two in Cancun, one in Los
Cabos and one in Puerto Vallarta. ARES Bank also invested $35
million in 1987 for another hotel in Cancun; Petit Laboratories
invested $12 million for expansion; American Express Bank in-
vested 60?/a of a $22 million investment with Club Med and
government development banks for a hotel in Huatulco; and
Kimberley Properties Ltd invested $30 million for a hotel named
the Oasis in Cancun.
In early 1987, 45 new permits were issued for secondary
petrochemicals manufacture. Thirteen of these projects involve
joint ventures with foreign participation. Among them is a joint
venture between E.I. du Pont and Reactivos Minerales Mexico
to produce sodium cyanide. A total P27 billion investment is
planned. Naamloze Venootshap (the Netherlands) and Cela-
nese Corporation will participate with Univex in a P21 billion
investment to expand caprolactame production.
1.08 Profitability of foreign investment. No figures on the
profitability of foreign-owned subsidiaries in Mexico are readily
available. However, according to the latest available data from
the US Department of Commerce, US companies earned a 140/0
return on the book value of their Mexican investments in 1985
(latest year available). Manufacturing income rose 121% to
$716 million.
1.09 Official sources of business information. Information
on doing business in Mexico is available from Banco de Mexico
(the central bank), located at Cinco de Mayo No. 2, 06059 Mex-
ico DF (Tel: [phone]); Nacional Financiera (Nafinsa),
Venustiano Carranza 32, Col Centro 06000 Mexico DF (Tel:
905-518-0060); and the Secretariat of Finance and Industrial
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Development (Secofi), Alfonso Reyes No. 30, Col. Condesa,
06140 Mexico DF (Tel: [phone]).
1.10 Other BI sources of information. Readers interested in
further information on Mexico available from Business Interna-
tional should consult the weekly publication Business Latin
America, the Latin American Forecasting Study, and ILT's com-
panion reference service, Financing Foreign Operations.
Other BI publications that offer in-depth information on Mex-
ico include the following: Cross-Rates covers the Mexican peso
with a quarterly forecast; Executive Living Costs in Major Cities
Worldwide (BI/COL), updated twice each year, surveys cost-of-
living data in 89 cities throughout the world; and BI Position
Evaluation and Remuneration Service (81/PERS) offers reliable
information on local remuneration practices in 25 countries. A
BI study, Reassessing Mexico: Strategic Questions for an Uncer-
tain Market, is also available, as How to Use Mexico's In-Bond
Industry.
In addition, Bl's research departments in New York, London
and Hong Kong are prepared to handle individually tailored
research on topics of special interest to ILT readers. Such
research i conducted on a fee-paying basis; a prior cost
estimate will be furnished upon request.
2.00 STATE ROLE IN INDUSTRY
2.01 General. The state plays an enormous and expanding
role in Mexico's industry, through either independent state-
owned entities (organismos decentralizados) or mixed public/
private.companies (empresas con participacion estatal). The lat-
ter are supervised by such state agencies as the Secretariat of
Energy, Mines and Parastate Industry (Semip), the Secretariat of
Commerce and Industrial Development (Secofi) and Nacional
Financiera (Nafinsa). Many mixed companies are in direct and
intense competition with private firms, even down to the retail
level.
Government involvement now ranges from investment in the
oil and electricity industries, which came under state control in
the 1930s, to such sectors as steel and other metals, basic
petrochemicals, fertilizers, vehicles, railway equipment and
forestry. The banking system is the most recent addition to the
public sector fold. The public sector's share of total investment
is estimated to be well over 50%.
The shortage of resources since 1982 has forced the govern-
ment to wean itself of nonstrategic enterprises. Out of the 898
companies and trusts operated by the government in 1982, 459
have been authorized to be liquidated, sold or transferred to
state governments. To date, however, the government has only
disposed of 178. Out of 96 firms put up for sale, 72 have actually
been sold?most in the industrial and tourism sectors. Out of
259 firms that are to be liquidated, merged or transferred to the
states, only 106 have actually been dealt with. In all, 30 firms
are expected to be eventually transferred to the states. Some 64
firms will be merged, 269 will be liquidated and 96 are to be
sold. In March 1986, the government announced it was liqui-
dating an additional 43 companies or trusts and transferring or
consolidating 16 others. Critics charged that too many of the liq-
uidated entities were obsolete trusts bound for extinction any-
way and not the real deficit-generating losers. However, the ad-
ministration's decision in June 1986 to shut down the Fundidor'a
Monterrey steel plant and shutdowns later in the year of Aceros
Chihuahua, Aceros Ecatapec and Aceros lndustriales, which af-
fected 13,661 workers, show a growing resolve to deal with po-
litically sensitive parastates.
The state's growing role as a planner is underlined by the far-
reaching extent of its sectoral development plans, and it also
directly affects industrial activity through the purchasing power
of large parastate companies such as Pemex, Fertimex and the
Federal Electricity Commission (CFE). The current adminis-
tration has also strengthened the economic participation of the
so-called social sector, comprising organized labor.
2.02 State-owned industry. Sectors reserved for the state are
banking, petroleum and other hydrocarbons, basic petrochemi-
cals, radioactive materials and nuclear energy, electricity, cer-
tain mining areas, railroads, and telegraph and wireless com-
munications.
Pemex has a monopoly over Mexico's oil exploration, pro-
duction, refining, marketing and distribution. It also controls
the basic petrochemicals industry. Sidermex, a holding com-
pany formed in early 1978, controls the government's majority
interest in the steel companies Altos Hornos de Mexico (Ahmsa)
and Siderurgica Lazaro Cardenas Las Truchas (Sicartsa).
Combinado Industrial Sahagun was formed by Diesel Na-
cional (Dina?manufacturer of buses and trucks), Constructora
Nacional de Carros de Ferrocarril (railroad cars) and Siderurgica
Nacional (special steel machinery and motor blocks). Further-
more, the state has smaller participations in many manufactur-
ing companies in such fields as automobiles, chemicals, steel,
appliances and food.
Nafinsa, the government development bank, currently holds
equity in a number of companies. It tends to buy and sell, how-
ever, recirculating its holdings. Nevertheless, the total number
of companies has remained constant at 64-65 since 1982. Dur-
ing 1986, it sold its shares in Alimentos Fuerte, Avantram Mex-
icana, KSV, San Cristobal paper mill, Industrias Penoles, Cen-
trifugas Bridbent Interamericana, Glicoles Mexicanos, and Pro-
ductora Mexicana de Farmacos. New investments have been
centered on the mining, steel, copper, chemicals, petrochem-
icals and basic goods sectors. New investments include
Refineria Cobremex (copper refinery) and Alfa Cedlulosa de
Mexico (chemical cellulose for export). A project to produce
sulphuric acid is slated to receive $55 million.
Nafinsa's other holdings include Grupo Pliana, Mexinox (with
France's Pechiney Ugine Kuhlmann as minority partner and
Fundidora de Mexico and the International Finance Corpora-
tion also holding some shares); Dina-Komatsu (in which Komat-
su of Japan has a stake); and Dina Rockwell (in which Rockwell
of the US participates). Nafinsa also holds a 33.5% stake in
Grupo Industrial NKS SA de CV, a joint venture with Sidermex
and Japan's Kobe Steel.
Grupo Somex, a state-owned banking and industrial con-
'glomerate, once had a dozen or so profitable joint ventures but
now is divesting most of its portfolio. It now focuses on tourism
and real estate for low-income housing construction. It has sold
its autoparts division, which included shares in Motodiesel (sold
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to Dina), Atsugui Mexicana (oil pumps) and Mex Par (breaks
and radiators). It has also sold its home appliance and capital
goods divisions and is reducing its petrochemical division with
the sale of Cloro de Tehuantepec.
2.03 Nationalization policy. Expropriation is regulated by
Art. 27 of the Constitution and by the Law of 1936, which re-
quires court approval and adequate compensation for take-
overs made for reasons of "public convenience." Owners have
the right to appeal, especially by invoking the recurso de am-
paro, which guarantees the individual rights of all Mexican
residents. Mexico takes both the right of appeal and the "ade-
quate compensation" stipulation seriously.
The most dramatic recent example of expropriation followed
the September 1985 earthquakes, when the Mexico City gov-
ernment took over several hundred properties. This was intend-
ed as a populist move?the properties were to be used for low-
cost housing?but it created a number of political problems and
legal entanglements.
In September 1982, outgoing President Jose Lopez Portillo na-
tionalized the banking sector ( 11.01). Shareholders were paid
through government-secured indemnization bonds with
10-year maturities. These bonds are negotiable on the stock
market. Citibank, the only foreign private bank with full opera-
tions in Mexico, was exempted from the nationalization decree,
as was the workers' bank, Banobrero.
3.00 ORGANIZING
3.01 General. The Mexican government has traditionally ex-
ercised tight control over foreign investors through various legal
and administrative mechanisms, which have included local-
content requirements, price controls, ceilings on foreign equity,
tax concessions, withholding of import licenses and, recently,
access to foreign exchange at favorable rates.
Since 1973, the backbone of government control has been
the Law for the Promotion of Mexican Investment and the Reg-
ulation of Foreign Investment, which limits the amount of equi-
ty foreigners may hold and the fields in which they may invest
(3.03). The law also instituted the Foreign Investment Registry.
Unregistered foreign investments are not recognized under
Mexican law. The foreign investment law is administered by an
interministerial committee, the National Commission on For-
eign Investment (FIC), which comprises representatives from
the secretariats of the Interior, Foreign Affairs, Treasury, Labor,
Budget and Programming, Commerce and Industrial Develop-
ment (Secofi), and Energy, Mines and Parastate Industry.
Other laws that apply to foreign investment include strict
rules on the transfer of technology (6.03) and limitations on the
employment of foreign nationals (12.07). The de la Madrid team
has consolidated the Office of Technology Transfer and the Of-
fice of Patents and Trademarks into one administrative unit, the
Department of Technology, Development, Patents and Trade-
marks; it has transferred control of this new unit from the FIC to
Secofi. Firms seeking special concessions, such as tariff protec-
tion or fiscal incentives, must secure additional approvals.
3.02 Basic approval procedure for new investments and ex-
pansions. The most important approval required is that of the
6 IL&T MEXICO 0 June 1987 Business International Corp
FIC, which consults with various government departments be-
fore giving foreign investors the go-ahead. Expansions and new
investments by established firms must also be sanctioned (3.04).
Even when prior FIC approval is not explicitly required?such as
when a firm seeks Mexicanization?companies are urged to ob-
tain the go-ahead from the FIC immediately.
From 1983 to 1986, the FIC approved 84% of the applications
it considered. In 1986, 330 applications were made; of those,
302 were authorized and 28 rejected. Rejections centered on
requests for majority ownership in the autoparts and secondary
chemicals area and requests to set up service companies that
already had Mexican majority firms in the sector. The most fre-
quent reasons for rejection are the displacement of domestic
producers, conflict with priority sectors of "national interest,"
insufficient integration of locally made inputs, insufficient
benefits in the form of export revenues, or a burden to a sector's
balance of payments. Foreign investors that comply with the
government's regional and sectoral priorities generally receive
favorable treatment.
The FIC has also rejected applications that comply with some
but not all of the government's goals. IBM was originally denied
majority ownership on a new product line of microcomputers,
the bulk of which was to be exported. Officials considered the
venture's local-content level, total investment and job genera-
tion insufficient. They also felt that the company did not offer at-
tractive enough concessions to make an exception to that in-
dustry's development program, which requires Mexicanization
of new investments.
However, IBM went back to the bargaining table with the FIC
and won approval for a 100%-owned PC-manufacturing facility.
The computer giant sweetened its offer considerably, especially
in the areas of local content and total new investment. The
company also has committed substantial funds to developing
local suppliers and distribution networks, as well as developing
university programs. The approved proposal also called for 820
more direct and indirect jobs than the rejected version.
While protection of local industry is a major reason for
negative rulings, officials claim that under certain circumstances
they will allow for a foreign-owned venture if similar local in-
dustry is inefficient. For that reoson, a machinery and tool
manufacturer was allowed to set up a wholly foreign-owned
operation to compete with the Mexican monopoly, which pro-
duces similar but obsolete goods at a high price.
After receiving FIC approval, foreign firms must also obtain a
permit from the Secretariat of Foreign Affairs, which authorizes
the acquisition of property, and must then register the invest-
ment with the National Registry of Foreign Investment. Both
steps are routine and can be accomplished in a matter of
weeks. Mexican nationals acting on behalf of foreign interests
must also register with the National Registry. Stiff penalties ap-
ply to any Mexicans acting as prestanombres?"name lend-
ers"?who serve as front men for foreign capital.
The foreign investment law's resolutions, which were re-
vamped in 1984 and 1985 (1.05), set a 30-day time limit on
decisions by the executive secretary and fix the same period
after submission of proposals to the full commission. However,
requests for further information frequently extend the 30-day
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limit. The new resolutions also empower the executive secre-
tary to rule on the opening of new establishments in cases in-
volving "significant export volume"?allegedly meaning most
of a firm's output. FIC authorization is no longer required in the
following cases:
? Sale or transfer to other 1000/0 foreign-owned companies
of in-bond plants with at least 75% foreign capital.
? Appointments and replacements of foreign board mem-
bers.
? Transfer of shares or fixed assets between foreign inves-
tors.
? Opening of new or relocation of existing establishments
"if significant export volume" is involved.
3.03, Activities not open to foreign capital. Mexico prohibits
foreign investment in banks, the petroleum and primary petro-
chemicals industries, radio, television, urban road transporta-
tion, air and sea lines, forestry, gas distribution and other areas
reserved for the state (2.02).
3.04 Limitations on foreign equity. The 1973 foreign invest-
ment law limits foreign equity and foreign management control
in new Mexican ventures to 49% except under special circum-
stances. The law does not apply to in-bond facilities, which may
be 100% foreign-owned (13.05). Secondary petrochemicals and
autoparts ventures are currently subject to a 40% ceiling on
foreign equity. Since 1984, pyramiding has been allowed in the
Mexican autoparts industry, but Mexico did not move as ex-
pected to allow full 100% foreign ownership in 1986.
Established ventures may continue under majority foreign
ownership, as long as they make no new investment?defined
as that which requires substantial new capacity, introduces a
new product line or is located in a new place. However, the
law's wording leaves plenty of latitude for the FIC, which can
apply the rule liberally or strictly when deciding about a new
model of an existing product or the introducion of a new line
closely linked with established ones.
Resolutions passed in 1984 and 1985 (1.05) allow companies
to open new administrative offices, facilities for worker training,
employee recreational facilities or parking lots for company
use. Firms must simply inform the FIC executive secretary
within 30 days of undertaking various expansions. These in-
clude setting up showrooms, service and advertising facilities
for their own products and establishing warehouses for finished
and semifinished products and raw materials, as long as the
company actually owns the warehouse.
Simple notification of the executive secretary is also the only
requirement when foreign investors want to set up representa-
tive offices that do not earn income, temporary offices (e.g. to
conduct negotiations or oversee projects) and representative of-
fices to conduct market research for future investments?as
long as Mexican nationals are employed by the last. The same
notification procedures apply to manufacturing companies'
relocations that involve increases of up to 100% in actual pro-
ductive areas and of higher percentages in personnel and fixed
assets if the move is to a less-developed area, preferably Zone I
(,10.00). For administrative, commercial, service and other es-
tablishments moving to less developed areas, subsequent
notification is sufficient for a 20% increase in physical space,
personnel and assets.
Capital increases do not require approval if the proportions of
foreign and Mexican equity are preserved. The executive secre-
tary may authorize foreign shareholders to subscribe the full
amount of capital increase provided they previously owned
51% of the capital in the company and the Mexican sharehold-
ers explicitly declined their right to participate in the capital in-
crease.
The new equity must be 'financed by new investor contribu-
tions to avoid need for FIC approval. Financing of new capital
through debt capitalization or reinvestment of profits requires
FIC approval. The executive secretary must also approve the
purchase of the 25% Mexican shareholding if 75% of the shares
are held by a foreign partner. Capital increases or purchases of
shares that would reduce a majority Mexican shareholder to a
minority position still require approval. The executive secretary
may permit foreign investors to acquire shares owned by Mex-
ican investors as long as overall foreign investment in the com-
pany does not exceed 49%.
Transfer of shares or assets among foreign investors requires
no authorization as long as it does not involve debt capitaliza-
tion or reinvestment of profits. The purchasing party must attest
before the executive secretary that all relevant obligations and
commitments undertaken by the selling party will be respected.
A 1981 modification of the foreign investment law tightened
rules against pyramids and holding companies. FIC authoriza-
tion must now be obtained for any purchase of stock in a Mexi-
can firm by a holding company with foreign capital participa-
tion if the purchase results in net foreign ownership of 25% or
more. The text of the new resolution was vague and did not re-
fer to existing pyramided investments, but it did specify that FIC
authorization is necessary for purchases that initiate, maintain
and increase net foreign ownership of 25% or more. Restriction
on pyramiding appears to be waning in the de la Madrid ad-
ministration. A 1984 autoparts law amendment allows it, and
similar treatment is expected to be approved for mining and
cement.
Equity limitations have also been affected by Resolution 14,
issued in 1986. Resolution 14 classifies investment by multilat-
eral banks and government development banks as neutral capi-
tal. Such equity must be sold within i 0 years.
Resolution 15, also issued in 1986, allows small and medium-
sized firms to make majority investments, relocate establish-
ments or engage new lines of activity in Mexico without prior
FIC approval. Net annual sales of the parent company cannot
exceed $8 million. Total employees must not exceed 500 per-
sons. The Mexican operation must be in the manufacturing sec-
tor and not employ more than 250 persons. Sales may not ex-
ceed the indexed equivalent of P.1 billion. In addition, the firm
must export 35% of its production and maintain a surplus in its
trade balance and equilibrium in its payment balance. Plant
location must also conform to decentralization criteria.
In early 1984, the commission released a list of specific indus-
tries in which it might authorize majority foreign ownership of
new or existing ventures (see the box on p. 8). Authorities
stress that new ventures should be self-sufficient in foreign ex-
change, unless they contribute directly or indirectly to substitu-
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Mexico's Favored Industries
Foreign investment officials may authorize majority foreign ownership in the
following industries:
Nonelectric machinery and equipment
Agricultural machinery and tools; woodworking machinery; machinery to process
and package foodstuffs and beverages; machinery for the petroleum and
petrochemical industry; numerically controlled tools to cut and shape metals; tex-
tile machinery; plastic moulding machinery; machinery for the graphic arts in-
dustry; cranes, pulleys, etc.
Electric machinery and apparatus
High-powered electric motors and generators; turbines for the processing in-
dustry; high-powered turbo compressors.
Metal-mechanic
High-technology metallurgy; high-precision microsmelting; specialized tools.
Electronic equipment and accessories
Telecommunication equipment; magnetic discs and tapes for the data-processing
industry; data-processing equipment and components; process-control equip-
ment; various electronic materials and components; electronics, scientific and
engineering equipment; consumer electronics.
Transportation equipment
Motorcycles of more than 350 cc; internal-combustion motors for vessels and
locomotives; equipment to construct and repair vessels.
Chemicals
Active pharmaceutical substances; plastic and synthetic resins; specialized goods.
Others
Measurement tools; medical equipment; photographic equipment and inputs for
the photographic industry; new high-technology materials; biotechnology equip-
ment; construction and management of hotels.
tion of imports. In 1986, the FIC began relaxing its stress on
local content and instead emphasized a strong export program,
surplus trade balance and research and development work.
A company seeking an equity position of more than 49% may
apply for special FIC authorization. The commission will raise
the limit if it thinks the move is in Mexico's interest. (Applicants
may consult with FIC authorities in advance on the merits of the
investment and about whether they can realistically expect to
receive permission for more than 49% equity.)
As with applications for expanding foreign-majority compa-
nies, the commission scrutinizes the economic benefits of a
proposal in terms of Mexican development goals. The FIC
claims to offer exceptions on the basis of the technology of-
fered, conditions in the relevant local industry, the venture's ex-
port potential, contributions to import substitution and in-
dividual considerations.
Although a number of existing companies have been allowed
to capitalize debt to obtain a majority foreign-capital structure,
authorities look at this as a last resource. They prefer capital in-
jections through preferential credits of industrial trust funds or
co-investments with Mexican development banks. Firms that
apply for debt-equity conversion must submit detailed informa-
tion about the nature of their indebtedness, their overall finan-
cial position and the amount of profit remittances, royalty and
8 IL&T MEXICO :c) June 1987 Business International Corp
interest payments made over the previous six years. If a firm is
presently registering profits, the conversion will be automatical-
ly rejected.
Authorized companies are virtually always required to re-
Mexicanize within the period the firm is expected to become
profitable again. Shares must be placed in a trust, and in some
cases the value of the stock at the selling time will be deter-
mined by applying to the stock value each year a percentage
based on CPP (Mexican banks' cost of lending-93.76% as of
May 1986) plus several points.
A 1975 mining law introduced an important "net capital"
concept by which the government prorates the foreign equity of
majority Mexican-owned firms in calculating the net foreign
participation in a new venture with a foreign-owned firm. For
example, if a 60% Mexican-owned firm takes 60% equity in a
new venture with a wholly foreign-owned firm, the resulting
venture is considered 36% Mexican (60% of the 60% Mexican
equity in the first company). The same system of calculating
equity is used for most other sectors, although in the autoparts
sector, for example, it is possible for a foreign partner with a
minority share to have effective control through pyramiding.
3.05 Building and related permits. Various approvals must
be obtained before any actual building can commence. During
the foreign investment approval process, specifications for new
plant must be submitted to the Secretariat of Commerce and In-
dustrial Development, which consults with different govern-
ment departments on various points (e.g. zoning, environmen-
tal protection). Foreign investors should request specific ap-
proval from each government department at the same time.
The Public Works Divisions of the various state governments
or the federal district authorize building permits. Extensive
water use must be approved by local water officials, and phar-
maceutical or food-processing plants must obtain Health
Department permission before beginning construction.
Detailed environmental regulations covering water, dust and
smoke pollution are in effect. Environmental matters in general
fall under the Department of Public Health, and the Depart-
ment of Water Resources decides on questions involving water
pollution control. Officials are beginning to request detailed
environmental-impact studies for large projects.
It usually takes slightly more than a month to obtain each re-
quired permit.
3.06 Acquisition of real estate. With the approval of the
. Secretariat of Foreign Affairs, foreign companies are free to ac-
quire land, including sites in industrial parks. However,
foreigners may not own land within 100 km of Mexico's borders
or 50 km of the coastline without special permission. If an in-
dustrial or tourist project is planned in a border or coastal area,
foreign investors may secure the land they need through a
fideicomiso (trust arrangement), under which local banks hold
the land in trust for a maximum of 30 years.
3.07 Acquisitions and takeovers. The 1973 foreign invest-
ment law made acquisitions extremely difficult. A foreign com-
pany must obtain authorization from the government before ac-
quiring more than 25% of the equity or more than 49% of the
fixed assets in established ventures. Moreover, Mexican in-
vestors have a 90-day period, subject to renewal for a like
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period, to make the purchase instead. The FIC occasionally ap-
proves foreign acquisitions, particularly to rescue ailing com-
panies, but this remains one of the most tightly regulated areas
of investment. The executive secretary of the FIC is empowered
to approve acquisitions up to 49%, but majority acquisitions
must have full FIC approval.
The 1975 mining law applies a "net capital" requirement to
acquisitions of majority foreign-owned companies by minority-
owned ones (3.04). That concept was extended to all com-
panies by the resolution concerning holding companies.
3.08 Local-content requirements. Tougher, more closely en-
forced local-content requirements have been imposed on many
industries. For example, the 1983 decree for the rationalization
of the automotive industry increases local-content require-
ments, computed as import content divided by total value of a
typical unit, on a vehicle-by-vehicle basis. Automobile manu-
facturers were required to increase the level of local content to
55% in model year 1986 (vs 50% in 1985), and to 60% in 1987.
Local-content requirements for vans and light trucks were hiked
from 65% in 1984 to 70% in 1985. Medium and heavy trucks
were required to gradually increase their local content from
65% to 80% by 1987, while tractor trailers and buses had to
reach a 90% minimum local content in 1985.
Local-content requirements for new lines designed primarily
for sale abroad depend on export targets and range from 0% to
29% for lines exclusively sold abroad to as much as 50% local
content if exports represent less than 60% of total production.
For autoparts manufacturers, 80% of total production must be
from locally made inputs. Each individual product line had to
have at least 50% Mexican content through 1985, 55% by 1986
and 60% by 1987. In addition, by 1986, at least 500/o of the
domestic content required of a given production line had to
arise from Mexican-made auto parts. Local-content require-
ments for automobiles also apply to engines.
Officials expect to increase overall local input of raw
materials for the pharmaceuticals industry from 43% in 1985 to
64% in 1988. New raw materials had to include at least 20%
local content in the first year, to be hiked to 500/0 in three years,
or in five years if permission is given.
Local content is also used to determine eligibility for public
sector sales put to bidding. A company whose products have
50% domestic content is considered Mexican, and as such it
can participate in tenders limited to local firms. The whole local
content issue will, however, have to be reviewed in light of
Mexico's entry into GATT, since GATT calls for no discrimina-
tion between local and foreign content.
3.09 Mandatory memberships. Every business in Mexico
must belong to at least one of the many local chambers of com-
merce and industry. The cost is usually small, and the obliga-
tions are limited. Some foreign-owned firms active in their
chambers have found the organizations useful for keeping in-
formed and for influencing colleagues (and, indirectly, the
government) in matters affecting their business. Lobbying
through the chambers is particularly important at present, as the
. government modifies its price-control mechanisms sector by
sector and further liberalizes trade. The chambers' functions in-
clude the monitoring of bids for major government purchases.
Chamber members are notified of imminent purchases and are
among the first to receive specifications.
3.10 Establishing a local company. Mexico has all the usual
forms of business organization, including the sociedad anonima
(corporation) and the sociedad de responsabilidad limitada
(limited-liability company). Several other forms of organization
(e.g. sociedad en nombre colectivo, sociedad en comandita por
acciones) are suitable only for small operations.
The permit for establishing a company stipulates that the
Calvo clause be inserted in the bylaws and on stock certificates.
This clause waives the right to invoke foreign diplomatic inter-
vention and foregoes any claim to treatment different from that
accorded to Mexican nationals.
The sociedad anon ima (SA) and the sociedad anon ima de
capital variable (SA de CV) are the most common forms of orga-
nization for foreign investors. The SA most closely resembles
the public limited company or corporation (see the box be-
low). The SA de CV, or corporation with variable capital, has
been favored by foreign investors with wholly owned sub-
sidiaries that want the added flexibility for increasing or de-
Requirements of a Sociedad Anonima
In Mexico
Capital. Minimum P25,000. At least 20% must be paid in initially. Shares
payable in kind must be paid in full immediately and remain on deposit with the
corporation for two years; if the assets represented by the shares decline by more
than 2511, in value during that period, the shareholder must pay in the difference.
Firms must place 5% in a legal reserve.until the reserve equals 20% of authorized
capital.
Founders, shareholders. Minimum five founders and shareholders (four may
hold only one share each).
Board of directors. Minimum two. A minority that holds.25% or more of stock
has the right to appoint one director. Foreigners may be appointed to the board
only in direct proportion to the authorized foreign capital participation in the
company. There are no residency requirements for board members.
Management. One individual manager may be appointed. There are no na-
tionality requirements.
Labor. No requirement that labor be represented on the board. Firms must
distribute 8% of pretax profits to employees.
Disclosure. Corporations must be supervised by examiners, who are appointed
at a stockholders' meeting (25'% minority can name additional examiners). No
publication requirements (except for companies listed on the stock exchange-
11.04).
Taxes and fees on incorporation are minor, but legal fees may be substantial.
Types of shares. Only nominative shares are permissible. For purposes of Mex-
icanization, shares are often classified as "A" and "B," one of which is restricted
to Mexican nationals. Special labor shares may be issued for personal service.
Founders may receive up to 10% of the corporation's profits every year during the
first 10 years of existence by means of founder bonds, provided the shareholders
have received at least a 5% dividend each year. There may be preferred and com-
mon stock. Preferred stock must have limited voting rights (only concerning ac-
tions to transform, merge, dissolve or make other such major changes) and must
receive a cumulative dividend (usually 5%, sometimes less) before the common
stock can participate in the corporation's profits.
Control. Simple majority of stockholders has control, unless charter calls for
higher majority (e.g. 60-800/o), as is frequently required for major decisions. An-
nual general meetings required; representatives of half the corporate capital con-
stitute a quorum. For extraordinary meetime, Our major changes in corporation),
75% of capital necessary or quorum on iir.t call 150% thereafter). Decision is by
simple majority.
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creasing capital. Procter & Gamble, Ralston Purina, Johns-Man-
ville, Kimberley-Clark, Union Carbide and Singer (all US), ICI
(UK) and Sandvik (Sweden) are among the companies using this
form of organization. All shares must be nominative.
Organizing a local corporation may take six weeks or longer,
depending on the complexity of the project. A permit must first
be secured from the Secretariat of Foreign Affairs (3.02). A
minimum of five persons must then appear before a notary
public to sign the deed of incorporation, which must contain
the names, nationalities and other particulars of the founders;
the name, domicile, purpose and duration of the company; a
breakdown of its capital and a statement of the founders' contri-
butions and their value'; a description of the manner of adminis-
tration; names of directors, managers and supervisors; the man-
ner of liquidation; and all other special agreements that will
regulate the operation.
3.11 Establishing a branch. A few companies have set up
branches, but branches are at a disadvantage for several rea-
sons: They are not well-regarded by Mexican authorities; they
cannot own real estate; they cannot deduct payments to the
parent for royalties, interest, fees or other services; and they
must pay a 55% dividend withholding tax on their income after
corporate tax, whether or not such income is remitted. Further-
more, establishing a branch takes more time and money, and
charters for branches usually contain more restrictions than
those for corporations. Mexican authorities have not yet deter-
mined the exact requirements for establishment of branches
under the 1973 investment law. Establishing a branch is def-
initely more time-consuming. Many foreign firms prefer instead
to set up a local Mexican majority company. It is easier, and the
company is subject to less government scrutiny.
4.00 RULES OF COMPETITION
4.01 General. Mexico has no specific antitrust Law, al-though
there are constitutional provisions against price fixing and other
. monopolistic practices. The government's moves to curtail
trade restrictions and to gain GATT membership will put exter-
nal pressure on domestic monopolies. The government some-
times tries to promote competition by fostering several firms in
the same industry, even if the market does not warrant it. In the
tractor industry, for example, the government opened the
market to Massey-Ferguson and Ford, even though John Deere
and International Harvester had understood that it was to be
reserved to them. As a result, all four companies suffered from
the lack of business and customers. Massey-Ferguson, in fact,
sold out to Grupo Alfa in 1980. Alfa, in turn, sold this subsidiary
to Fabrica de Tractores Agricolas (FTA), a joint venture in which
Ford holds a 40% stake.
4.02 Monopolies and market dominance. Monopolies are
not subject to legal limitations unless they violate price controls
(5.00). The National Development Plan stresses the govern-
ment's commitment to strengthen small- and medium-scale in-
dustries through priority treatment?including preferential
credits, technical assistance and tax incentives. Large conglom-
erates will probably continue to flourish because Mexico needs
their industrial strength, but they are not looked upon
10 IL&T MEXICO c June 1987 Business International Corp
favorably. Foreign investors are encouraged to team up with
small Mexican concerns whenever possible, rather than with
the local conglomerates?which, in any case, are relatively few.
4.03 Mergers. Mexico has no specific legislation covering
mergers. FIC approval is needed for mergers that would alter
the balance of equity ownership. An informal FIC ruling is
necessary when two foreign-owned companies contemplate a
merger. Under the 1985 pharmaceuticals decree, foreign-
owned firms are not allowed to acquire existing operations in
the industry. Majority Mexican-owned companies, however,
are encouraged to merge.
4.04 Freedom to sell. Mexico seldom prevents manufacturers
from selling to whomever they wish. Exceptions include provi-
sions in the 1975 mining law that require coal and sulfur produc-
ers to distribute their products according to government specifi-
cations and some restrictions on exports of products deemed
necessary in the domestic market.
A 1975 consumer protection law set guidelines for advertising,
consumer credit and packaging. Companies are prohibited from
packaging or advertising in foreign languages to the general
public. Advertising aimed at children is closely scrutinized, and
companies are expected to meet legal standards when backing
guarantees and servicing products. Promoting a product of "ex-
port quality" or "at export prices" is forbidden.
Regulations issued in 1980 revamped much of the 1975 con-
sumer protection law. Under the revised rules, companies must
have approval from the Secretariat of Commerce and Industrial
Development (Secofi) for promotional campaigns offering free
items, such as two items for the price of one. (In such instances,
the final sales price must be lower than the items' combined
market value.) Moreover, promotions based on collecting a se-
ries of coupons, etc., are now generally prohibited unless firms
can show some benefit to consumers. Secofi no longer approves
campaigns requiring complicated or unclear procedures to ob-
tain bonuses.
The government's two television stations stopped broadcast-
ing liquor advertisements in 1981. Privately owned stations can
air ads for beverages with an alcohol content over 13% only after
10 PM. As of July 1, 1984, the labels of all alcoholic beverages
have had to include a warning stating that alcohol abuse
damages health.
A variety of foods and other necessities require labels with a
list of ingredients, the maximum price or both (5.00). Companies
should now expect greater emphasis on nutritional content.
4.05 Resale price maintenance. Although there are no regu-
lations either permitting or prohibiting the practice, it is very dif-
ficult to control resale prices in Mexico.
5.00 PRICE CONTROLS
Over the course of 1986, Mexican officials revamped the ex-
isting three-tier price surveillance system to ease cost pressures
on producers and to make the system generally more flexible.
The three tiers are as follows: (1) products for which prices will
remain frozen until the authorities find it necessary to modify
them; (2) products for which companies may apply for price
hikes when their costs have risen; and (3) products subject to
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price registration. Officials have not published a product
classification list.
Prices on Category I products are set by the government after
industry-wide negotiations. This group includes all basic foods,
drugs and many primary industrial materials. Secofi and the in-
dustry chamber jointly select a prototype company and track
the firms costs to determine when an increase is necessary.
Companies with goods in Category I note that the new system
has resulted in quicker price adjustment, averaging about 90%
of the rise in the official COL index.
Category II products are on system known as the Registro
Controlado. Here a company and Secofi work out a schedule
for periodic increases at an annual percentage of the inflation
rate?usually 90% of inflation. Once the rates of increase are
agreed on, the firm automatically increases prices by the agreed
amount and on the set time schedule. It then submits its new
price list to Secofi, which has five days to halt the increase if it
finds the firm has gone beyond what was agreed to. If a com-
pany finds that its input price increases are much higher than
the norm, it can put in a request for a special increase. This is
most common with companies that have a high percentage of
imported inputs.
Recently, Secofi has been willing to consider moving some
products out of Category I. For instance, in the canned
vegetable industry, the chamber has argued successfully that
canned vegetables should be moved to Category II, since the
cans used in packaging are in Category II and this way price in-
creases can be simultaneous. A chemicals producer was also
successful in getting phosphates, phosphoric acid and purified
phosphoric moved from Category Ito Category II.
Prices on Category III goods are merely reported to Secofi.
This is called the tracking system. Firms are free to raise prices
as desired but must submit a cost analysis every six months. The
auto industry was put on this system in mid-1986 and since then
a wide range of appliances have been moved into this category.
Secofi has also started experimenting with a new technical
coefficient based price increase mechanism. It is being tested
on the detergent industry. Under the system, a technical coeffi-
cient taking into account input costs, technology and produc-
tion costs is determined for each firm. When the coefficient in-
creases by more than 5%, a price increase is automatically
granted. The decision is supposed to be made within five work-
ing days once the request is made. Detergent producers say the
time period is usually from 10 to 30 days but that thisis better
than the 30 to 60 day waits in the past.
In 1979, Secofi issued requirements that selected products be
labeled with maximum selling prices and/or a list of ingredients
according to percentage of importance. The list of products af-
fected by the measure, more than half of which are under price
controls, is broken down into the following categories:
(1) Label must show ingredients and maximum price.
Prepared baby foods; canned chiles; soluble coffee; detergents;
canned fruits and vegetables; cookies; vegetable fats and oils;
laundry and personal soaps; condensed, evaporated and pow-
dered milk; infant formula; toothpaste; ground and refined salt;
sardines in containers; and wheat flour pastas.
(2) Label must show ingredients. Canned tuna; prepared
cereals; processed condiments; powdered and table chocolate;
snacks and candies; fruit jellies and marmalades; mayonnaise;
mustard; packaged bread; canned soups; and vinegar.
(3) Label must show maximum price. Purified water; rice;
oatmeal; raw and refined sugar; roasted and ground coffee;
beef; all varieties of beans; wheat flour; corn flour; eggs; milk;
fresh, refrigerated, frozen or dehydrated fish; bottled soft
drinks; and corn tortillas. Labels of all products included in the
basic pharmaceutical basket must display the generic name of
the medicine's main ingredient and its sanitary code number in
the same size and letter type as the brand name. Labels must
also clearly display the official price.
Mexico's price control regulations state that a company whose
application for a price increase has not been answered within 30
working days may assume that approval has been officially
granted. If the authorities ask for more information within 10
days of receiving a request, the company has 60 days to submit
the additional material, and the authorities have another 20 days
to give a final answer. In practice, 60 to 90 days elapse between
the time of application and the actual authorization of the price
hike, although some firms have had to wait up to six months
before an increase was approved. During this period, Secofi
grants provisional increases based on the cost of raw materials,
packaging and increases in labor cost.
Pharmaceuticals regulations issued in February 1984 rein-
forced government control of the prices of drugs. Generic label-
ing for all products with a main ingredient included in the basic
basket of some 480 drugs is now compulsory, and officials will
gradually set uniform prices for the generics. Secofi has also set
reduced prices for 27 essential medicines, leaving producers
and distributors minimal margins on some number-one sellers.
Officials claim they will take into account the higher raw-
material costs of franchised drug manufacturers when fixing
price ceilings.
In 1986, prices of basic foodstuffs were hiked by 108.7%
against inflation of 105.7%, mainly as a result of efforts to cut
government subsidies. The price of tortillas increased 250.2%,
bread 118.1% and eggs 117.1%.
6.00 LICENSING
6.01 General_Mexico's 1982 transfer of Lech.nology_patents-
aird trademarks _law .(Ley_sobre_el, _ControLy Registro. de I
4Transferencle Tecnologia y ert.p_b_gtacft-5F-1.crelPatentes,y-2._
Marcas)--supersed&I-t-W1976-iTiaustrial prowties
_
t ions govern ingimplementation_of,the_re.visedta-W-Were-aclopted)
November_1982. Mddifitions were:addls-d-inianuary_19fTh
The de la Madrid government has consolidated the Office of
Technology Transfer and the Office of Patents and Trademarks
into one unit?the Department of Technology Development,
Patents and Trademarks. It has also shifted control of this unit
from the FIC (3.00) to Secofi's Subsecretariat of Foreign Invest-
ment Regulation and Transfer of Technology.
Mexico's development goals have led the authorities to look
for foreign licensors with needed technology and put them in
touch with potential local licensees. Licensing arrangements are
still common for international companies in Mexico, both in
IL&T MEXICO u June 1987 Business International Corp 11
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Patents and Trademarks in Mexico
Conventions. Paris Convention 1883-1967, World Intellectual Property
Organization (WIPO).
Basic laws. Law of Inventions and Trademarks, 1976, and modifications to this
law dated Jan. 16, 1987; also, Law on the Control and Registration of the Transfer
of Technology and the Use and Exploitation of Patents and Trademarks 1982
(regulatory guidelines published in the Official Gazette of Nov. 25, 1982).
PATENTS
Type and duration. Patents of invention or improvement, 14 years; no renewal.
Unpatentable. Patents are not available for inventions involving food process-
ing, pharmaceuticals, agriculture, pesticides, herbicides, fertilizers, pollution con-
trol or nuclear energy, although processes for obtaining such products are now
patentable. Also unpatentable are inventions whose publication or exploitation
would be contrary to law, public order, health, public safety, good habits or
morals. Chemical products may not be patented; however, industrial methods for
obtaining them and industrial applications may be patented.
Application and examination procedure. File with legalized power of attorney
at the Direccion General de Tecnologia, Invenciones y Marcas, Salvador Alvarado
56, Co. Escandon, Mexico, DF. Examination is under the jurisdiction of the
Secretariat of Commerce and Industrial Development. Publication in the Gazette
of Industrial Property is required, and application is subject to prior scrutiny for
two months to check whether other Mexican patent or pending application ex-
ists. It is advisable to make an application for special examination (nullifying any
claim against novelty after five years). Mexico now accepts the finding of interna-
tional examining offices when reviewing applications for patents on products
already patented abroad.
Fees. Application: P44,000; P22,000 each for examination of novelty or use;
P11,000 for reconsideration of negative response; P12,500 for review application
or completion of missing information; P66,000 for the expedition of titles and for
annual fees in the first three years; P20,000 annual fee beginning with the fourth
year, P29,500 as of the eighth year; P16,500 for transfer, modification of contract
or change of name.
Compulsory licensing is possible when patents are not worked sufficiently to
fulfill domestic market needs or to.exploit potential markets fully, when they are
not worked within three years, or for reasons of public health, national defense or
public interest (see text for further details). Patents can also be expropriated if
such action is deemed to be in the public interest or for reasons of health, national
security, etc.
Inventor's Certificate
Type and duration. Provides payments of royalties on certain unpatentable
products; 14 years; nonrenewable.
Fees. Application P5,500, plus P5,500 for each license, modification of con-
tract, examination of novelty and transfer. P5,100 for document replacement or
for complementing missing information. P5,500 for transferring patent application
to inventor's certificate information.
TRADEMARKS
Duration. Good for five years and renewable for like periods as long as marks
are commercially used. Marks not put to use within three years are voided.
Legal effect. Right is established through use. Registration establishes an exclu-
sive right to use by the registrant, but there are prior rights granted to earlier
nonregistered users of trademarks.
Not registrable. Political symbols, technical or common terms normally used to
describe a product; geographic names; surnames used without permission; marks
contrary to morals or deceitful; those lacking novelty; words for items to be made
only in Mexico and Latin America.
Linked trademarks are no longer required and were not enforced in the past.
Procedure. Applications are made to the Industrial Property Office and are
published in the Gazette of Industrial Property and the Official Gazette.
Fees. Application fee for a trademark to be applied to one product, P11,600; for
two to 10 products, P22,000; to more than 10 products, P44,000; recognition of
prior rights. P16,000; verification of use, P22,000; renewal, P22,000 or P44,000,
depending on the class of the mark; P487,000 for registration of an expired
trademark for one to nine products, if applied for within one year of expiration;
P11,000 for transfer, modification of contract or change of name.
INDUSTRIAL DESIGNS AND MODELS
Application procedure is the same as for patents; duration is seven years,
nonrenewable.
Fees. Application: P11,000, plus PI 1,000 for each right granted; P22,000 for the
initial expedition of title, including the first three years' annual fees; annual fee,
P11,000 each for the fourth and fifth years; P5,300 for transfer, modification of
contract or change of name; P5,500 for examination of novelty; P4,900 for a
review of the application.
conjunction with direct investment and independent of it,
although Mexican officials usually prefer that a technology sup-
plier share the risks of a new venture by taking a capital stake.
6.02 Patent and trademark protection. In early 1987, Mex-
ico made some modifications-in its 1976 patent legislation. But
the changes were not enough to prevent the country from losing
GSP benefits in early 1987 because of a US Trade Representative
Office finding that Mexico was not providing adequate protec-
tion for intellectual property.
Under the revised law, the length of patents is increased from
10 to 14 years. Industrial drawings and models will be protected
for seven years instead of the previous five. Mexico only offered
the pharmaceuticals industry the promise of product patents in
10 years. Process patents did become available in a number of
areas the old 1976 law left unprotected, but the process patents
are generally considered inadequate protection. Now available
are process patents on pharmaceuticals and chemicals, agro-
chemicals and manufacturing alloys as well as patents on nu-
clear energy processes (which do not compromise national se-
12 IL&T MEXICO June 1987 Business International Corp
curity) and processes for antipollution equipment.
The revisions also did away with rnandatocy trademark linkage
requirements and beefed up penalties for trademark piracy. Pi-
rates can now get two to six years in prison. New enforcement
procedures allow goods or services to be seized at the time an
initial complaint is filed with the Attorney General's Office,
rather than after a lengthy legal process. In early 1987, two long-
standing trademark infringement cases were settled?one in-
volved a dispute over the Nike tennis shoe, and the other the use
of the Christian Dior trademark.
In a red-tape cutting measure, the Commerce Secretariat will
now accept the findings of international novelty examinations
when firms seek Mexican protection on products already pa-
tented abroad. This should speed up the normal three- to four-
year approval process.
Companies operating in sectors without product patents may,
however, apply for inventors' certificates (cedificados de invert-
cion), which provide for payments of royalties but also make the
technology available to all who want it. The authorities fix royal-
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ty. levels if private parties fail to agree. Majority foreign-owned
pharmaceuticals firms will receive authorization to manufacture
previously imported active ingredients only if no Mexican firm
applies for a license. In the case of chemicals, only new in-
dustrial methods for obtaining them and their new industrial ap-
plications may be patented.
A clause in the law allows expropriation of patents for the
public good and obligatory licensing of patents. A patent holder
can lose exclusivity for several reasons, including the following:
(1) failure to put a patented process to industrial use within
three years of approval; (2) failure to use the process for a
period of six months; (3) failure to exploit the domestic market
fully; and (4) failure to exploit potential export markets.
If a third party applies for an obligatory license under any of
the above conditions, the patent holder has two months to pro-
pose a program to change the offending condition. If the holder
fails to devise a suitable program, a compulsory licensee is
designated. The government may fix the royalties if the two par-
ties cannot reach an agreement. The patent holder is required
to provide necessary backup to help the designated licensee. If
no compulsory licensee steps forward within a year after the pa-
tent holder loses exclusivity, the patent becomes void. Up to
now, however, the clause has never been applied.
Patents and inventors' certificates are valid for 10 years from
the date of granting. Obtaining final approval often takes two to
three years. The cost of securing a patent or certificate ranges
from P100,000 to P220,000 if the application is handled through
a well-established law firm, a procedure that is highly recom-
mended.
Authorities require a number of trade-offs, mainly focusing on
local technology development. Firms will have to channel a
percentage of sales to human resources development as well.
They must provide scholarships that can range from financing
employees' technical training in Mexico to doctorate degrees
abroad. In some cases, renegotiated contracts also stipulate pro-
visions to give direct technical assistance to local suppliers, and
may even include a development program for suppliers so that
these will eventually start to sell abroad. MNCs are asked to sup-
port these export efforts through their international marketing
network. Companies must also offset their royalty payments
with exports, though not necessarily of their own products.
A trademark must be used within three years of registration or
be voided. However, for one year following these three years,
the trademark cannot be adopted by unrelated applicants: Dur-
ing this period, the firm that originally registered the mark but
never used it may reapply for registration.
Trademark certificates are good for five years and can be re-
newed indefinitely with proof of the mark's actual use. Register-
ing a mark currently costs P61,500 plus about $500 in lawyer's
fees. The process takes six months to a year; protection begins
on the first application.
In 1986, Mexico granted 987 patents out of 3,700 requested.
Of 306 inventor's certificates applied for, 235 were approved.
While Mexico has begun to take a harder line toward pirates in
recent years, legal red tape and corruption in the legal system
make the control of pirate operations'extremely difficult. A firm
can spend years in court shutting down one pirate operator only
to have another one spring up after the shutdown. Pirating of
clothing trademarks has become particularly prominent in re-
cent years. Where applicable, lawyers advise pursuing pirates
under Mexico's copyright laws, which are tough and enforced
more efficiently by the Secretariat of Public Education. By using
this approach, Televisa had little problem shutting down
videocassette operators who were pirating Mexican as well as in-
ternational films. The laws have also proven effective in dealing
with software piracy. Mexico is a signatory to the Universal Bern
Convention on Copyrights.
6.03 Legal and administrative limitalitms-onwlicensing.A
new law regulating the transfer of technorgcriciak-effect in
1982. AllfleChTrrology contractnow-subject-to--approvaLby
the-Department-of -T-echnology--D, ev.elopm.ent Patents and
(T-radem-a rtzs7a- rid-fht't5F-Vegisteredz-withz.theNationai,
ft-egistr751-Teh nolitTa-h-s-fe-r:-S-uch-contracts-cover-thee-pf
patents and trademarks or the supply of plans, diagrams,
models, instructions, formulas, assignments, engineering details
for installations, managerial and technical assistance, consulting
and evaluation services, and computer programs. Agreements
involving in-bond plants (maquiladoras-13.05), which were
previously exempt, must also be registered.
(Isign7Fc-linillogy-transfer-contracts-must-be-presented-within
60-days-ofrexecutior-7:57-ncth7ifies-have-90-days-to-decideo
wbetherah e-cdn Era ct quail fifor -registrationiljfe.the0;._d ay
- '
period elapses without.a,response,.tne.contracus_automaticaII -3y
EgiStered. However, the_agency rnay cancelration?ifit
finds-that-the-contrart-lia-s-b-eerrmodified-in,practice .
Noni-TgirTa contracts have no legal-v7liaity, and com-
panies cannot establish or expand manufacturing operations or
receive incentives unless related technology-transfer contracts
are registered. Amendment agreements or side letters cannot
be enforced though Mexican courts.
When a firm submits a licensing contract for consideration, it
must pay P42,000 plus P28,000 for each patent or trademark
mentioned in the agreement; actual registration costs another
P28,000. Modification of the contract once it has been regis-
tered requires additional fees. The registry also charges a
P28,000 annual renewal fee for continuing inspection.
Practices forbidden by the 1982 law include obliging a licen-
see to submit disputes to foreign courts (although provisions for
international arbitration are permissible); restricting a licensee's
exports so as to damage Mexican interests; limiting a licensee's
R&D efforts; limiting production volumes or setting sales prices;
obliging a licensee to buy equipment, tools, parts or raw
materials only from a certain supplier; limiting a licensee's sales
freedom; or obliging a licensee to sign exclusive sales or
representation contracts with the licensor.
Also prohibited are contracts that involve the transfer of
technology freely available in Mexico; establish excessively long
terms (10 years is generally considered a maximum); set a price
that is out of proportion to the technology sold-i.e. one higher
than that charged for comparable technology easily available
elsewhere or one that imposes an excessive burden on the Mex-
ican economy or the buyer; permit the licensor to interfere with
the management of the licensee; or disallow the use of com-
plementary technology.
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Recognizing common industrial practices, however, the au-
thorities slightly modified the previous prohibition against grant-
back clauses. Mexican firms are now permitted to share with
suppliers new developments and refinements they make in
technology acquired abroad if there is a reciprocal arrangement
or other benefits to doing so. The ruling against obligatory sales
or representation contracts with the supplier has also been
softened. Authorities will allow such contracts for exports if the
Mexican purchaser accepts the deal and can prove that the
foreign supplier has either the expertise or the image to do a bet-
ter marketing job than the Mexican firm.
6.04 Royalty and fee patterns. The Department of Technol-
ogy, Development, Patents and Trademarks does not establish
firm guidelines on acceptable royalty rates. Until recently, 3% of
net sales was generally considered the maximum royalty on
domestic sales; now officials will allow higher rates, in some
cases they say as high as 10%, if they feel that the technology
contributes to Mexico's specific development goals. Lawyers say
that in practice the rate appears to top out at 7% and the higher
rate is usually on export sales. Higher domestic sales rates of
4-5% have also been obtained recently in cases where the com-
pany implements technology assimilation and supplier develop-
ment programs. Rates above 1-2% are generally only given to
well-known brand names.
Authorities are looking for technology packaged in a way that
allows the licensee to effectively absorb and/or modify it. There
is a new emphasis on models and plans. Rulings also give prefer-
ence to know-how that optimizes Mexico's natural resources
and does not have a harmful effect on the environment. Rather
than receiving a final contract, officials want to be involved in
drawing up the agreement, and many companies make it a prac-
tice to consult authorities before handing in their proposals.
In line with their quest to create a local technology base, offi-
cials are now asking companies for substantial contributions to
domestic research and development. Firms must channel a
fixed dollar amount, rather than a percentage of sales, into local
R&D over the 10-year period, and they must present specific
research projects within or outside of the company. They are
also asked to give technical assistance to local suppliers. In ad-
dition, technology receivers must offset royalty payments with
exports, and officials stress that these exports must consist of
products made with the purchased technology. If authorities
consider that the product has export potential, they may re-
quire that export revenues exceed royalty outlays and increase
over the period of the contract duration.
The government permits technical-assistance fees to be paid
to overseas residents only if the services are (1) rendered by
those possessing the technical capacity to do so; (2) performed
directly, and not through third parties; and (3) not otherwise
available. The primary purpose of the rules is to ensure that
technical services are indeed rendered and not just used as a
means of avoiding taxes.
7.00 REMITTABILITY OF FUNDS
7.01 Exchange controls. Since December 1982, a two-tiered
exchange rate has been in force. The controlled rate applies to
14 BAT MEXICO (0 June 1987 Business International Corp
export revenues, all imports, private and public sector foreign
debt, royalty payments, in-bond plant expenses and the govern-
ment's overseas diplomatic expenses. Firms can also purchase
controlled dollars for import credits incurred after Dec. 20,
1982, or deduct these payments from their export revenues. In
1986, Banco de Mexico liberalized the rules covering access to
controlled-rate dollars for advance payments on imports. Ad-
vance controlled-rate dollars are available for the entire cost of
the import up to $10,000. Beyond that amount, controlled-rate
dollars are available for advance payments covering up to half
the import costs. An exception is made for capital goods im-
ports; controlled dollars for advance payments are limited to
20% of the value. All other transactions fall under the free rate.
The controlled exchange rate transactions fall under one of
two categories: The tipo de cambio de equilibrio is a floating
controlled rate set each day at a Banco de Mexico meeting.
Companies have the option to contract for the purchase or sale
of foreign currency either at this official daily rate or at what is
known as the tipo de cambio ventanilla. Under the latter system,
each bank posts a rate at which it will buy or sell dollars on that
particular day. Essentially, banks cover themselves for any daily
jumps in the equilibrio rate by keeping a small margin between
the buy and sell rates. Companies that need foreign currency in a
hurry use the ventanilla; the equilibrio route takes up to four
working days.
In January 1987, the government launched a futures market
for the controlled-rate peso, which is managed by Mexican
banks and authorized exchange houses. The forward market has
drawn little interest from MNCs, however, because of the high
premiums charged. The scheme also does not guarantee access
to controlled dollars, only the peso equivalent. Because of this,
the market does not qualify as a true hedge under many firms' in-
ternal financial controls. The relative stability of the peso and
easy access to free-rate dollars at nearly the same rate as con-
trolled dollars has also discouraged use of the market during the
first four months of its existence. But an upswing in peso volatili-
ty could lead to greater use.
Another forward hedge exists in the Pagare de la Tresoria de la
Federacion (pagafe). The pagafe was launched in July 1985 and
has also received a cool reception. The pagafe is denominated in
dollars but bought and sold in pesos at the controlled rate. There
is no secondary market for sale of the pagafes. The 180-day term
of pagafe issues has made them difficult for exporters to use ef-
fectively. Yet, while in 1986 pagafes had a modest average an-
nual yield of 4%, pagafe yields on an annualized basis have risen
to over 12% in 1987.
During the first three months of 1987, the equilibrio rate?
which is supposed to be set according to supply and demand?
slipped 20% during the first quarter against inflation of 21.9%.
During the same period, the free rate devalued 22%. The strat-
egy of the central bank appears to be to keep devaluation rough-
ly even with inflation but not to have devaluation lead inflation
as it did in 1986, when the controlled rate devalued 148% versus
inflation of 105.7%
Since July 1985, the free peso has been on a free float, with
banks and exchange houses setting daily rates. The Central
Banks does intervene effectively at times to control wide fluctua-
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tions in this market. Except for a brief period in June 1986 when
the free peso was allowed to fall rapidly to discourage capital
flight (which was a reaction to balance-of-payments pressures),
the peso showed surprising stability in 1986, ending the year at
P923:$1 for the controlled rate and P914.5:$1 for the free rate.
The controlled and free rates became equal briefly in December
1986. In 1987, the differential has been about 0.04% through the
first four months.
Officials exercise strict control on the use of foreign exchange.
Exporters must promise to sell their export proceeds to local
banks within 90 days. From these revenues they may deduct im-
port costs, import- and export-related expenses and payment of
bank and supplier credit not enrolled in any of the government's
special programs (see 7.06 for payment options for principal and
interest on foreign loans). Companies must keep a certified
register of all their foreign currency transactions?including
bank and supplier debts, foreign exchange credits, accounts
receivable and payables and cash operations. Incorrect invoic-
ing (e.g. underinvoicing of exports and overinvoicing of imports)
and other violations of foreign exchange regulations are heavily
penalized, and in cases of recurrence, violators may be kept
from exporting or purchasing foreign currency for import pur-
poses.
7.02 Transfer of profits and dividends. Profits and dividends
are freely remittable, provided a company is registered with the
National Registry of Foreign Investment and meets legal reserve
requirements and tax obligations (8.09). By law, firms are re-
quired to distribute 10% of their pretax profits to employees and
allocate 5% of net profits to the legal reserve until 20% of stated
capital has been set aside.
7.03 Transfer of interest is subject to Banco de Mexico
regulation (see 7.06 for payment options for principal and inter-
est on foreign loans).
7.04 Transfer of royalties and fees can be made at the con-
trolled rate provided the contract under which the fees are to
be paid has been duly registered with the National Registry of
Technology Transfer (6.03). Licensees, however, are allowed to
calculate the dollar equivalent of the peso amount due at the
free rate and purchase the dollars at the controlled rate, thereby
reducing their effective cost without affecting flows to.the licen-
sor.
7.05 Repatriation of capital. Since the partial relaxation of
exchange controls in December 1982, capital repatriation has
not been explicitly prohibited; however, such transfers are sub-
ject to the availability of foreign exchange, and the authorities
could impose restrictions on capital movements to stem capital
flight. In 1986, foreign-owned firms remitted $296.1 million, ac-
cording to Mexico's capital account.
7.06 Repayment of principal. The Mexican government has
established several programs to aid the private sector with the
payment of its foreign obligations. One of the debt-repayment/
exchange-coverage schemes is the Fideicomiso para la Cober-
tura de Riesgos Cambiaros (Ficorca) program, which was in
force from April 6 to Oct. 25, 1983. The program offered several
options for covering future payment of principal?or principal
plus interest?on foreign debt incurred before Dec. 20, 1982.
Creditors were able to make peso deposits for the equivalent
dollar debt at preferential exchange rates that. were tied to the
term of the renegotiated debt. A minimum term of six years
with three years' grace was required; peso credits at the average
cost of three six-month peso deposits were available.
Almost $12 billion was initially covered through Ficorca,
representing two thirds of the private sector's $18 billion foreign
debt. Of the 1,200 companies that participated in Ficorca, 94
chose the option that covered principal and interest and in-
cluded a peso. credit. Ficorca made a stunning P1.6 trillion in
such credits available?almost equal to the Mexican banking
system's total credit portfolio at the time. Both the government
and the banks knew the payout schedule was unworkable. In
early 1987, Mexico and the foreign banks renegotiated the re-
maining $10.3 billion in Ficorca, stretching payments out over
20 years with seven years' grace?the same period agreed to in
the renegotiation of the public debt.
Guidelines for firms wishing to renegotiate individual Ficorca
contracts were published in early 1987 (Schedule G). The rene-
gotiation option is available only to firms enrolled in the original
Ficorca program. Approval of foreign creditor banks is normaly
also required. Firms electing to renegotiate can choose one of
two options for refinancing their peso credits: (1) Firms can
refinance out to eight years, with four years' grace. The interest
rate would be the average of three- and six-month CDs. The
peso value of these credits, however, would be recalculated at
the controlled rate effective on the day of the restructuring.
(2) Firms can refinance out to 12 years with six years' grace,
maintaining their present Ficorca contract exchange rate, but at
the higher interest rate of 110% of CPP.
The new tax plan limits the deductability of Ficorca exchange
losses and interest payments. A number of companies have
taken a hard look at the option of doing debt swaps to prepay
Ficorca. In some cases, the debt can be paid off at $0.50 on the
dollar when the debt swap premium and preferential Ficorca ex-
change rate are taken into account. Some firms have also sold
their Ficorca contracts to other companies, although the prac-
tice has been rare since 1986.
Companies were also able to pay off principal and interest of
past-due supplier debt incurred before Dec. 20, 1982, through
various programs. For instance, firms could cover these debts by
depositing pesos at the controlled rate into dollar-denominated
accounts; these dollar deposits then became an asset of the
creditor. Banco de Mexico covered a total of $800 million
through such schemes. The average amortization period of a
long-term credit must be at least 12 months, and 200/o advance
payment is allowed. Importers can purchase controlled dollars
for interest payments on these credits up to the maximum yield
of three-month deposits in the corresponding foreign currency
on the date interest payments are due; the remainder must be
covered with free-rate dollars.
Several payment mechanisms are available for supplier credits
that are secured by foreign government agencies in the US,
Europe and Japan. Their governments make credits available
through Mexico's foreign trade bank (Bancomext) and Nacional
Financiera (Nafinsa), which then pay the outstanding debt to the
foreign creditor.
Mexican debtors with payments that tell past due betore
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Dec. 31, 1983, can make peso deposits at the controlled rate for
the amount of debt and interest in dollar-denominated accounts
in favor of the foreign creditor. Creditors may withdraw from
these accounts and receive pesos plus the equivalent of LIBOR
at the controlled rate in force on the day of withdrawal once pay-
ment schemes for their respective credits are announced; Mexi-
can debtors are, as a result, hedged against exchange risk. For-
eign government-secured import credits that are past due or that
fell due after Jan. 1, 1984, can be covered directly by debtors.
These payments can be made with controlled dollars.
New foreign currency borrowings must be converted at the
controlled rate and be registered at the Secretariat of the
Treasury (Hacienda). Coverage for the foreign exchange risk of
certain new long-term credits is available at moderate rates
through Ficorca. Some firms have successfully bought an old
Ficorca contract with a lower exchange rate from another com-
pany. Usually the two companies split the gain from the ex-
change rate savings on the new debt.
7.07 Guarantees against inconvertibility. None.
8.00 CORPORATE TAXES
8.01 General. Mexico has introduced sweeping changes to
its income tax law. The primary objective is to speed up tax col-
lection and stop the decline in the tax base caused by infla-
tion?all with the aim of boosting government tax revenue,
which had been falling in recent years as a percentage of GDP. A
secondary objective is to promote productive investment and
discourage excessive indebtedness.
The first moves came in April 1986, when a special session of
Congress accelerated tax payments, increased companies' man-
datory contributions to social security and partially eroded some
existing incentives. Then, in November 1986, Congress passed a
new income tax law, which will be phased in over the next five
years. During the transitional period, firms will pay a percentage
of their income tax as figured under the old income tax system
known as title VII and a percentage under the new system
known as title II. In 1987, firms will pay 80% of their taxes under
the old system and the remaining 200/o under the new system.
The effects should be mild this year but will become of more
concern in 1988, as the percentage becomes 600/o and 40%,
under the old and the new tax systems, respectively. In 1989,
firms will pay 400/o under the old system and 60% under the
new. In 1990, it will be 20%, old system, and 80%, new. In 1991,
the new system will be fully in effect.
The tax rate will continue to be 42% under the old system but
drops to 35% under the new tax plan. During the transitional
period, firms will apply the two rates for each system and take
the appropriate percentages.
The chief difference between the two systems is the introduc-
tion of inflationary considerations into the calculation of net tax-
able income in the new system. The negative effects are most
prominent on interest deductions (exchange losses are consid-
ered as interest, as are net gains from sale of financial instru-
ments such as petrobonds.). Favorable effects can be generated
by the inflationary adjustment of interest income.
The goal of the system is to recognize the real reduction in
16 IL&T MEXICO ,c) June 1987 Business International Corp
debt that occurs as a result of inflation, and the corollary increase
in the real return on assets in an inflationary environment. Under
the plan, if the reduction in debt that occurs as a result of infla-
tion is larger than the amount of interest paid out, a firm will be
taxed on the difference?which is termed an inflationary profit.
Likewise, if the return on assets is less than the inflationary in-
crease in value of the assets, companies generate a deductible
inflationary loss.
The effect is to greatly expand the tax base of heavily indebted
firms. Firms with more debt than assets will pay more under the
new system. Those firms with little or no debt will benefit from
the reduction in rates under the new tax system. As firms will still
have 80% of their income taxed under the old system in 1987,
tax consultants note that there will still be benefits to generating
high levels of interest and exchange loss deductions. Major
changes in tax strategies will have to be made as the new system
takes a bigger bite in 1988 and 1989, however.
The new tax plan also freezes inventories and allows imme-
diate deduction of all purchases. Firms will get no tax benefit
from inventories maintained after the four-year tax period. In-
ventories not deducted during that period will not be deductible
until the firm is liquidated. While in 1987 firms will still benefit
from inventory deductions, inventories should be reduced to the
minimum in following years.
The new law also introduces a choice in depreciation allow-
ances. Firms may take either a straight-line depreciation or a
one-time deduction of the present value of the asset.
During the transition period loss carryback is suspended but
carryforward is expanded to five years. Losses are revalued
based on a Banco de Mexico index when taken against the new
system. However, the procedure for revaluation effectively
limits this to four years. Carryback will be reinstated in 1991
when the new system is fully operational.
Once net taxable income is calculated under the new and old
systems, tax calculation is the same. Mandatory profitsharing
and dividend treatment remain unchanged. The Mexican Con-
gress repealed a law that would have switched to a creditable
tax system in treatment of dividends in 1987.
Since December 1985, retailers have been required to incor-
porate the value-added tax (VAT) into shelf prices?rather than
levy the VAT separately at the time of purchase. In 1987ia 10%
surcharge on high income wage earners for earthquake recon-
struction was repealed.
8.02 Corporate income tax rates. Over the next four years,
companies will pay taxes at two rates under the two systems. A
42% rate will be applied under the old system, and 35% applied
under the new system. Companies earning under P250 million
qualify as medium-capacity firms and pay taxes on a simplified
system with set rates for depreciation, and interest deductions
as well as interest income. A new firm starting up that does not
expect to make P250 million its first year can pay taxes based on
this system as well.
Individuals carrying out business activities and earning up to
P16 million are know as small taxpayers; they pay income taxes
at graduated rates ranging from 5% to 42% and are required to
follow simple bookkeeping procedures. Mexico has no local or
state corporate income taxes.
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Corporate Taxation in Mexico
Below is a highly simplified example of how to calculate the tax burden on a
wholly foreign-owned company operating in Mexico with P100 million in taxable
income and paying a cash dividend of P30 million over the tax year's earnings.
P30 million in dividends was paid the previous year over that year's profits. Note
that inflationary gains or losses related to interest income or payments are not in-
cluded in this simplified model. Also, the corporate tax rate is based on a mix of
80% under the old system and 20% under the new.
(1) Taxable income
P100,000,000
(2) Net taxable income
70,000,000
(3) Corporate income tax
25,578,000
(4) Mandatory profitsharing-10% of (2)
7000,000
(5) Dividend withholding tax-55% of P30,000,000
(dividends paid this year)
16,500,000
(6) Total tax payable
49,078,000
(7) Effective tax burden
49.10/0
Income generated by branches or agencies of foreign firms is
subject to the same federal tax, plus a 55% withholding tax
(whether or not the income is remitted) on the aftertax balance.
The 42% corporate tax rate under the old system is reduced to
40% for firms engaged solely in agriculture, livestock raising,
forestry or fishing, to 25% for firms that also process their pro-
duce and to 25% if these companies obtain 50010 of their gross in-
come from industrial or trade activities.
8.03 Taxable income defined. Taxable income for local com-
panies and branches is defined as gross income less costs and ex-
penses related to producing that income, with exceptions. Items
that are not deductible are income tax payments, profitsharing
(12.05) or other payments conditional on profits, provisions for
employee liability or indemnity reserves, premiums over par on
stock redemptions, and income from technology exports. Pro-
motional and travel costs may be subtracted, provided the tax
authorities believe they are legitimate business expenses.
Foreign exchange losses are fully deductible under the old
system on an accruel basis. Under the new system, exchange
losses are considered interest. The amount of interest?if any?
hat exceeds the inflationary reduction of the debt is deductible.
Calculation of exchange losses remains the same. To calculate
the loss, a company uses the difference between the exchange
rate in effect when the foreign currency liability was incurred
and the rate at which payments are due. In 1983, officials ruled
that if companies renegotiated their foreign credits on longer
terms, they could take the full deduction for exchange losses at
the controlled rate in force on Dec. 31, 1983 (P96:$1), even if
they were unable to make the payments. Exchange losses can
still be taken when a payment is due, even though it is not ac-
tually made; the debtor no longer has to extend the terms of the
obligation to take the exchange loss. Additional loss suffered
when payment is made may also be deducted; it is figured at the
difference between the exchange rate?for which the credit was
eligible, not necessarily the one at which it was paid?at the rate
and the date at which payment is made. Exchange losses or gains
on cash and other liquid-instrument operations included in a
foreign exchange register are calculated on a LIFO basis.
There are three alternatives for tax deduction of exchange loss
on debt enrolled in Ficorca. They are as follows:
? The deduction can be taken in one sum during the year the
loss is suffered. An earlier provision allowing losses to be spread
in equal shares over four years?beginning when payment
would have been due under the original loan terms?or when
payment is actually made under the program has been repealed
effective Jan. 1, 1987. Under the new system, exchange losses
are revalued by a CPI-based factor, then reduced by-the amount
of the inflationary component of the debt. ?
? Under the old system, Ficorca interest deductions can be
taken spread over the length of the contract or as they come due.
Firms that previously elected to spread interest deductions over
the contract period have the option to change in 1987 to the "as
interest comes due" option. Interest deductions not taken on in-
terest paid prior to 1987 would stay on the old system.
? Under the new system, Ficorca interest must be deducted
or declared as it accrues. Interest paid but not deducted prior to
Dec. 31, 1986, must be revalued by the Banco de Mexico factor
and reduced by the inflationary component of the debt. The
Ficorca interest deductions are treated the same way.
Foreign exchange gains accrued are taxable in the fiscal year
in which the claim or the debt comes due according to the
original terms of the debt. Any additional exchange gains be-
tween the due date and the payment date are taxable in the
fiscal year payment is made. Between 1987 and 1990, exchange
gains incurred on offshore deposits will be taxable only on the
real component in both the new and the old tax systems. Accu-
mulated interest and exchange gains are reduced by the infla-
tionary component of the deposits that generated them.
Amendments to the tax law, effective Jan. 1, 1983, stipulate
that Mexican companies that pay dividends may deduct such
distributions from taxable income unless the dividends are paid
in the form of shares or unless the recipient reinvests them in the
payor through a share-capital increase within 30 days. (In the lat-
ter case, the deduction may be taken in the year the share capital
is decreased or the company is liquidated.)
Also, companies that pay dividends must withhold 55% of the
gross amount distributed to resident individuals and nonprofit
organizations and all overseas recipients; such withholding is
not required for dividends paid to another resident firm (see also
8.09 and 9.00). Dividends are tax deductible only if paid out of
the prior year's earnings.
As of Jan. 1, 1985, firms could no longer deduct dividends
generated by gains resulting from a revaluation of assets or any
B-10 inflation effects. Companies that register losses while pay-
ing out dividends must adjust their final results by the amount of
the payout. A planned shift to a creditable tax system in 1987,
Which would have ended deductibility of dividends, did not oc-
cur, and the law authorizing it was repealed (see box on p. 18).
Dividends received by residents in cash or in kind (except for
those reinVested) must be included in taxable income, but indi-
viduals are allowed to deduct the dividends paid out. A recip-
ient firm can offset this additional tax cost if it pays dividends to
its shareholders out of retained earnings not subject to deducti-
bility restrictions?e.g. dividends paid out of earnings generated
before end-1964 may not be deducted.
Operating losses incurred in 1982 and 1983 may be carried
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Mexico's New Tax System
Over the next four years, companies will calculate their taxes twice?once
under the old system and once under the new system, paying a percentage of the
tax due under each system. In 1987, the mix is 80% old and 20% neve. A 42% rate
is in effect under the old system and a 350/0 rate under the new. The chief differ-
ence between the two systems is the introduction of inflationary considerations
into the calculition of net taxable income in the new system. The effects are most
prominent on interest deductions (exchange losses are considered as interest, as
are net gains from sale of financial instruments such as petrobonds). The goal of
the system is to recognize the real reduction in debt that occurs as a result of infla-
tion. At the same time, only real interest earnings are taxed. For example, if a firm
had P500 million in exchange losses and paid P800 million in interest, while hav-
ing a total debt of P42 billion and assets of P10 billion, and having earnings during
the period of P5 billion sales and P900 million in interest, the results for the two
systems would be as follows.
Old System
Gross revenue P5,000,000,000
Plus interest income P900,000,000
Minus interest paid P800,000,000
Minus exchange losses P500,000,000
Equals P4,600,000,000
New System
The P800 million in interest plus P500 million in exchanges losses equals P1.3
billion in total interest under the new system. This amount is then reduced by the
inflationary reduction of the total debt (this is done by multiplying the adjusment
factor, which is the difference between the current month's CPI index and the CPI
index at the beginning of the period minus one. For the sake of this example,
assume the difference minus one is 0.06. We multiply total debt, P42 billion, by
0.06 and obtain P2.52 billion. This is the inflationary component of the debt. We
then take P1.3 billion minus P2.52 billion. Since the inflationary component is
larger than the interest paid we hove a taxable inflationary gain of P1.22 billion.
Debt is defined as all debt including that stemming from client advance payments,
financial leasing and funds provided for future capital increases. Excluded are tax
debts and profitsharing. Also exempt from the inflation adjustment are company
reserves for retirement and pensions, as well as reserves that do not correspond to
a definite debt and are not payments that are deductible. Deferred credits are also
excluded.
Interest received as income would be handled similary if we had P900 million in
interest income. It would then be reduced by the inflationary component of the
assets that generated the interest income. Considered as credits are deposits with
Mexican banks, deposits with brokerage houses or offshore deposits (offshore in-
terest is calculated at the exchange rate in effect at the first of each month) and ac-
counts receivable payable in 30 days or more. The total amount of credit out-
standing is then multiplied by the inflationary factor 10.06 x P10 billion equals
P600 million). This gives us a taxable interest income of P300 million. The out-
come under the new sytem would be this:
Gross revenue 5,000,000,000
Plus inflationary gain on debt P1,220,000,000
Plus interest income P300,000,000
Equals taxable income P6,520,000,000
Because the hypothetical firm in question has more debt than assets, the tax-
able income jumps substantionally. On the other hand, if a firm has less debt than
assets the effects start to become favorable.
In terms of cost of sales, the new tax plan freezes inventories and allows im-
mediate deduction of all purchases. Firms will get no tax benefit from inventories
maintained after the four-year phase-in period. Inventories not deducted during
that period will not be deductible until the firm is liquidated or changes business
activities. While in 1987 firms will still benefit from inventory deductions, inven-
tories should be reduced to the minimum in following years.
The new tax law also introduces a choice in depreciation allowances. Firms
may take either a straight-line depreciation or a one-time deduction of the present
value of the asset.
During the transition period, loss carryback is suspended but carryforward is ex-
panded to five years. Losses are revalued based on a Banco de Mexico index
when taken against the new system. The procedure for revaluation, however, ef-
fectively limits this to four years. Carryback will be reinstated in 1991, when the
new system will be fully operational.
Once net taxable income is calculated under the new and old system, tax calcu-
lation is the same. Mandatory profitsharing and dividend treatment remain un-
changed. The Mexican Congress repealed a law that would have switched treat-
ment of dividends to a creditable tax system in 1987.
Business International would like to thank Deloitte, Haskins + Sells (Mexico) for Is helpful comments on the tax section.
back for one year and may be carried forward six years. Losses
incurred before 1982 can only be carried forward four years.
Starting in 1987 and through 1990, loss carryback is suspended.
Losses can be carried forward for five years. In 1991, when the
new system is fully functioning, carryback will be reinstated.
Losses taken against the new system are revalued by a CPI-
based index.
Carryforward is not permitted for losses incurred to drive out
competitors, to write off uncollected accounts or to set up
nonspecified employee pension funds. Firms may deduct their
losses in one line of business from profits in another.
A temporary regulation of the tax law states that income
received through monetization of tax-incentive certificates
(Ceprofis-10.04) is not taxable if the income is received in
1983, 1984, 1985 or 1986. The Mexican government also did
not follow through with plans to make the value of Ceprofis tax-
able income in 1987. Ceprofis remain tax exempt, but must be
included as income in calculating mandatory profitsharing.
18 IL&T MEXICO ((--` June 1987 Business International Corp
Related majority Mexican-owned companies may pool their
profits and losses for tax purposes. To resolve some of the
uncertainties regarding fiscal consolidation, the tax law con-
tains the following provisions:
? Once a group opts to file a consolidated return, it must
continue to do so in subsequent years unless it obtains the tax
authorities' permission to stop.
? The subsidiaries within the group are relieved of some
standard bookkeeping requirements, since the information will
appear in the parent company's books.
? The adjusted tax loss of a separate company cannot be ap-
plied against the consolidated net taxable income of the group
if the separate company was not a member of the consolidated
group in the prior fiscal year.
? Loss carryforward of the group, as well as of the parent,
that originated before the time of consolidation may no longer
be deducted from the group's consolidated taxable income.
Any foreign-sourced income received by resident companies
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is subject to Mexican tax, but companies may credit income
taxes paid abroad, within certain limitations, against the
amount of Mexican tax due. Technically, companies not
domiciled in Mexico are taxed only on their Mexican-sourced
income, but no clear-cut rule establishes sources of income
liable to Mexican tax.
In general, income is deemed to derive from "sources in
Mexico" when the assets or activities are in Mexico or when the
sales or contracts are put through in Mexico, regardless of
where title passes. Firms or individuals are considered to be
domiciled in Mexico and therefore liable to Mexican tax if
represented by an agent who can enter into contracts on their
behalf. The source of income from services rendered in Mexico
and income from Mexican branches of foreign corporations is
always deemed to be Mexican. The same holds true for interest
payments, royalties, etc., when one of the parties to the con-
tract resides in Mexico.
In view of Mexico's high inflation, the Mexican Accounting
Institute has introduced standardized procedures for asset
revaluation for all financial statements ending Dec. 31, 1984,
and later. These procedures, known as B-10, are obligatory for
all companies registered with the Mexican stock exchange.
Many US-affiliated firms do not use 8-10 since their results will
be adjusted at headquarters with the application of FAS No. 52.
The Mexican Accounting Institute does not levy any sanctions
on nonpublicly traded companies that do not use B-10; it is,
however, required to mention in a footnote that results were
calculated according to historic costs.
These regulations give firms the option of choosing between
the constant-peso method, which adjusts for price changes by
applying a factor derived from the central bank's CPI, and the
replacement cost method', a variation of the current cost-ac-
counting technique. Firms can use both methods, except if they
consolidate financial statements. Inventory, cost of sales, fixed
and net assets, results of nonmonetary assets and the cost-of-
financing concept must now include interest payments and ex-
change rate fluctuations. These results, which were formerly
mentioned in a footnote, must now appear separately on the in-
come statement, except when the result of the monetary posi-
tion is positive, in which case it can be brought directly to net
assets.
8.04 Depredation is calculated on a straight-line basis under
the old tax system. Firms have a choice between straight-line
depreciation and a one-time present value deduction under the
new. The annual rates for machinery and equipment vary by in-
dustry. Examples are metal production, tobacco and natural
coal derivatives (7%), pulp and paper manufacturing (8%),
manufacturing of motor vehicles and parts, metal products,
machinery, professional and scientific instruments, beverages
and food processing (9%), chemical, petrochemical and phar-
maceutical products as well as rubber and plastic products
(11%), textiles, apparel (17%), airplane construction (170/0,
agriculture, stock-raising and fishery (37%).
Special rates apply to some items, such as dies and molds,
? pollution-control equipment and equipment used to develop
new products and local technology (all 400/0), aircraft used for
agricultural fumigation (37%), other aircraft (25%), buses (16%),
electronic computing equipment (370/a), mechanized equip-
ment for computer systems (17%) and rolling stock (6%).
All industries are allowed a 5% rate for buildings and con-
struction, 5% for intangibles (excluding goodwill) and deferred
charges, 100/0 for office equipment and 20% for certain trucks.
Intangible assets may be depreciated at a 10% annual rate.
Accelerated depreciation is authorized only for certain assets.
A special permit must be obtained from the Secretariat of the
Treasury. The authorities decide on a case-by-case basis when
accelerated depreciation may be used. Firms that entered into
accelerated depreciation allowance agreements between 1984
and 1986 may continue to use them and make deductions
against both the new and old tax bases.
Otherwise, firms have recourse only to the present value
deduction under the new system. No present value deduction is
allowed, however, for office equipment or equipment or goods
acquired through financial leasing.
New present value depreciation rates are the following: con-
struction, 51%; automobiles, 81%; computer equipment, 84%;
and tools, dies and molds, 87%. Machinery rates in specific sec-
tors are as follows: food and beverages 670/o; chemicals and
pharmaceuticals 710/s; construction 90%; and clothing and tex-
tiles 76%.
The decision to take the present value deduction must be
made in the month the asset is put into use. There is no longer a
fixed time for which assets must be kept to qualify for the deduc-
tion. Also, there are no Mexican equity requirements to qualify
for the present value deduction.
8.05 Schedule for paying taxes. Taxpayers are required to
make advance payments on the seventh day of every month,
based on assumed income computed by comparing the previ-
ous year's ratio of taxable profit to gross revenues with the cur-
rent year's gross. This rate is applied to monthly income, includ-
ing inflation gains. Under the new system, the previous year's
profits and losses are adjusted by the inflationary component of
he assets and liabilities. This can change a loss into a profit and
hike monthly payments if the inflation component of the
liabilities is higher than that of the assets. Tax payments must be
based on a full 12-month period.
Income derived from monetization of Ceprofi tax credits in
1983 through 1987 is considered income for purposes of calcu-
lating provisional payments. This regulation also affects calcula-
tion of the profit factor for the preceding year. Since 1984, com-
panies have been required to make estimated tax payments in
their initial year of operations equal to 42% of any dividend in-
come received. No advance payment is required if companies
incurred a loss the previous tax year. Firms can apply for a reduc-
tion in provisional tax payments no later than 15 days before the
payments are due. A final payment must be made three months
after the end of the tax year. Interest on overdue tax liabilities is
now charged at a rate of 8.5% per month if a delay in payment
has been approved. If no delay is granted, the rate jumps to
12.75%.
The government may challenge tax returns up to five years
after their filing and up to 10 years under certain circumstances
that may apply to small, family-run businesses. In practice,
however, the tax authorities generally check returns for the
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most recent fiscal year and for the subsequent period up to the
time of the examination. Additions to the tax law stipulate that if
errors discovered in any single tax category exceed 5% of offi-
cial calculations of tax liability, authorities may audit com-
panies' books from the previous five years.
Taxpayers have five years to file amended returns when re-
funds are anticipated. If the refund is not made within four
months of filing, it accrues interest. Accounting firms indicate,
however, that companies seldom benefit from this provision.
8.06 Excess profits tax. None.
8.07 Capital taxes. None.
8.08 Capital gains taxes. Corporate capital gains or losses
arising from the sale of fixed assets are treated as ordinary in-
come or losses and are taxed at the normal rates. Firms
relocating from the Mexico City metropolitan area to certain
zones slated for development are entitled to a tax rebate on
gains resulting from the disposal of real estate.
A formula introduced in 1981 allows companies to adjust
asset values to reflect inflation when calculating the tax on gains
arising from the sale of land, buildings, shares of stock, and
other capital interests. The amount of adjustment permitted
varies according to the number of years the asset is held (see
box on p. 22); these factors were increased substantially in
1984. Capital gains resulting from the sale of publicly traded
stocks by individuals are tax-exempt.
8.09 Taxes on dividends. Since Jan. 1, 1983, dividends paid
by one Mexican corporation to another have been included in
the recipient's taxable income, except when such dividends are
received in the form of shares or are reinvested in the payor
within 30 days. No withholding tax applies to these payments
(see also 8.03).
Mexican companies that' distribute dividends in cash or in
kind to resident individuals and nonprofit organizations and to
foreign recipients (both corporations and individuals) must
withhold 55% of the gross amount and pay this tax to the
government. With certain exceptions, resident individuals may
credit the amount withheld against their income tax due (9.00).
The 55% withholding tax is not charged and the distribution is
not deductible on (1) dividends from retained earnings gener-
ated before end-1972, for which tax on distributable profits has
been paid; (2) reimbursements of capital reserves on which the
tax mentioned in (1) has not been paid (the distribution of such
retained earnings is subject to a 15% withholding tax); and (3)
reimbursements of capitalized profits from 1973 to 1982 (a 21%
withholding rate also applies in this instance).
8.10 Taxes on interest. A 15% withholding tax rate applies to
interest paid to foreign banks and financial -institutions
registered with the Secretariat of the Treasury. Interest paid by
Mexican financial institutions to foreign creditors, as well as that
paid on negotiable instruments to recipients abroad, is subject
to withholding at 21%. Also taxed at 21% are loans to finance
the purchase of fixed assets, and inventory (even if the credit is
not extended by the supplier), along with loans to provide
working capital.
' Other types of interest payments, including those on loans
from foreign parents to their Mexican subsidiaries, are charged
a tax of 42%, withheld at source. Treasury officials have moved
20 IL&T MEXICO - June 1987 Business International Corp
to prevent the use of intercorporate loans as a means of remit-
ting profits without paying full taxes or of circumventing other
tax regulations.
Several options exist for taking interest payment deductions
on peso credits from both the old (April 1983) and the new
Ficorca program. Firms can deduct the interest paid to Ficorca
as payments are made, or they may opt to subtract?for tax
calculation only?the amount of additional credit extended by
Ficorca to cover those interest payments from the interest paid
in a given year. The company is thus allowed to deduct the in-
terest subtracted from the initial deduction when it begins to
pay the additional peso credit. A previous limit on deductible
interest to two points over LIBOR was dropped in 1984. Under
the new tax system, interest is reduced by the inflationary com-
ponent of the debt, thus limiting the amount that can be
deducted.
8.11 Taxes on royalties and fees. Payments abroad for the
use of models, plans, formulas, know-how and technical assis-
tance are subject to a 210/o withholding tax. Royalties paid to
foreign licensors of patents, trademarks and trade names are
charged withholding tax of 42% (see also 6.04).
8.12 Tax treaties. None.
8.13 Taxation of headquarters companies. Corporate
regional headquarters and offices theoretically are taxed only
on income generated in Mexico, at the normal rates.
8.14 Turnover, sales and excise taxes. The general VAT rate
is now 15% (up from 10% in 1982), except in the border areas
and the free zones of Baja California, Baja California Sur and
northern Sonora, where it remains 6%. The VAT on real estate
transactions in the border regions was also upped from 10% to
15%. In addition, a special 20% rate was introduced for luxury
goods and services; all medicines and most foodstuffs are to be
charged 6%; and professional services, except those of doctors,
are subject to the general rate.
The following items are exempt from VAT: certain basic
foods; machinery and equipment used in agriculture, fishing
and livestock raising; fertilizers; and and residential buildings;
books and periodicals; share transfers; and such services as
public transportation and education. Exports are also exempt;
producers of exported goods and manufacturers of machinery
and equipment for the agricultural and livestock sectors are
eligible or a credit or refund of tax in all stages of production.
Imports used to manufacture exports are also free of VAT.
Companies can apply for a VAT waiver at the Secretariat of the
Treasury (Hacienda). Because this procedure is extremely time-
consuming, firms generally prefer to pay the VAT on their im-
ports and either credit this outlay against their overall tax return
or file for cash rebates on a monthly basis. As of 1987, firms
must follow more complex procedures to obtain VAT refunds
when they have made excess payments.
Companies may credit excess VAT payments against income
or other tax payments. If within three months the excess cannot
be credited in its entirety, firms can apply for a refund. The
Secretariat of Hacienda must grant certificates validating the
VAT credits. Nonexporters may only apply for credit approval
on a monthly basis. Exporters are eligible for three-month credit
certificates, based on estimated excess VAT payments. Heavy
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penalties exist for understating VAT liability.
The VAT is levied at each stage of production and distribu-
tion, and producers credit the entire VAT against the amount
they will collect from purchasers. The actual tax payable at each
stage is the difference between what is paid to suppliers and
what is collected from buyers; it reflects only 15% of the value
added during that stage of production. For imports, the VAT is
based on customs value plus tariffs. As of Jan. 1, 1986, retailers
have been required to incorporate the VAT into their shelf
prices. This does not affect VAT taxation procedures throughout
the production and distribution chain.
Companies must settle with the tax authorities monthly, mak-
ing their payments by the 10th of the following month. VAT
payments to Hacienda for installment sales can be made when
principal and interest payments are actually received, not when
the sale is invoiced?provided half of the purchase price is paid
after six months (35% of the price for final consumer sales).
A special tax on production and services is charged to
manufacturers and wholesalers of selected goods, which in-
clude soft drinks, alcoholic beverages and tobacco. This tax is
levied on the different production and sales stages but, unlike
VAT, it is not charged to the consumer. The tax varies by prod-
uct and ranges from 3% on life insurance to 139.3% on ciga-
rettes. A 1984 incentive exempts bottlers with no ties to foreign
interests (including trademarks) from part of the tax, which is
15.7% in that industry.
New automobiles, mobile homes and certain other types of
vehicles are subject to additional sales taxes. The recent tax
amendments abolished the exemption for low-priced vehicles,
and the law now provides for monthly indexation of new vehi-
cle sales taxes based on average vehicle price. Rates range from
5% on a car worth P3.9 niillion to 18% on a car in the P5.9
million range. Most new cars are in the 13-18% bracket. In
1989, the top rate is scheduled to jump to 20%.
Purchases of real estate are taxed at a rate of 10% of the value
of the property after a total of 10 times the annual minimum
wage prevailing at the location is deducted.
8.15 Other taxes include a 1% levy on total monthly salaries
payable by all employers; workers pay another 1%. A 5% payroll
tax supports worker housing (12.05), and an export tax is applied
to some commodities, such as oil.
Special taxes were levied to aid in reconstruction after the
September 1985 earthquake. These included increased taxes on
new automobiles, gasoline, alcoholic beverages, including beer
and wine, tobacco, and telephone service. An additional 10%
tax was imposed on wage earners in the highest income brackets
(over P3.98 million), but this was suspended in 1987.
9.00 PERSONAL TAXES
9.01 General. One of the government's goals is to ease the
tax burden on lower-income individuals. To qualify as a low-
income taxpayer, a person must meet certain requirements,
some of which were modified under the 1982 tax law amend-
ments. Minimum-wage earners are entirely free from income
tax, and only persons receiving salaries in excess of five times the
yearly minimum wage in effect in their place of residence must
file annual income tax returns.
Rates for high-income earners continue to climb. In 1987, a
new 55% top rate for those earning P64 million was instituted.
Income brackets are adjusted for inflation annually, however, to
avoid bracket creep.
Of the recent changes in the personal tax structure, the most
significant is the application of a compulsory system of withhold-
ing on dividend income. Under the rules issued in 1982, com-
panies must retain 55% of the gross amount of dividends
distributed to resident individuals; such recipients must include
the gross dividend in their taxable income and are allowed a cor-
responding tax credit for the 55% withholding tax (see also 8.03
and 8.09).
Business enterprises making payments to individuals for fees
must withhold a 10% tax. Companies making rent payments to
individuals must withhold 20%; the tax and a statement includ-
ing information about the payments made must be filed with tax
authorities in February of the following year.
9.02 Persons liable to tax. Mexican citizens and resident
aliens are required to pay Mexican taxes on all income regard-
less of source (but this is seldom enforced for resident aliens
earning foreign income). Foreign nationals residing full-time in
Mexico enjoy the same rights as citizens, except that they may
not vote; they also incur the same responsibilities. Resident or
inmigrado status ma'y be obtained after five years' residence.
Nonresidents (foreigners with qualified resident status of in-
migrante) pay taxes only on their Mexican-sourced income;
nonresidents on temporary assignment in Mexico pay a flat
30% tax on all income earned there.
9.03 Determination of taxable income. Taxable income in-
cludes remuneration for personal services rendered by an
employee or professional, return on capital investment, and
dividends, royalties, etc., after certain deductions.
Personal deductions are limited to (1) the equivalent of the
annual minimum salary in the region; (2) medical and dental
fees and hospital expenses incurred by the taxpayer, spouse or
other dependents with income no higher than the annual min-
imum salary; (3) funeral expenses not exceeding the minimum
annual salary; (4) certain donations; and (5) deposits into a
special savings or retirement account up to a maximum of two
times the yearly Mexico City minimum wage.
In addition, pension, disability and death benefits .are tax-
exempt unless they exceed 10 times the legal minimum salary
for the region. Severance-payment benefits are exempt if they
amount to less than 90 times the daily base salary of the region
times the number of years employed.
Taxpayers whose income is composed of professional fees
may not take a standard deduction for operating expenses; they
can deduct only provable, "strictly necessary" expenses.
Expense-account deductions must be documented, as must the
difference between the market and sale price of shares bought
under stock-option plans.
Individuals are given some relief from the effects of inflation
when calculating capital gains. Taxpayers may increase their
historical cost of land, buildings, shares and other capital inter-
ests by a multiple ranging from 1.00 for an asset held one year to
321.48 for an asset held over 49 years (see the box on p. 22).
IL&T MEXICO June 1987 Business International Corp 21
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The historical cost must be reduced by an accumulated depre-
ciation at a rate that varies with the type of assets.
The difference between the historical price determined ac-
cording to the above formula and the selling price is the net tax-
able capital gain. Through 1982, 20% of the net taxable capital
gain was added to other taxable income in the annual return,
and the tax for the remaining 80% was levied at the rate that
resulted. Under certain conditions, losses arising from the sale
of real estate and shares were totally deductible from taxable in-
come in the year of the loss, and any amount not so deducted
could be carried forward and deducted from capital gains
earned in the following three years.
Since 1983, however, the proportion of capital gains to be
added to other taxable income in the annual return has been
based on the number of years the asset was held. For assets held
for 10 years or more, only 10% of the taxable gain must be add-
ed to determine the top income tax rate payable. The im-
mediately deductible proportion of a capital loss now also
depends on the number of years the asset was held. This pro-
portion may be deducted from any kind of income declared for
the year or from capital gains arising in the following three
years. The amount of loss not deemed deductible will give rise
to a credit against the tax on other capital gains earned that year
or in the next three years. Capital gains resulting from the sale of
publicly traded stocks by individuals are tax exempt.
9.04 Personal tax rates. Monthly income tax rates for 1986
are as follows:
Lower limit
Upper limit
Tax on
lower limit
Percentage
on excess
0
201,600
0
3
201,600
1,453,400
6,048
10
1,453,400
2,355,900
131,228
14
2,355,900
3,190,600
407,824
18
3,190,600
4,227,400
407,824
22
4,227,400
6,613,600
635,920
26
6,613,600
7,975,600
1,256,332
30
7,975,600
14,073,100
1,664,932
35
14,073,100
17,166,600
3,799,057
40
17,166,600
25,371,200
5,036,457
44
25,371,200
32,188,400
8,646,481
48
32,188,400
37,029,800
11,918,737
50
46,591,200
56,275,200
19,311,365
54
56,275,200
64,000,000
24,540,725
54.5
64,000,000
and up
28,750,741
55
The employer withholds provisional tax payments, but tax-
payers must file personal income tax returns by end-April. The
box on p. 23 shows what the tax burden would be for someone
earning an annual salary equivalent to $35,000 or $50,000.
9.05 Capital taxes. None.
10.00 INCENTIVES
10.01 General. Mexico completely overhauled its incentives
schemes in 1979, replacing scant tariff duty exemptions with
22 IL&T MEXICO June 1987 Business International Corp
Inflation-Adjustment Factors for Calculation
Taxes on Sales of Certain Assets, 1987
Years
held
Adjustment
factor
Years
held
Adjustment
factor
0-1
1.00
25-26
183.55
1-2
2.15
26-27
191.63
2-3
3.44
27-28
201.01
3-4
5.46
28-29
211.47
4-5
9.89
29-30
224.16
5-6
19.65
30-31
241.64
6-7
25.30
31-32
260.73
7-8
32.85
32-33
291.24
8-9
39.41
33-34
324.44
9-10
45.80
34-35
325.04
10-11
55.23
35-36
358.44
11-12
70.26
36-37
422.95
12-13
78.20
37-38
438.60
13-14
94.31
38-39
448.69
14-15
114.39
39-40
450.48
15-16
120.81
40-41
486.52
16-17
126.84
41-42
641.72
17-18
133.18
42-43
668.03
18-19
141.17
43-44
919.21
19-20
144.70
44-45
1,071.80
20-21
148.90
45-46
1,169.33
21-22
156.50
46-47
1,177.52
22-23
160.41
47-48
1,237.57
23-24
170.36
48-49
1,266.03
24-25
177.34
49 or more
1,329.34
generous tax credits and tailor-made programs. Ceprofis (Certi-
ficados de Promocion Fiscal) provide investment tax credits of
up to 40% to majority Mexican-owned private firms that further
certain national objectives.
Ceprofi incentives are available for new investments in
designated areas and for job creation. Ceprofi credits for pur-
chases of Mexican machinery and equipment are available to
both Mexican and majority foreign-owned firms. Ceprofi tax
credits are granted according to two major criteria: location and
priority of the industry. The government has specified two high-
priority categories that cover a wide range of manufactured
goods. Generally, highest priority is given to the production of
inputs for the agricultural, food-production and health indus-
tries. Manufacture of capital goods is also given top priority.
The three geographical priority zones range from the least-
developed Zone I to Zone III-A, which includes the heavily in-
dustrialized Mexico City metropolitan area. Complete listings of
the hundreds of cities that make up the regional priority zones
are published in the Diario Oficial. Zone I incentives are the
most generous. Tax credits of up to 40% of capital expenditure
are available for investment in "micro-industries," defined as
those that employ up to 15 people and have net annual sales of
no more than P30 million. Credits of up to 30% exist for small
industries and for medium-sized and large industries in the
highest-priority sectors. The second-priority category provides
credits of up to 20%. Job creation was given more attractive in-
centives under the revamped Ceprofi program.
The highest credit available to large companies is 30% of
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three times the annual minimum wage for the region, multi-
plied by the number of new jobs created. The number of jobs
must be maintained for at least two years from the time the in-
vestment is made. All companies that buy new Mexican-made
machinery or equipment that will become part of their fixed
assets are eligible for a tax credit equivalent to 10% of the value
of the purchase. Companies registered in the Capital Goods
Development Program (Programa de Fomento de Bienes de
Capital) are also eligible for a 10% tax credit for certain parts
and components. Zone II incentives are identical for small and
micro-industries and slightly lower for medium-sized to large
companies. Zone 111-B tax credits apply only to investments in
industrial parks in the region. For medium-sized and large in-
dustries, these credits amount to 15% and 10% for first- and
second-category sectors, respectively. Small companies can ob-
tain a 20% credit for investment in Zone III-B industrial parks. A
bonus equivalent to 30% of the existing tax credit is available
for companies that start their new investment production on
? stream by Dec. 31, 1988.
Since both the degree of priority and the location of a project
determine the amount of tax credit, firms planning to manufac-
ture a Category I product in Zone I stand the best chance of get-
ting top-of-the-line incentives (see the box on p. 24). The attrac-
tiveness of a project in terms of local sourcing, value added, job
creation, balance-of-payments impact and vertical integration
determines the investor's eligibility for priority classification.
Majority foreign-owned firms are generally excluded from the
tax-credit scheme; however, the authorities may make excep-
tions if a firm negotiates concessions on its local equity share.
10.02 Qualifying for incentives. Decentralization and diver-
sification are major development goals, and, as noted above,
the government awards incentives according to both criteria.
The broad plan hinges on close cooperation between local ad-
ministrators and federal authorities to designate industrial de-
velopment priorities and desirable types of manufacturing. The
states are to submit for federal approval a list of preferred
municipalities and types of industry. Approved regions and in-
dustries are then published in the Diario Oficial.
10.03 Applying for incentives. To obtain a Ceprofi, a corn-
Personal Taxation in Mexico
Below is an example of the personal tax burden on a married employee who
has two children and who earns the equivalent of $35,000 or $50,000 (P42 mil-
lion or P60 million, respectively, at a rate of P1,200:$1) in 1987, all of it remunera-
tion for services.
(11 Salary
P42,000,000
P60,)00,0(X0
(2) Deductions:
Annual general minimum salary for
Mexico City plus an additional month's
income, i.e. yearly bonus (P61,950)
times 13 months)
1,427,400
1,427,400
Medical expenses
850,000
650,000
(3) Total deduction
2,277,400
2,277,400
141 Taxable income
39,722,400
57,722,600
(5) Tax payable before surcharge
15,739,589
25,329,558
(6) Effective tax burden
37.5%
42%
pany must first apply to the Secretariat of Commerce and In-
dustrial Development (Secofi) to obtain a priority classification
for its project. The investment proposal must be accompanied
by the firm's "development program." This should specify pro-
duction targets, export potential, investment plans and local-
sourcing possibilities.
Once Secofi has granted a firm a priority category assignment
and the appropriate certificate?a procedure that should be
completed within 30 working days of the request?it contacts
the Secretariat of the Treasury (Hacienda), which has 15 work-
ing days to calculate the amount of tax credit. Hacienda will
review the planned capital outlay for machinery, equipment
and plant construction (if incentives are to be granted for new
investment in installations or expansions).
10.04 Corporate tax incentives. Under the Ceprofi system, a
company may obtain direct tax credits for purchase of Mexican
equipment, for new investments or expansions and for job crea-
tion. Only majority Mexican-owned companies are eligible for
the incentives. However, some foreign-owned firms have been
able to negotiate relaxation of the ownership requirement.
Foreign-owned companies qualify for the incentive to purchase
Mexican-made equipment.
The highest incentive, a 40% tax credit, is awarded for new
investment by a "micro-industry" in either Zone 1 or II. In
medium-sized to large industries, the largest credit-30%?goes
to first-priority industries in Zone I. Second-priority industries in
this zone and first-priority sectors in Zone II qualify for a 20%
tax credit. An additional credit is available for job creation,
equivalent to up to 30% of the number of jobs, multiplied by
three times the annual minimum wage of the region. The box
on p. 25 gives a breakdown of the incentives granted according
to regional and sectoral priorities. Ceprofis can be credited
against any federal taxes. Special tax incentives granted to
specific industries should be announced when their respective
sectoral plans are issued.
An investment Ceprofi is good for five years. A charge of 4%
of the tax credit is levied to cover costs of inspection. If a com-
pany fails to carry out its investment program, Hacienda will
rescind the Ceprofi, and all unpaid tax falls due within 15 days.
Sometimes Ceprofis may be used by other companies within
the same group as the firm that is entitled to the credit. A special
ruling is needed to transfer the tax benefit.
Tax credits for employment are much easier to obtain than in-
vestment Ceprofis. Firms creating jobs through new industries
or expansions qualify for a credit, depending on the zone, of up
to 30% of the annual minimum wage, multiplied by the number
of jobs generated. The credit is good for one year only, and the
new jobs must last for at least two years. Ceprofis cannot be
combined with other tax incentives, and in recent years many
companies have opted for the attractive depreciation allowance
rather than investment Ceprofis.
Firms in the highest-priority areas that are already eligible for
Ceprofis may qualify for an .additional 5-10% tax credit if the
new investment generates significant new employment. How-
ever, the raise will he approved only if efficiency, competitive-
ness and other criteria of the appropriate industrial develop-
ment program are fulfilled. Nonpriority projects are excluded
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Mexico's Sectoral Priorities
Category I
Basic goods: Natural milk, cream, butter, cheese; packing, packaging and pro-
cessing of meat or fish; soy and wheat flours; cookies, crackers and pastas; white
and whole bread; corn flour and tortillas; vegetable oils, greases and lards; process-
ing of fruits and vegetables; salt and sugar; manufacture of nutrients for food prepa-
rations; fish meal and fish flours; feeds and chemicals for livestock; chemicals derived
from agro-livestock, forest or marine development; cellulose; finished wood prod-
ucts and parts manufacture of nutrients for food preparations; fish meal and fish
flours; feeds and chemicals for livestock; chemicals derived from agro-livestock,
forest or marine development; cellulose; finished wood products and parts manu-
factured at integrated forestry plants; veterinary medicines, pharmaceutical prod-
ucts and raw materials for the basic list of medicines.
Capital goods: Machinery and equipment for food processing; wheeled trac-
tors, harvesters, farm tools and crop-duster planes; machinery and equipment for
petroleum prospecting and drilling and for petrochemical industries; valves, valve
trees, pumps and connections; motorpumps, motorcompressors, turbocompres-
sors and blowers; pipelines for drilling, collection and processing; tubular heaters;
machinery and equipment for electric generation, conduction and distribution of high-
voltage electricity; hydraulic, steam and gas turbines and electricity generators; in-
jection pumps and high-capacity boilers; machinery and equipment for mining,
concentration and processing of minerals; coking machinery and equipment, pel-
letization or smelting of ferrous minerals; foundry, casting or lamination of metals
and for manufacture of metal products using sheets, rods or wires; machinery and
equipment for construction, earth moving and grading; manufacture of diesel
engines and parts, trailer trucks, medium- and semi-heavy trucks, trolleybuses,
buses, nonsport boats and parts, locomotives, railroad cars, equipment and heavy
installations; machinery and equipment for other industries including machine
tools, carbon, steel and alloy steel pipe, pumps, valve bands and connections for
manufacturing; industrial controls; laboratory and measuring instruments; high-
power DC and AC electric motors and controls; machinery and equipment for ce-
ment manufacture, paper and cellulose industries; foundry, castings and moldings
for machinery and equipment manufacture using iron and steel and alloys; heavy
welding and soldering equipment; electronic telephone exchange systems and
switchboards, professional and industrial electronic communications equipment
and parts, electronic computation systems, general use electronic integrated cir-
cuits and parts; machinery and equipment for handling merchandise; machinery
and equipment for packaging and bottling; antipollution equipment; machinery
and equipment for water wells; speed reducers for industrial use; metal molds, dies
and casts; electronic measuring and control equipment.
Category II
Consumer nondurables (all for low-income consumption); Leather, cloth or
plastic shoes; threads, clothes and textiles from cotton and artificial or chemical
fibers; bleaching, stretching, preparation and processing of cloth and textiles for the
manufacture of clothing; hide tanning; soaps and detergents; paper and cards,
cardboard; glass, plasticor tinplate food packaging; paper and school supplies, text-
books and encyclopedias.
Consumer durables: Electric appliances arid furniture for low-income consump-
tion; automobile parts; popular bicycles and motorcycles; optical equipment med-
ical and hospital equipment and instruments; telephone equipment and accessor-
ies; hand tools; industrial security, safety equipment; equipment and materials for
electricity transmission, electric cables and conductors; computing, e.g. comput-
ing equipment and parts for office use.
Intermediate goods: Fibers derived from petrochemical products; intermediate
petrochemical products; synthetic rubber, plastic resins and their raw materials;
basic inorganic acids and salts; chemical specialties from coal coking and coal tar
distillation; sodium and potassium alkalies; metallic silicons and intermediate
monomers of organic silicon products; chemicals and products derived from non-
metallic minerals; aluminum smelting and refining; smelting, refining, casting and
lamination of nonferrous metals, their alloys and special steel; casting, lamination
and relamination of iron, steel and their alloys; plate glass and its plastic products
for construction; bricks, tiles, clay products; cement-based construction
materials; bathroom fixtures and furniture made from clay, tile or porcelain for
use in low-income housing; agglomerated wood sheets and plywoods; refracto-
ries and abrasives.
from the tax credits but may garner a 200/c employment benefit
if various conditions are met.
A 1982 decree hiked the Ceprofi for job creation through new
investment from 20% to 80% depending on the firm's location
and industrial activity. However, firms are only eligible for this
incentive if they relinquish the generally more attractive tax
credit that corresponds to the value of investment in fixed
assets.
Investors in border zones may opt for Ceprofis on new invest-
ment, job creation and purchase of Mexican-made equipment
or duty exemptions on imports of machinery, equipment and
spare parts calculated according to the percentage of local con-
tent. Unlike in-bond activities, these investments can be geared
toward producing for the domestic market, provided com-
oanies justify that domestic sales generate a favorable foreign
exchange balance, replace imports on a national scale or have
content equal to the average local content of similar products
made elsewhere in Mexico. Ownership must be at least 51%
Mexican.
A February 1985 decree revamped Mexico's relocation in-
centives. The new decree makes available several Ceprofis for
majority Mexican-owned firms moving out of the Mexico City
metropolitan area into priority Zones I and II and a number of
industrial parks in Zone III-B. To be eligible for these tax
rebates, a company must completely close operations in Zone
24 IL&T MEXICO June 1987 Business International Corp
III-A within three years of the date the relocation program has
been approved by Secofi.
The highest tax credits are given to a number of polluting and
water-intensive industries that relocate (see tie box on p. 26).
These preferred relocation firms are entitled to a 100% tax
rebate on the capital gains derived from the sale of buildings
and land, provided the proceeds are reinvested in the new in-
dustrial installations within two years of the sale; the tax rebate
is 75% for other relocating companies.
If the relocation involves the establishment of a new com-
pany, proceeds may also be invested in shares of that new firm
as long as these shares are held by the tax credit beneficiary for
at least five years. This incentive also applies to firms that sold
fixed assets as of Jan. 1, 1982, provided they fulfill all the other
relocation requirements. In addition, preferred industries may
receive a Ceprofi equivalent to 20% of the replacement cost of
machinery and equipment transferred to the new location. The
incentive drops to 15% for other firms. Preferred industries also
receive a tax credit equivalent to 20% of moving expenditures,
including mechanical and electrical installations; the Ceprofi is
15% for nonpreferred companies.
All majority Mexican-owned firms relocating from Zone III-A
to industrial parks in Zone III-B are entitled to tax credits
equivalent to 10% of machinery and equipment replacement
cost, 50% of the capital gains on fixed assets sales and 10% of
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Tax Credits Under Mexico's Incentives Schemes
Percentage rates refer to the amount of the tax credit for new investment, job creation or equipment purchases. In the case of investment, the credit applies to the total
approved capital expenditure. In the case of job creation, the credit applies to the total number of new jobs created during the first year, multiplied by three times the area's
annual minimum wage.
Microindustries' Small industries'
Priority industries
Location
Priority I Priority II
Purchase of
Mexican equipment
Zone I
40%
Investment and jobs-30%
Investment and and jobs-30% Investment and and jobs-20%
100/0
?Zone ll
40%
Investment and jobs-30%
Investment and and jobs-20% Investment and and jobs-15%
10%
Zone III-A
Zone III-B
30%
Investment and jobs-20%3
Investment and jobs-15%3 Investment and jobs-10%,
10%
100/0
Rest of country
30?k
Investment and jobs-20%
Investment and jobs-15%? Investment and jobs-10%4
100/0
(1) Microindustries are those that employ up to 15 people and have annual sales of up to P40 million. .
(2) Small industries are those that employ 16-100 people and have annual sales of P40-500 rnillion.
(3) Only in industrial parks.
(4) For expansions only.
moving expenditures.
10.05 Personal tax incentives. A tax-deductible personal
savings plan has been available to individual depositors since
1984. Formerly, these deposits had to remain untouched for
one year to be tax deductible, but the latest tax changes stipu-
late that funds may be withdrawn, in which case a withholding
tax of 21% will be levied on deposits made in 1984 and 55% on
funds deposited after Jan. 1, 1985. These special accounts cur-
rently pay 50.3%, which i's several points over the highest peso
deposit yield.
10.06 Tariff incentives. Authorities only recently began to
revive the virtually abandoned system of import duty exemp-
tions. The industries to benefit from these incentives are auto-
motive manufacturers and companies in priority industries, in-
cluding producers of basic foodstuffs, consumer goods for low-
income households and various intermediate manufactured
goods (e.g. fibers derived from petrochemicals, synthetic rub-
ber, plastic resins). Also eligible are producers of specific
chemicals and capital goods. Car manufacturers can obtain
duty exemptions on machinery and equipment for new invest-
ments or expansions, provided the goods cannot be purchased
locally.
Exemptions range from 50% to 100%, depending on product
line and plant locations. The imports must be used to manufac-
ture new products that increase either local content or exports
in new plants outside Zone III or in expansions of existing plants
outside the Mexico City metropolitan area. The duty waivers
may not be combined with other fiscal incentives, such as ac-
celerated depreciation. Producers of priority goods may import
raw materials, components and spare parts duty-free, or at re-
duced rates, if imports cannot be obtained locally or if domestic
suppliers are unable to fill the order on time. If the prevailing
duty is 10% or less, a reduced tariff rate will not be granted.
10.07 Capital incentives. Mexico offers a vast array of special
Amigormi
funding programs that grant preferential financing for priority
activities. Emphasis is given to development in the same priority
zone used for granting tax incentives. Most of the credits are
funneled through commercial banks. Some firms have com-
plained that the red tape involved in obtaining these soft loans
can be time-consuming. To be eligible for funding from most of
these official trusts, companies must be 51% Mexican owned.
Fonatur, the tourism development fund, and Fomex, the export
credit line, are about the only preferential funds that majority
foreign-owned firms have easy access to. Fira will also provide
export funds to majority foreign-owned firms that are agricultur-
al and livestock exporters.
Government officials are showing some flexibility in this area,
however, and firms carrying out high-priority projects may find
they can get special approval. In the past, majority foreign-
owned companies have been able to tap Fonep (Fonda Na-
cional de Estudios y Proyectos), which is supported by funds
from the Inter-American Development Bank, for financing of
feasibility studies, but this has now been closed to majority
foreign-owned firms. Mexican consulting firms hired by majori-
ty foreign-owned firms can apply for the funds, however. Eligi-
ble firms may receive direct financial assistance from these
funds, although their low-interest loans are also channeled
through banks. Fonep's and Fomex's special programs must be
applied for through regular commercial banks. Firms have tradi-
tionally complained about the red tape involved in obtaining
these preferential credits.
Rates on these credits are based on the bank's cost of lending
(costo promedio percentual?CPP, according to the industrial
sector?with the lowest rates going to priority industries), size of
the company (measured through sales and number of employ-
ees) and geographical location of the project. Preference is
given to the least industrialized areas, and officials will take into
account the effect of the project on the nation's priority.goals:
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Mexico's Preferred Relocation Industries
Mexican authorities would like to move the following industrial activities out of
the Mexico City metropolitan area:
? Food processing; processing of cereals and other grains and dairy and wheat
flour products; slaughtering and packaging of meat.
? Alcoholic and nonalcoholic beverage production; breweries.
? Textile products; manufacturing of bland and hard fiber threads and fabrics.
? Leather industry.
? Paper and cardboard industry; manufacturing of cellulose paste.
? Chemical industry.
? Fertilizer, pesticide and basic chemical substance production.
? Synthetic and artificial resins and paints and lacquers production.
? Basic petrochemical production.
? Crude oil refining.
? Pharmaceutical and personal care industry.
? Manufacturing of nonvegetables and animal oils and greases for industrial
use.
? Mineral carbon and asphalt mixtures.
? Rubber and plastic industry.
? Manufacturing of china, clay and porcelain products.
? Glass industry.
? Manufacturing of clay products used for construction.
? Cement, lime and chalk industry and manufacturing of other nonmetallic
minerals.
? Basic steel, iron and nonferrous metal industry. ,
? Other metal products except for machinery and equipment.
? Automotive industry.
exports, basic goods production, import substitution and local
technological development.
Rates have been climbing steadily since 1985. Credits that
were available for as little as 55-65% of CPP now range upward
to CPP. While Fomex export credits will only increase slightly in
real terms, major increases are budgeted for most other
development loan programs. These loans have taken on addi-
tional attractiveness because of their full deductibility of interest
under the new tax system.
Mexico has a wide scope of trust funds managed by develop-
ment banks such as Nafinsa and Banrural. In line with the Na-
tional Development Financing Program, these funds will gradu-
ally move away from providing working capital and move
toward risk capital to finance projects in priority industrial areas
and relocations. The funds will increasingly take temporary
minority partnership.
The Fondo Nacional de Fomento Industrial (Fomin), operated
by Nafinsa, will temporarily take minority equity in new or ex-
panding industries, particularly those established outside indus-
trially congested zones. Fomin usually assists small and
medium-sized companies. Participating firms must be majority
Mexican held. Fomin contributes risk capital in return for
preferred shares, up to 49% of the capital stock of companies
whose activities promote regional development or who use or
develop local technology. In 1987, Fomin has a budget of P26
billion. It also makes loans at CPP to CPP plus 3 through accep-
tance of subordinate convertible paper; the rate depends on the
industry priority and priority of the geographical zone.
? The Fondo de Garantia y Fomento a la Industria Mediana y
Pequena (Fogain) makes inventory and industrial-equipment
credits available to majority Mexican-owned small and
.26 IL&T MEXICO , June 1987 Business International Corp
medium-sized manufacturing companies. To qualify, firms must.
not employ more than 250 people or generate more than P2
billion in sales. Inventory loans are available at terms up to
three years, with rates from 85% of CPP to CPP, depending on
size of the firm and geographic location. Fidein, the fund for the
development of industrial complexes, supports small- and
medium-scale industrial operations ranging from the subdivi-
sion of industrial parks to long-term financing for purchasing
factory buildings, machinery and equipment. In 1987, loans
were available up to P500 million, with maximum terms of 12
years and a grace period up to the time required for construc-
tion, not to exceed 18 months. Rates vary from 75% of CPP to
CPP.
The tourism fund, Fonatur, also falls under Nafinsa's jurisdic-
tion. The fund makes available inventory and industrial equip-
ment credits to majority Mexican-owned firms investing in con-
struction, expansion or remodeling of hotels and other tourism-
related projects. Terms range from three to 15 years; up to 60%
of the total amount of a given investment can be covered. Rates
vary from 72% to 95% of CPP depending on the ranking of the
hotel. Rates for time-share condominiums are a bit higher at
CPP plus 0.04. Fonatur also has a special credit program for
repair of earthquake-damaged hotels, with rates running 65% to
88% of CPP. Tourism-related food and beverage facilities can
be financed at CPP plus 0.04 as well. In some cases, a grace
period for principal and interest payments is available for the
period of construction. Fonatur also makes direct investments
in hotel projects, mainly through joint ventures. In 1986,
Fonatur provided P8I.5 billion in joint-venture funding to proj-
ects worth a total of P137 billion. In 1987, Fonatur has a budget
of P92 billion, most of which is traditionally allocated to direct
investment in Mexico's tourism development areas. Under
study is a new program to provide financing to set up travel
agencies, guide offices and car rental agencies.
The industrial equipment trust fund (Fonei), operated by the
Banco de Mexico, provides long-term financing to majority
Mexican-owned enterprises for up to 13 years. Financing for in-
dividual projects cannot exceed P3 billion.
Fonei makes financing available for purchase of equipment,
with the focus on industrial reconversion, feasibility studies, R&D,
pollution control and working capital. The decision to grant a
credit is based on the feasibility of the proposed projects.
In 1987, Fonei has P213.5 billion available. Some P139.4 bil-
lion has been allocated for long-term (up to 13 years) equipment
financing at CPP plus three. Loans up to eight years at CPP plus
three are available for optimization of installed capacity; a total
of P2.7 billion is available for this type of project. A total of P36.1
billion has been allocated for long-term R&D loans of up to 13
years at 94% of CPP. For pollution control efforts, P7.9 billion is
available at 94% of CPP. A working capital fund of P23.8 billion
to provide working capital loans at CPP plus four over three to
seven years is also available. A total of P465 million has been
allocated for financing feasibility studies. Terms are up to eight
years at 94% of CPP.
Another attractive source of official financing comes from the
National Fund for Studies and Projects (Fonep), administered by
Nafinsa. The fund finances feasibility and prefeasibility studies.
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list of Strategic Capital Goods
401111????
Purchases of the following capital goods are entitled to a 15% Ceprofi:
Construction equipment and machinery: industrial caterpillar tractors over
300 hp, motor plows over 200 hp, self-propelled vibrating compactors, backhoes
over 85 hp.
Equipment and components for industrial electronics: microcomputers
(complete systems), minicomputers (central processing units), video terminals.
Environmental protection equipment: closed solid waste management sys-
tems, complete gas treatment systems, complete solvent recovery systems,
packet water treatment plants.
Machinery and equipment -for the food industry: separaters and sifters,
humidifiers.
Petroleum machinery and equipment: petroleum-drilling machinery, equip-
ment and rigs; marine petroleum-drilling platforms; equipment for movable tub-
ing, gyrating coupling, rotating base, hook and travalling block; mud pumps.
Electric machinery and equipment: AC electric motors of over 1,000 hp; DC
electric motors of over 100 hp; switches for tensions over 34.54 kv; variable speed
for DC electric motors of over 100 hp; hydraulic, steam and gas turbines; electric
switches for tension from 13.8 kv to 400 kv; electric transformers for tension from
34.54 kv to 400 kv; electric measuring equipment such as wattmeters and
Vahrmeters for multiple use.
Machinery and equipment for the mining and metallurgy industries: movable
scaffoldings, laminating equipment for the steel industry, continuous forging equip-
ment; flat roller laminators. ?
Equipment for the naval industry: glass fiber, ferrocement or wood fishing and
shrimp boats up to 100 ft long; depot ships from 100 to 250 ft; general cargo ships,
container and tank ships; tow boats, ferries, stationary dredges, maritime signaling
ships, research and training ships.
Machine tools: machines for metalworking, standard vertical and semiauto-
matic lathes, grinding machines, standard vertical and horizontal milling ma-
chines, drills, tapping machines, gear generators, transfer machines, machining
centers; mechanical and drop forge presses; mechanical and hydraulic shears;
high-capacity (over 300 tons) hydraulic presses.
General machinery and equipment: casting machinery for the glass industry;
concrete pumps; centrifugal pumps over 1,000 hp and compressors; compressors
with a capacity over 1,500 cu ft per minute; forged, stainless steel and alloys valves
with diameters over 12 inches; condensors with over 1,000 meters of surface;
steam boilers over 20 Mw; heat exchangers with over 1,000 meters of surface;
heavy-duty travailing cranes and hydraulic truck cranes; winches with a capacity
over 20 tons; sugar mills; arc and standard ovens.
In 1987, interest charged was 70-90% of CPP, plus a 1% com-
mission for inspection and control. Terms of Fonep loans range
from one to four years with one year's grace. In addition to finan-
cing studies, Fonep provides financing to consulting firms.
Credits ranging from 70% to 90% of CPP are available for work-
ing capital, acquisition of fixed assets and technological devel-
opment. Only majority Mexican companies are eligible.
Organizacion Somex is a semiofficial source of both loan and
equity capital. Majority-owned by the Mexican government,
Somex includes a banking and an industrial division. Banco
Mexicano Somex became a national credit company according
to the 1982 banking law. Interest rates follow prevailing levels. In
the past, Somex has proved an excellent joint-venture partner
for some foreign companies, including Fairbanks, Morse, Nikko,
Amoco, Atsugy Motor Part Co, Colt Industries, ITT and Ciba-
Geigy. However, Somex has begun to reduce its participation in
companies. All banks are required to keep their equity participa-
tion limited and not hold a stake in a company for more than five
years.
Several large parastate companies make credits available to
their suppliers through development banks. Pemex, in conjunc-
tion with Bancomext and Fomex, offers two programs to firms
that manufacture goods contributing to import substitution.
CFE, the national electric company, makes credits available
through Bancomext as well to majority Mexican-owned capital
goods suppliers. Access to these credits should improve in 1987
with the arrival of fresh financing. Interest on supplier credits is
payable quarterly at CPP plus two. Terms are decided case by
case. Bancomext will finance up to 70% of the order up to a
maximum of P1 billion. Total funding given to one single sup-
plier may not exceed P1 billion, and suppliers that opt for this
financing will not receive advance payments.
Occasionally, states offer additional capital incentives. San
Luis Potosi, for example, has been known to provide land for in-
dustrial investors.
10.08 Research and development incentives. The 1980 in-
centives plan for local research and development is no longer
applied by the government.
11.00 CAPITAL SOURCES
11.01 General. Mexico's highly developed banking system
was in private hands until it was nationalized in September
1982. Ex-shareholders were paid through government-sourced
indemnization bonds with a 10-year maturity. These bonds are
negotiable on the stock market. In accordance with a new
banking law, Mexico's 66 banking institutions were consoli-
dated into 29 national credit companies. The Finance Secre-
tariat (Hacienda) exercises considerable control over these
credit companies. Two types of shares have been issued: series
A, which consists of 60% of the capital and is held by the federal
government; and series B, which is sold to the general public,
provided that a purchaser?who must be Mexican?buys no
more than 10/ of the total equity. In early 1987, Mexican banks
began making public issues of the series B stock. Up to 34% of
total national bank stock will be privatized this way. Most of the
stock was placed privately with bank employees and prime
customers in 1986. however. The small amount that remains is
only available at inflated prices. This stock is nonvoting, and no
individual or company can own more than 1%.
In December 1984, Mexico made a. number of crucial
changes in its banking legislation as part of a total reorganiza-
tion of the financial sector. The changes, which took effect Jan.
1,1985, more clearly define the sphere of influence of the na-
tionalized banks and the role of private initiative in the
country's financial sector. The number of banks will eventually
be trimmed from the present 29 to 17. Only the five largest
banks will continue to provide nationwide coverage, while the
smaller institutions will be limited to regional operations.
Technically, banks are required to set aside 10% of deposits
for the legal reserve and another 65% for an obligatory loan
portfolio of funding to priority areas such as housing and
agriculture. However, starting in July 1985, the central bank
capped the amount of new funds available for private sector
lending at around 10%. The Banco de Mexico directed com-
mercial banks to put aside virtually all otherwise uncommitted
new deposits over the June level toward the purchase of
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government bonds. This was announced as a three-month mea-
sure to restrict liquidity, but it has been continued through first-
half 1987. As a result, bank credit to the private sector has been
essentially limited to funds available from repaid loans over the
past 18 months. Credit to the private sector in 1986 was down
17.2% compared with 1985. There are some signs of increased
loan availability in 1987, however, due to slack demand for
financing and repatriation of capital, which has bolstered the
central bank's reserves and taken a bit of pressure off the local
financial markets.
11.02 Short-term credit. Commercial banks have traditional-
ly provided most of the short-term credit in Mexico, but scarce
bank financing in 1986 sparked a move toward banker's accep-
tances, commercial paper and extrabursatil commercial paper.
Direct intercompany loans also became more common. In ear-
ly 1987, the situation has begun to improve both in terms of
bank financing availability and cost. This will no doubt lead to a
return to use of bank credit by many firms.
Short-term credit, whether by secured or unsecured loans or
discounting of trade acceptances, is limited by law to 180 days
(except for financing exports of manufactured goods) but can be
rolled over indefinitely for like periods. Mexican banks have
been lending at 30 days, with rollovers allowed for up to one
year, after which full repayment must be made and a new credit
line put into effect. Some banks can be persuaded to extend un-
secured credit; however, this concession is usually given only to
prime firms with considerable financial strength.
Competition for business with Mexican brokerage houses,
casas de bolsa, has led to elimination of upfront interest
payments and often countervailing balances for prime firms.
Smaller Mexican banks will stilldemand them, however. Thirty-
day loan rates have fallen from CPP (costo promedio percentual)
plus 15 in December 1986 to CPP plus five for top customers as
of April 1987. Nevertheless, the effective borrowing rate remains
around 160-170%.
The commission for rollover of a term loan is normally 1%. In
addition, some banks charge a fee, also around 1%, for inspec-
tion of goods pledged as loan collateral. During times of large ex-
cess lending funds, banks have been willing to loan for very short
terms, ranging from three to seven days, with an effective cost
only a few points over CPP.
Bankers acceptances (BA) have been steadily gaining in im-
portance. In 1987, use of the instrument balooned as Banco de
Mexico encouraged banks early in the year to issue acceptances
above 100% of their capital and deposit them with the central
bank. This was done by hiking the interbank rate for such
deposits. In the second half of the year, the central bank rate was
lowered substantially, discouraging the practice. Nevertheless,
banks have become increasingly sophisticated in providing
bankers acceptance financing to firms, generally at BA plus 2-3.
During 1986, bankers acceptances accounted for 33% of all
market transactions. The number of offerings rose to 2,825, up
45% over 1985. Total value placed was P19 trillion?up 499% in
real terms over 1985. In early 1986, BA rates were higher than
Cetes. In the second half, rates fell, however, and during early
1987 were running at par or slightly below 28-day Cetes rates, at
93-95%. Companies can often obtain 28-day financing
28 IL&T MEXICO :1) June 1987 Business International Corp
renewable for 90 days through bankers acceptances. ?
Firms also relied heavily on the commercial.paper market in
1986. Commercial paper is denominated in pesos, with terms
ranging from 15 to 91 days (28-day placements are most com-
mon). It is sold on a discount basis in notes of P100,000 through
the stock market. The paper is unsecured, but the Comision Na-
cional de Valores (CNV) requires detailed information before it
authorizes a placement. A secondary commercial paper market
has not developed. One big reason is that brokerage houses
have lacked the resources to take positions themselves.
The volume of commercial paper traded in 1986 increased by
449%. Peso value in circulation rose to P2.7 trillion. During the
year, there were 610 new issues, worth P566.76 billion. This
represents a 121?/. increase in the number of new issues and a
peso value increase of 15% in real terms. The increase was
largely due to the lack of credit availability through the banks.
Rates have consistently risen because of competition with
treasury bills (Cetes). Because of its higher risk, rates of commer-
cial paper are above those of other instruments?at three to
three and a half percentage points over the Cetes yield, with
returns averaging three percentage points over bankers accep-
tance yields, according to Banco de Mexico's 1986 report.
Brokerage houses charge a 1.75% commission, which is tax
deductible. Nominal rates for commercial paper in May 1987
ranged between 96% and 98%. Companies issuing commercial
paper in early 1987 included Kimberly Clarke, Almexa, Borden
and Purina.
In addition to bolsa-issued commercial paper there is extra-
bursatil commercial paper, which is placed privately by casas de
bolsas to companies and private investors. This paper averages
1-2 points above the cost of bolsa commercial paper but can be
issued faster without extensive disclosure requirements. Opera-
tions with this paper totaled P1.7 trillion in 1986, an increase of
4810/ in real terms.
In April 1986, the National Stock Commission authorized a
new instrument, the pagare empresarial, which combines the
attributes of bolsa-issued commercial paper and those of the ex-
trabursatil paper. Non-bolsa listed firms can issue the new
pagare empresarial by meeting disclosure requirements similar
to those for commercial paper. These notes are then placed by
casas de bolsa in a manner similar to extrabursatil paper. Rates
tend to be 1-2 points lower than those of extrabursatil paper be-
cause of strong disclosure requirements. In the first nine months
of operation, there were 174 placements, with an overall value
of P105.3 billion. (Rates on pagares, extrabursatil paper and
commercial paper are based on a spread over Cetes.) The in-
strument was suspended in February 1987, however, at the re-
quest of the Finance Secretariat, which maintained that it en-
couraged offshore borrowing through back-to-back loans.
In 1986 through early 1987, the spread has been Cetes plus
3-5 points on commercial paper and Cetes plus 5-10 points on
pagares and extrabursatil paper. MNCs with established casa de
bolsa relationships have been able to place extrabursatil paper
at Cetes plus five and in a few cases Cetes plus three.
Although the 1978 amendments to the banking law removed
the obligation to secure lending, term loans must frequently be
backed by pagares (promissory notes with return payable on
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maturity), inventory or mortgages on fixed assets. MNCs can
often use offshore bank balances and foreign bank guarantees.
A minimum 20% reciprocity is required, and in many cases
banks will try for higher amounts. Until very recently, interest
was always payable up front, but can now be negotiated
because of the increased competition from the casas de bolsas.
Some MNCs are also finding more flexibility on compensatory
balances.
Companies can also get short-term 28-day loans through the
mesas de dinero operated by the banks. These are trusts that
operate like brokerage houses. Companies with lines of credit
can borrow short term at the bankers acceptance rate plus two
to three percentage points. Companies with strong bank rela-
tionships can often put up less than a 100% guarantee in Cetes,
foreign bank balances or other liquid assets (casas de balsas, in
contrast, almost always require 100% guarantees). The
brokerage houses are working to have these bank trust opera-
tions shut down, arguing that they are infringing on the law ban-
ning banks from running casas de bolsas.
11.03 Medium and long-term credit. Even when pesos are
available for free lending, banks are reluctant to lend for periods
exceeding 180 days. Most long-term financing is available only
for equipment loans. Little change can be expected in the need
to continuously roll over short-term loans. Domestic long-term
borrowing usually requires a statement specifying the use of the
funds, a provision for mortgage collateral and inspection by
bank representatives every six months to assure that borrowed
funds are being used as intended. In addition, banks ask for an-
nual balance sheets and profit and loss statements for the
preceding year or years, depending on the amount to be bor-
rowed. Companies must also provide banks with sales projec-
tions, sometimes up to two or three years. However, require-
ments depend greatly on the client-bank relationship.
Exporters stand the best chance of tapping the paltry amount
of longer-term funds that are available locally, especially since
Mexico received a $500 million loan from the World Bank for
export development. At the same time, Nafinsa is also offering
long-term loans for technological reconversion at CPP plus 2-3.
Mexico has reached its borrowing limit with the Inter-American
Development Bank (IDB), thus ruling out what has been an im-
portant source of official finance.
Multibanks are the main source of long-term loans. The law
limits the duration of such loans to 15 years, but it is extremely
difficult to obtain pesos for more than three to five years. A
parent guarantee may be required for foreign affiliates, although
some large subsidiaries of multinational firms have secured
loans without them. Nominal interest rates for medium-term
loans and longer-term lending (over five years) are set according
to CPP. As with all borrowing, effective costs are substantially
higher once guarantees, commissions and interest payment
schedules are factored in.
At present, credit institutions revise the spread on medium-
term loans quarterly?or in some cases, semiannually. They
may hike the premium if CPP does not accurately reflect their
actual borrowing cost.
Some treasurers are willing to settle for a higher premium if
the bank agrees to fix the spread for the entire lending period.
They argue that this curbs the wild fluctuations in borrowing
costs somewhat, thereby helping the company to project its
financial expenditures over the medium term.
Inventory loans (prestamos de avio) are available for certain
priority sectors, including exporting and agriculture. For the lat-
ter, basic crops such as corn and wheat qualify for selective
credits. As of 1986, preferential rates were offered to low-
income farmers. These rates range from CPP minus four to CPP
minus five. Larger producers must now pay. CPP plus five. In-
ventory loans are made for 12 to 24 months. Inventory loans for
nonpriority sectors, when available, cost about the same as
bankers acceptances.
Chattel mortgages (prestamos refaccionarios) for terms of up
to 10 years may be granted only to industrial firms to cover pur-
chases of machinery, equipment and other fixed assets. Cost is
comparable to inventory loans.
Nafinsa (10.07) is a source of term loans for joint ventures that
cannot raise sufficient funds from local sources. However, the
state-owned institution expects private investors to provide at
least 51% of the capital required. Export and import-substitu-
tion industries stand an excellent chance of obtaining financing
from Nafinsa.
Another way to finance equipment and machinery is through
equipment-leasing companies. Most important among these are
Interamericana de Arrendamientos, in which Wells Fargo Bank
(US) has a share of about 20%; Arrendadora Comermex of the
Comermex group; Arrendadora del Atlantico; Arrendadora
Banamex, owned 40% by Citibank (US); Arrendadora Interna-
cional SA, with Bank of Boston (US) as a minority partner; Ar-
rendadora Bancomer, owned 49% by Manufacturers Hanover
Leasing Corp (US); and Arrendadora e Inversionista Latina SA,
partly owned by First National Bank of Chicago (US).
11.04 Stock and bond financing. In early 1986, the National
Securities Commission (CNV) reinstated a previous ruling
against majority foreign-owned companies issuing bonds.
However, in early 1987, CVN official indicated they are once
again willing to consider requests by majority foreign-owned
firms to make such issues. Approval will be more likely to be
granted in the second half of the year when local market condi-
tions are expected to improve. 1 he type of project to be fi-
nanced by the issue has some bearing on the approval process.
In 1986, total emissions reached P535.1 billion?a real in-
crease of 134.5%. There were 37 new offerings, for a total of
P135.9 billion, an increase of 123% over 1985. In 1985,
multinational companies, such as Ford, Chrysler and Nabisco,
were among the 24 firms issuing bonds. Chrysler worked hard
to secure CNV approval, which was growing increasingly diffi-
cult at the time. The funds were to be used to finance a large-
scale plant improvement. The company apparently won CNV
approval because of its ambitious export program and the posi-
tive employment effects of the investment.
Typical maturities that the CNV will approve are terms of four
to seven years. It requires voluminous documentation before
approval and stipulates that funds must be used for fixed assets
only. Regulations issued in 1984 now allow firms whose shares
are not publicly traded to issue corporate debentures through
the stock market. The CNV charges a 3% fee. Coupons have a
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floating-rate structure, typically linked to Cetes or bank deposits
(whichever are higher). The seven-year P800 million issue by
Nalcomex in June 1986 was set at Cetes or CD yields plus five
percentage points.
Mexico has a single stock exchange, known as the Bolsa de
Va/ores. There are 187 stocks registered on the bolsa. Of that
amount, 112 are industrial companies. Only about 26 stocks are
highly liquid and can be easily traded; another 23 have some li-
quidity, but rapid purchase and sale can be a problem. As a re-
sult, Mexico's stock market is extremely thin. Adding to the
problem is that listed companies seldom allow more than 7% of
their stock to be freely traded. In 1986, four companies
alone?Frisco, Kimberly Clarke de Mexico, Grupo Pliana and
Vitro accounted for 13.4% of the total volume traded. Stock
trading still accounts for only 4.9% of total bolsa activity.
Despite the economic downturn, the bolsa has been rising
steadily since 1985. In 1986, it posted the second highest gain in
the world?up 215% in real terms. By mid-February 1987 alone
the Bolsa was up 40.8% in nominal terms and had hit a record
65,981 points on the index. The narrowness of the market
makes the bolsa a poor indicator of overall economic perfor-
mance, however. Speculative moves against several stocks or
government invervention (support of various stocks by Nafinsa
for instance) can cause jumps in the index.
In early 1987, the market appeared to be enjoying the effects
of expectations that Mexico will experience traditional growth
during the presidential election period. Some investors are also
investing in companies that are expected to undergo debt capi-
talization, which tends to push up their stock prices. The high
real returns paid by stock investments in 1986 have also no
doubt attracted some new investors into the market.
The availability of tax incentives (capital gains are tax exempt
for individuals) and the strengthening of local brokerage houses
have also played a role in putting life into the long dormant
market. The bank nationalization has had the effect of drawing
creative ex-bankers into the brokerage business, an area they
largely ignored when they were running the private banks prior
to 1982.
Stock mutual funds have also begun to play a larger role. In
1986, 60.9% of the stock traded was in industrial, commercial
and service companies, while trading in mutual funds account-
ed for 36.5% of activity.
New stock issues have begun to pick up after four years of no
activity. In 1985, one company, Nacional de Drogas, issued
P908 million worth of shares, representing 25% of its total
stock. In 1986, there were 19 new issues. Eight issues were
money market mutual fund companies, and six were stock
mutual funds; three were casas de bolsas. A telecommunica-
tions firm, an insurance firm and a bonding firm also issued
stock. Tele Industrias Ericsson SA issued P6.5 billion worth of
shares as part of a Mexicanization move to reduce its foreign
ownership from 90% to 80%.
Other new issues were Val SBM, P200 million; Valores
Awlasa, P500 million; Afin, Soc. Inv. Renta Fija, P5 billion; In-
vermexico, P1.5 billion; Madrazo, Money Market Fund, P500
million; Operadora de Bolsa, P3 billion; Fondo de Inversion
Fova, P500 million; Fondo de Acciones Finamex, P5 billion;
30 IL&T MEXICO June 1987 Business International Corp
Fondo de Renta Fija Bancomer, P10 billion; Fondo Valbrumer,
P1 billion; Fondo Valmer de Capitales, P968 million; Fondo
Mexinval, P1 billion; Probursa, P2.2 billion; Multifondo de Ren-
ta Variable, P2 billion; Bursamas, P300 million.
In a potentially important development that could help
strengthen Mexico's weak local capital market, several changes
were made in regulations governing Mexico's nascent venture
capital funds. In January 1987, regulations were published
allowing venture capital funds to own up to 100% of the firm in
which they invest, providing greater potential control for the in-
vesting fund. Foreign companies were allowed to own up to
49% of a venture capital fund operating company, and the law
leaves open the possibility for majority ownership if approved
by the FIC and the Treasury Secretariat. The changes have en-
couraged foreign banks and casas de bolsas to begin talking
about joint ventures. The initial foreign investment will likely be
made using debt swaps. Citibank, Morgan Guaranty, Bankers
Trust and Chicago First National and Paine Webber are said to
be discussing investment possibilities. If the joint ventures come
about, the participation of foreign venture capitalists and their
ability to control 100% of the funds could provide the security
and confidence necessary to attract offshore investment into the
Mexican financial market and substantially strengthen it.
12.00 LABOR
12.01 General. Most firms find labor plentiful and relatively
cheap. In some geographical regions, lack of industrial maturity
can be a problem?often much of the work force is composed
of first-generation factory workers, to the detriment of produc-
tivity. Many companies feel their principal operating problem is
the serious shortage of skilled labor and managerial personnel.
Though companies experience a shortage in well-trained mid-
dle and upper management, the most serious labor problem
now is more immediate: how to maximize job retention and
minimize employees' loss of purchasing power.
Labor-training legislation introduced in 1978 has improved
the situation somewhat by increasing the pool of'skilled labor.
The law formally obligates companies to set up training pro-
grams for all workers; however, the requirements remain fairly
hazy. In essence, it calls for training at all levels, from top man-
agement down to the least skilled worker, and aims for quick
promotions. Training is to be conducted on company time,
unless it is not directly related to a worker's job (e.g. language
lessons), and may be in-house or in conjunction with registered
instructors or institutions. Excessive red tape has stymied the
program's implementation.
Programs and related policy matters are decided by a mixed
commission comprising an equal number of worker and com-
pany representatives at each firm and usually including skilled
workers, supervisors, the plant manager, the industrial-relations
manager, etc. The training program must be registered with the
Coordinating Unit for Employment and Training (UCECA),
which authorizes the program after consulting with national
level committees composed of industrial workers and technical
experts.
The cost of the training programs is tax-deductible. The labor
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secretariat has begun to enforce the training provisions by using
Social Security Institute (IMSS) company lists and cross check-
ing for registered training programs.
Several executive-recruiting services are available for com-
panies seeking to contact top managers. Recruitment of skilled
labor is normally done through unions, newspaper advertise-
ments, employment agencies, industrial chambers and groups
such as the American Chamber of Commerce of Mexico, which
offers a placement service. Unskilled labor is usually recruited
at the factory gate, through unions or by word of mouth.
Absenteeism has generally declined owing to job-security
fears. However, while fewer workers fail to show up, lack of
punctuality still affects productivity. A study by the Mexican
Association of Finance Executives found that Mexican workers
miss an average of 12.5 working days a year.
12.02 Unions and work stoppages. About half of Mexico's
work force is unionized, and unions represent about 90% of in-
dustrial workers in establishments of more than 25 workers.
Most of these workers belong to one of the nine big national
labor federations. Unions have firm control over their mem-
bers. Only about 15% of union workers belong to single-
company unions; the rest are members of nationwide organiza-
tions. Firms sometimes face considerable jurisdictional strife, as
each union seeks to get the best working conditions and highest
salaries. Federal law requires that collective-bargaining agree-
ments be renewed at least every two years. Salaries must be
reviewed annually, though for the past two years there has also
been a midyear minimum-wage hike. Many firms have granted
these midyear salary increases to workers that fall under collec-
tive contracts as well.
The oldest labor organization is the Confederacion Regional
Obrera de Mexico (CROM), with over 400,000 members from
the textile, shoe, garment and maritime industries. But the
strongest union organization is the Confederacion de Traba-
jadores de Mexico (CTM), representing three to four million
members, about half of Mexico's organized work force. The
CTM is a mainstay of the Partido Revolucionario Institucional
and is closely connected with the government.
Labor's ? political organization is the Congreso del Trabajo
(CT), which includes the CTM, the CROM and the Confedera-
cion Revolucionaria Obrera y Campesina (CROC). The CROC
represents about 700,000 members and is chiefly made up of
unions in the textile, restaurant and shoe industries. All
together, CT-affiliated unions represent about 90% of the
organized labor force.
Strikes are legal only if employers have refused to comply
with their contractual obligations (e.g. to make or revise a con-
tract; to accept an arbitration award by a board representing the
workers, management and the government; or to pay legally re-
quired profitsharing). A strike may also be called to support an-
other strike if the majority of workers agree. Labor's stance has
been moderate over the past four years?in 1986, there were
189 strikes called out of 13,969 labor disputes. The number of
disputes has been declining each year, and the level in 1986
was only 23% of the 1983 level?partly because of job-security
concerns and a strong government hand in oreventine strikes.
Any uptick in the Mexican economy, on the other hand, will
likely make labor more aggressive.
In 1987, the government's moves to 'declare an electrical
workers strike illegal and its successful moves to isolate the
telephone workers in their strike has strained government-labor
relations. The upcoming presidential elections and labor's
crucial role in getting out the vote argues for the government to
be more indulgent in coming months. Labor has begun to in-
crease pressure for formal wage indexation, and if inflation con-
tinues in the three-digits' range in the next administration, such
a move could be passed by Congress.
12.03 Wages. Minimum wages are set by the National
Minimum Wage Commission, a tripartite group comprising rep-
resentatives of business, labor and government. The commis-
sion has moved toward a more uniform national minimum
wage, and in 1986 a three-tiered scale replaced the former four
levels. In 1986, wages were hiked an average 32% in January,
25% at midyear and 20.1% in October, for a compounded
98.4% increase for the year against 105.7% inflation. So far in
1987, the minimum wage was increased 23% in January and
20% in April. The government's stated objective is to maintain
real wages at the 1986 level.
With the April increase, Mexico's minimum wages stand at
P3,660 per day: P3,660 for Mexico City and certain border
cities; P3,385 for Monterrey, Guadalajara and other cities; and
P3,045 for the rest of the country. Actual wages in industry are
much higher than the legal minimums, and even these are sub-
ject to an additional premium of about 50-60% for legally re-
quired fringe benefits.
12.04 Working hours. The normal workday has traditionally
been eight hours, and the normal week, 48 hours. For every six-
day work period, the worker is entitled to one day of rest with
full pay. Overtime is paid at twice the normal rate for the first
nine hours a week and triple pay thereafter. Workers receive a
25% premium for Sunday work.
In the past several years, unions have applied intense
pressure to obtain a 40-hour week for all industries. Employers
have generally resisted because they fear lower productivity.
However, most industries that have not already adopted the
shorter week are expected to do so eventually, and the govern-
ment has left the matter to be decided in collective bargaining.
12.05 Fringe benefits. The overall cost of fringe benefits is
substantial at present, and demand for additional benefits will
become more pronounced in the coming year. Fringe benefits
and profitsharing currently add about 600/o to base payroll ex-
penses, depending on the salary level of the employee. The
most important benefit is profitsharing: All firms must distribute
10% of their pretax profits to employees.
The labor law grants seven paid holidays annually plus one
for Inauguration Day every sixth year. Labor contracts call for
another nine to 10 paid holidays. After a year's work, employ-
ees are entitled to at least six days' paid vacation, increased by
two days for each additional year of employment, up to a total
of 12 days. But, as a rule, employers grant 15 days under their
contracts, and some pay an additional 15-day vacation bonus.
(A bonus of 25% of normal pay during the vacation period is
mandatory.) A Christmas bonus of 15 days' pay is also
obligatory and must be paid before December 20. Sick pay is in-
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cluded in only a few contracts since Social Security provides
compensation. Where it is included, it can run to 90 days at full
pay and 45 more at half pay. Companies must also contribute a
sum equal to 5% of payroll to a national workers' housing insti-
tute (Infonavit) established in 1972.
The social security system, administered by the Social Security
Institute, provides many other benefits. Its programs cover work-
connected accidents and illnesses (e.g. 100% salary for up to 72
weeks of disability and permanent disability insurance); non-
occupational diseases and paid maternity leave; daytime
nurseries; disability, old age and various death benefits; and un-
employment insurance. The cost of social security is shared
among employers (62.5%), employees (25%) and the govern-
ment (12.5%). The employer's share may run to about 10% of
payroll.
In addition, companies with more than 100 employees must
maintain a fully equipped infirmary under the direction of a
qualified doctor, and firms with more than 300 employees are
required to establish hospital facilities. A 1986 Supreme Court
decision found, however, that firms are relieved from this
responsibility if they are affiliated with the Social Security In-
stitute. The mandatory worker-training program (12.01) has also
added to employer costs.
Besides the mandatory fringe benefits, most labor contracts
provide for such "voluntary" benefits as savings plans, life insur-
ance, social and sports activities and lunches. Most large com-
panies maintain a cafeteria on the premises, serving meals well
below cost to their employees. Many companies supply working
clothes, make interest-free loans and help finance automobiles.
Some employers set up additional incentive plans to stimulate
increased production and sales. In general, fringe benefits are
tax deductible if they are prbvided to all employees.
12.06 Dismissal. Unless dismissed for a justifiable cause (i.e.
dishonesty, disrespect, absenteeism, etc.), laid-off employees
are entitled to three months' pay and 20 days' additional pay for
every year employed. Workers employed over 12 years receive
an additional 12 days for every year of service after the twelfth. A
ceiling on this calculation has recently been established, how-
ever, and it is twice the minimum wage at the time of calculation
multiplied by 12 days and the number of years. If the employee
decides to appeal the dismissal, he receives full pay from his last
day of work until the court reaches a final decision.
Workers unjustifiably dismissed are allowed to choose be-
tween reinstatement and indemnification of three months sev-
erance pay. Employers can refuse to reinstate confidential
employees, apprentices and workers with less than one year's
service, but must add 20 days' pay for each year of service to
the standard three months' severance pay, or pay half the time
worked if it was less than a year.
12.07 Limitations on foreign nationals. According to Sec. I
of the federal labor law, at least 90% of a firm's skilled and un-
skilled workers must be Mexican nationals. Sec. III of the same
law requires that employers favor Mexicans over foreigners and
unionized personnel over nonunionized employees. A special
provision permits temporary employment of foreign technicians
(up to 10%) if firms can prove that skilled workers are not
available locally. The 10% limit does not apply to managers,
32 IL&T MEXICO June 1987 Business International Corp
directors and other key officers, who must secure special immi-
gration permits. In addition, operations along the US border are
exempt from the personnel requirements (13.05). Some foreign
firms strongly feel the pressure for Mexicanization in the per-
sonnel area, and application of the regulations gets stricter
every year. The 1973 law regulating foreign investment places
special emphasis on the Mexicanization of management.
Foreigners may enter Mexico with either nonimmigrant
(visitante) or immigrant (inmigrante) status. Visitante status
allows them to work for a six-month period and can usually be
renewed once for another six months, or twice in certain cir-
cumstances. Foreigners may enter as immigrants for a five-year
period, during which time they may not spend (either continu-
ally or intermittently) more than 90 days outside the country
during the first two years, or 18 months or more over the five-
year period. Otherwise, foreigners lose their status as immi-
grants (unless special permission is granted by the Secretariat of
the Interior). After five years, foreigners must apply for perma-
nent immigrant (inmigrado) status if they want to remain in the
country. Recently, the Interior Department has become very
strict about not granting inmigrado status to foreigners who
aren't married to Mexican nationals.
Mexico has various categories of immigrants, but three are of
special interest to the foreign investor. Cargos de confianza
status may be obtained by foreigners who fill key executive
posts or other positions of responsibility in established corpora-
tions or institutions. The Secretariat of the Interior will grant
such status only if it is satisfied that the work is necessary and no
local national is able to do it. Firms should apply for this status
well in advance, since the process takes several months. Occa-
sionally, a foreigner can qualify for initial nonimmigrant status,
which is later changed to immigrant status if the holder goes
abroad and reenters the country.
Inversionista or investor status may be obtained by foreigners
who invest in industrial activities that contribute to the
economic and social development of the country. Tecnico or
technician status may be granted to people who undertake
research, technical or other specialized activities for which no
qualified residents are available. Mexico also has provisions for
scientists, professionals, people with independent income,
dependents of immigrants and permanent immigrants.
To obtain immigrant status for its employees, a company must
file applications with the Secretariat of the Interior in Mexico,
submitting evidence of investment (with proof of tax payment).
Usually, a new company may not apply for permanent resi-
dence visas for its personnel unless the government considers
its activity of importance to the nation, and until it has been
operating for two years. If approved, the permit is granted pro-
visionally for five years and reviewed every year. At the end of
the five years, foreigners are eligible to become inmigrados, or
permanent residents.
13.00 FOREIGN TRADE
13.01 General. In 1986, oil and oil-related products account-
ed for only 35% of Mexico's export revenues as a result of the
dramatic 57?/0 decline in petroleum exports. Nonpetroleum ex-
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ports witnessed a 410/0 growth owing to rapid devaluation of the
peso and access to export financing. Petroleum exports should
recover somewhat in 1987, rising to $7.7 billion, vs $5.6 billion
in 1986. Average prices for Mexico's oil should be at least
$14.5/bbl (vs $11.87/bbl in 1986).
The administration is making a serious effort to expand nonoil
exports, which are considered vital to obtaining foreign ex-
change and utilizing idle capacity. Improvements in the Profiex
export promotion program announced in March 1986 now
treat exporter suppliers as exporters entitled to most of the same
benefits. Yet, despite their dramatic rise in 1986, nonpetroleum
exports could fall off in 1987 and 1988 as the domestic
economy comes out of its slump. Exchange rate policy and US-
Mexico trade relations will remain salient factors as well.
The rapid 148% devaluation of the controlled rate in 1986
spurred the 41% grow in nonpetroleum exports, which totaled
$9.7 billion. The rapid devaluation also held down imports,
despite Mexico's trade opening. Imports fell 14%, to $11.4 bil-
lion. The trade balance fell from $8.45 billion in 1986 to $4.6
billion in 1987 as a result of the loss of $8.46 billion in
petroleum revenue.
While Mexico has been striving to diversify its exports and im-
ports in order to lessen its dependence on the US, progress has
been meager so far. The US remains its chief trading partner. In
1986, exports to and imports from Mexico's northern neighbor
accounted for 63% and 68%, respectively, of its total trade.
Besides the US, Mexico's leading trading partners are Japan,
Canada, Europe and other Latin American nations. In 1986,
Japan took 7% of Mexico's exports and provided 6% of its im-
ports; the respective figures are 7% and 1.7% for Spain, 4.5%
and 1.7% for the UK, and 3% and 2.8% for France. Next in line
were Brazil, Israel, West?Germany and Canada.
Export licenses have been lifted from most products and now
exist for approximately 12% of total exports, mostly foodstuffs,
precious metals and some raw materials. Revenues from export
sales must be converted at the controlled exchange rate (1.04,
7.01).
13.02 Import controls. Since 1983, Mexico has been
gradually dismantling its system of heavy protection through im-
port permits and reference prices. Mexico's entry into GATT in
September 1986 will push the process further along.
Currently, 638 items out of a total list of 8,077 imported prod-
ucts still require licenses. Mexico wants to retain licenses.on
about 600 items, but has yet to formally justify them to GATT.
This list naturally includes many key imports: basic agricultural
products; many manufacturing inputs, such as automotive
assembly parts; raw materials for the pharmaceuticals industry;
final products for the computer industry; and some machines
and tools, including those related to transport of materials and
to the paper industry. About one third of the products still re-
quiring licenses are considered luxury goods whose import is
only allowed in exchange for a greater volume of exports.
During 1986, Mexico eliminated reference prices on all but
960 products. In June 1987, Mexico will eliminate reference
prices from another 238 items. Mexico has also lowered its
tariffs, with the range now 0 to 45%. Three quarters of all prod-
ucts are now in the 10% range.
To compensate for the removal of reference prices, Mexico
has put high tariffs on the affected products. It has also passed
antidumping legislation. Cases began to be processed in
September 1986. Action can be swift. Products can be hit with
countervailing duties iflocal producers can show damage and if
the imported good in question is being sold locally at a price be-
low that in the country of origin. Secofi can make a preliminary
ruling within 10 days. Exporters are not notified until the
preliminary finding is published in the Official Gazette. Input
from the exporter is allowed during the six-month period lead-
ing up to the final ruling. Currently, there is no formal appeal
procedure following the Secofi ruling, but once Mexico signs
the GATT code on antidumping?something it has promised to
do?an appeal procedure will have to be implemented.
Authorities have consolidated into a single document the 30
import and export license forms that previously stymied com-
panies. They have also reduced the red tape required to register
persons entitled to handle such transactions.
The allotment for goods subject to quotas was hiked to $1.75
billion in 1987, from $300 million the previous year, and now
covers an estimated 12% of purchases abroad. Not all of the in-
crease is liberalization, since some products, such as
aluminum, tinplate and inputs for the paper industry, are now
subject to quotas.
Although most imports into the free zones are excluded from
the licensing rules, several goods?mainly locally, manufactured
metal-mechanic components, packaging material and some
chemical substances?now need an import license. Temporary
imports that are used to manufacture exports are exempt from
import license requirements, and regulations have been
liberalized.
13.03 Tariffs and import taxes. Duties range from 0% to
45%, with higher duties for greater value added and for goods
already produced nationally. Duties were structured generally
as follows: 0% for agricultural inputs such as fertilizers and
seeds; 5% for unassembled machinery and equipment; 10% for
raw materials and capital goods not manufactured in Mexico;
15% for intermediate goods that are part of a long production
chain; 20% to 30% for goods for which approximate substitutes
are manufactured in Mexico; 400/a for goods in the last stage of
the production chain and intermediate agricultural goods; and
45% for nonpriority finished goods.
Starting in 1982, exemptions previously granted to fellow
LAIA members were waived in some cases; in others, a margin
of preference was conserved, but duties were hiked consider-
ably. Last year, Mexico reinstated the system of preferential
tariffs on imports from other LAIA members. Mexico also ap-
plied unilateral duty preferences for goods imported from the
less-developed Latin nations. In addition to duties, a 2.5% tax is
levied on all imports, which are also subject to the 15% VAT.
Automotive manufacturers, companies in priority industries
and producers of specific chemicals and capital goods are eligi-
ble for import duty exemptions (10.06). Authorities will main-
tain the use of import duties to protect local industry and pro-
mote import substitution.
Importers may declare imported goods at the port of entry or
transport them to interior customs houses in cities such as Mex-
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ico City and Guadalajara for clearance. Goods may be stored in
bonded warehouses for one year, extendable to a second year,
during which time the firm may withdraw the merchandise in
whole or in part, provided withdrawals are of whole packages
or in portions of at least one metric ton. Duties are paid on with-
drawal.
13.04 Nontariff barriers. Mexico has no major barriers apart
from import-licensing procedures (a situation that is now chang-
ing?see 13.02) and exchange controls (7.00). However, im-
ports of luxury cars and vans are prohibited. Full customs duties
on imported motor vehicles must be deposited in advance. Im-
port quotas were in force for about $1.75 billion worth of im-
ports throughout 1985, representing 12.5% of that year's
estimated purchases abroad. These imports include raw mate-
rials for the pharmaceuticals and paper industries, photographic
paper, aluminum, wool, sodium carbonate, herbicide, butyric
fats, kraft paper, natural rubber latex, tin plates, cattle hides and
computer components.
All branded patent medicines, toilet accessories, foodstuffs
and drinks must be registered with the Department of Health,
and all electrical equipment must meet Mexican safety rules.
13.05 Free ports, zones. Mexico's free ports have all been
eliminated and turned into free zones. Thus, the free ports of
Coatzacoalcos (Veracruz) and Salina Cruz (Oaxaca) are
classified as free zones. Several other port cities have free zone
areas: They include Ensenada (Baja California Norte), Guaymas
(Sonora), Mazatlan (Sinaloa), Lazaro-Cardenas (Michoacan),
Progreso (Yucatan). The most important free zones are the
states of Baja California Norte and Sur, Quintana, North-West
Sonora and Agua-Prieta (Sonora).
Companies importing goods or materials into a free zone for
completion and sale to the -domestic market are eligible for a
partial duty exemption on those items. The size of the exemp-
tion is determined by the difference between the levy on the
material actually imported and the amount that would have
been paid had the item been imported in finished form. A
manufacturer simply has to prove that the additional fabrication
took place in the free zone. Authorities promise to expedite ap-
plications within 30 days. Moreover, companies are permitted
to post a bond for the expected waiver rather than pay the full
amount and receive a refund at a later date.
Free zones are used all over Mexico to stimulate assembly in-
dustries. Plants may be set up virtually anywhere in the country
(except where industrial concentration is dense) as "in-bond"
assembly plants (maquiladoras) without regard to Mexicaniza-
tion requirements and immigration limits. Procedures to set up
an in-bond company are quite simple (seethe box on p. 35), and
the whole process generally does not take more than three
months. It is recommended to use a law firm with ample experi-
ence in assisting firms to establish a maquila plant.
Because of US quota restrictions, certain textile and apparel
maquiladoras must be at least 51% Mexican-owned. Maquila-
doras may not own land along the borders for operations. They
may lease land or use the fideicomiso system, through which a
local bank holds the land in trust for the user (3.06). Most firms
simply rent space in the border zone's many industrial parks.
Real estate to establish an in-bond production facility may be
34 IL&T MEXICO June 1987 Business International Corp
freely bought in the interior of the republic. Foreign technical or
management personnel are easily granted work visas. For tax
purposes, it is advisable that a technical and management
assistance agreement be executed between the maquiladora
and its parent. Such an agreement must be registered with the
national transfer of technology register. This regulation is
generally easy to obtain for in-bond companies.
The extension of the in-bond assembly scheme from border
areas to almost anywhere in Mexico was chiefly aimed at boost-
ing employment. Under the scheme, foreign-owned firms may
import machinery and raw materials duty-free and ship the
goods from the assembly plants. When the US is the target
market, as it is in most cases, the goods are subject to duty only
on value added under Secs. 806 and 807 of the US tariff code. A
1983 decree for the in-bond industry allows maquiladora manu-
facturers to apply for permission to sell a set percentage of their
output (20% is the stated limit, but this can be negotiated up-
ward) to the local market (even more when a plant is located in
an undeveloped zone), provided local production of these
goods is insufficient and no special program to develop similar
industries exists. Local content and balance-of-payment require-
ments niust also be met.
The number of in-bond companies grew from 790 to 925 in
1986, an increase of 17%. Rapid devaluation of the peso cut
into value-added growth, however. Value climbed a mere 1%,
to $1.29 billion. Job expansion continued to be strong. Employ-
ment increased by 50,000, to 268,000. Value added should
reach $1.5 billion, and employment 300,000 in 1987.
The majority of maquiladoras are partly or wholly US-owned
or US-licensed. Clothing, auto parts and electronics plants are
the most common. Parts are shipped there from the US for
assembly by local labor, and the finished product is then
shipped back to the US, subject to US duties only on the value
added in Mexico. Since in-bond incentives were extended
beyond border areas, in-bond plants have been set up in
Chihuahua, Torreon, Guadalajara and other interior sites.
Japan, Korea and Taiwan are also showing an interest in ma-
quiladoras as assembly sites for products sold into the US
market.
To attract a wider range of Mexican-controlled manufacturing
enterprises to the free zones, 100% freedom from import duties
on machinery, equipment, spare parts and raw materials is
available to companies that are at least 51% Mexican-owned
and setting up export, assembly or repair operations, and to
firms engaged in agriculture, forestry, fishing or mining produc-
tion or processing. The plan differs from the existing in-bond ar-
rangement in that companies are not obliged to export all of
their production; however, they must have a favorable balance-
of-payments impact and provide import substitutes. These com-
panies may also sell their products on the domestic market if
they achieve local content equal to the average industrial level
(outside the free zones).
?
?
13.06 Export incentives. The de la Madrid administration '14"g'r-?-?'-"?...-?
backed its commitment to export promotion with some sutc1-11TrevalP,'
stantive incentives when it unveiled its Profiex (Integrated
port Development Program) export-development program In--- vet
1985. Profiex was designed to help Mexico compete intra. Nom
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Requirements for Setting Up an In-Bond Facility in Mexico
A. Any Mexican national or any corporation which has been organized accord-
ing to Mexican law, for example as a Sociedad Anonima, may request authoriza-
tion from the Secretariat of Commerce and Industrial Development (Secofi) to
operate under maquiladora status in Mexico. Companies that participate in the
Mexican market must request authorization in order to use part of their idle pro-
duction capacity for maquila purposes.
B. If a company has foreign capital, it must request and obtain an authorization
to incorporate from the Secretariat of Foreign Relations. (This is separate from the
procedure detailed below involving the Commerce Secretarial.) Foreign Relations
will request the following information: proposed name or names of the company
in Mexico, capital stock, domicile, duration and the final draft of what are to be
the purposes of the company (in this case, to operate a maquiladora). Companies
with foreign capital also must register with the Secretariat of the Interior (Gober-
nacion) and the National Foreign Investment Registry.
C. All companies that want to operate under maquiladora status must file an
application with Secofi at the Direccion General de Promocion Industrial y
Desarollo Regional, Subdireccion de la Industria Maquiladora, Periferico, Sur
3025 (Tel: [phone]). The application must include the following:
(1) General information of the company: Name and domicile, amount and
structure of capital stock, date of incorporation of the company, federal taxpayers
register, foreign investment register, date of the legal representative or authorized
as of the last board of directors meeting, main officers of the company, names of
foreign or Mexican suppliers;
(2) Description of the production process: For the first Iwo semesters, the
value must be stated for use of domestic and foreign raw materials and packaging
materials, amount of national added value generated in the country, creation of
jobs for workers, technicians and administrative personnel, duration of the pro-
duction cycle.
(3) General characteristics of the product or service: Name and use of the
product, technology transfer, countries to which the product will be exported.
Textile companies should include the following information by product: textile
category (US), type of weave, use and amounts of the fabric in sq yds and kilo-
grams.
(4) A list of the raw materials to be imported temporarily, per semester (for
two semesters, amount and value).
(5) A list of the machinery and equipment to be used in the maquiladora oper-
ation (technical description, value, production capacity, new or secondhand, ori-
gin).
(6) Investment program: building and facilities, total fixed investment, work:
ing capital.
(7) Any additional information Secofi may require. Depending on the specific
assembly/production operations of the maquiladora, additional permits?such as
from the Secretariat of Health?may be required.
D. Before Secofi issues its final approval, the company must commit to the
following requirements:
(1) Compliance with the maquiladora program, which is. approved with re-
gard to the amount to be invested in Mexico, value to be added 40 the product,
the number of jobs to be created and location of the plant.
(2) Use of the equipment and/or raw materials which are imported under the
in-bond status only for the purpose for which the company has been authorized.
(3) Hiring and training of Mexican personnel according to the law.
(4) Compliance with all tax, labor and foreign exchange contrial regulations.
(5) Notification to Secofi of any changes in the operation or of any suspension
of activities at least 10 days in advance.
E. Once Secofi approves the program, the company receives a number in the
National Maquiladora Industry Register (Registro Nacional de la Industria Maqui-
ladora); this number must be used by the company in all subsequent official com-
munication. All companies must request renewal of the registration every two
years and Secofi may then review whether the company has complied with its
corn in
F. After approval, Secofi will also notify the Customs Department of the Secre-
tariat of the Treasury (Hacienda). The Customs Department (Direccion General
de Aduanas) will then open a file in which all imports and exports of the company
are to be recorded. The department will also register which items are to be im-
ported, the period during which they are to remain in the country, the port of entry
of imports and exports and the authorized percentages of shrinkage and wastage.
G. Maquiladoras must post a bond for an amount equal to the duties that
would have been paid on definitive imports. Once the company has established
its solvency in the eyes of the Customs Department, this department may
authorize that the bond to be posted cover only 40% of the duties that would
have been paid on definitive raw material imports, and 60% of the duties that
would have been paid on definitive imports of machinery and equipment.
H. After the company receives Seca approval for its maquila program it must
start to import all authorized items within six months following the approval. The
firm inay obtain a Secofi extension in special circumstances, such as the construc-
tion of special installations.
I. Companies must start exports within the six-month period following the date
of raw material imports. All raw material and supplies imported must eventually
be discharged through the corresponding exports of imported items. There are
special provisions for shrinkage, wastage and rejects.
tionally without running afoul of antisubsidy agreements. Incen-
tives included a more generous import-duty rebate (drawback)
system; more liberal tax breaks for export-related expenses;
cash refunds of the value-added tax; expansion of the tempo-
rary import program; and increased benefits for trading com-
panies in the in-bond industry.
In June 1985, the government announced another compo-
nent of its export-promotion effort?the Dimex free-import
scheme. Dimex enabled exporters and their suppliers to im-
port, without license or authorization, goods for the local or ex-
port market. Limits were set according to companies' overall
exports. Dimex applied only to exporters whose goods had at
least 30% local content.
The program lost much of its punch when in July 1985 the
government lifted import licenses for 3,604 items overnight.
Currently, about 638 items still require a license.
In March 1986, the government acknowledged that Profiex
had fallen short of its goals and announced a series of measures
to support the program. These include the following:
? Suppliers of exporters are promised the same benefits as
exporters with respect to taxes, duties and financing. Suppliers
will have access to government resources for both peso and
hard-currency financing.
? Exporters of manufactured goods no longer need approval
to bring in temporary imports for export production. Like the in-
bond industry, they now only have to register their anticipated
temporary imports with Secofi. Officials have also promised
lower bonds on temporary imports, which currently range from
40% to 60%. In addition, duties on goods made from temporary
inputs that have been authorized for sale in the domestic
market will be levied only on the imported component?and
not on the final product.
? Officials promise to extend rebates of indirect taxes on
production, in addition to the refund of the VAT already ex-
tended to exporters. Trading companies have also been prom-
ised similar fiscal incentives, as well as preferential credits.
? Exporters (and, if they wish, their suppliers or affiliated
companies) may now use up to 100% of their export earnings to
IL&T MEXICO .c June 1987 Business International Corp 35
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prepay imports. Proceeds can be kept in special interest-
bearing accounts and used, without prior approval, for any
transaction eligible for the controlled exchange rate.
? Officials promise to provide exporters with "sufficient and
competitive credits"?presumably at permissibly attractive
rates. Mexico's trade bank Bancomext granted P3.2 trillion
worth of peso and dollar credit in 1986 and is expected to make
P6.7 trillion available in 1987.
13.07 Export insurance. Export-credit insurance covering
political risk may be contracted from Fomex for up to 90% of
export value. Later this year, a single policy covering political
and commercial insurance risk is expected to be available
through Comesec, though Fomex will still cover the political
risk portion of the policy. Premiums vary according to contract
term and export destination. One year of insurance covering
exports to the US carries a premium ranging from 0.125% to
0.9%, while a similar contract for sales to Central and South
America may cost up to 1.5%. These rates reportedly are being
examined, however, and may increase. Commercial export in-
surance is available through Comesec, which has paid-in capital
of P100 million and a reserve for damages of P2.269 billion.
Rates are based on the company seeking the coverage and the
destination as well as the time period to be covered. Ninety-day
coverage to the US currently costs 0.7%; 180-day coverage
costs 0.9%. Rates for Third World shipments are 1.4% for 90
days and 1.9% for 180 days. Rates can go as high as 2.5% for
unknown companies shipping to the Third World. Coverage
ranges from 70-80% of shipment value. Global and specific
shipment policies are available.
The government requires export-credit insurance for all com-
panies that use the concessionary credit extended by Fomex.
13.08 Export credit for financing sales is available in ample
volume for industrial products with a minimum of 50% Mex-
ican content. Exporters obtain the credits through their com-
mercial banks or from state institutions, which discount them
with Mexico's export development bank, Fomex. Fomex offers
export as well as preexport financing. In the latter program, ma-
jority Mexican-owned companies manufacturing goods with
over 50% local content can obtain financing of 100% of their
direct production cost?or 70% of the f.o.b. price; 85% of the
f.o.b. price if the firm is enrolled in a Secofi-registered export
program.
Companies producing items with a local content between
30% and 50% may receive preexport financing for 1000/o of the
Mexican part of their direct production cost or double that
amount if the company has a Secofi-registered export program.
The terms of these loans run from the time raw materials are pur-
chased until the final export. (The rate presently stands at around
95% of CPP.)
Fomex will finance 100% of the invoice value plus interest for
exports with more than 50% local content if the term is one year
as of the date of shipment. For one- to two-year terms, com-
panies can finance 85% of the invoice value, and Fomex will
provide funds for 85% of the cost of the Mexican part of the in-
voice, and 85% of the imported part of the invoice if they agree
on a two- to five-year term. If credit terms exceed five years,
Fomex sets the amount it will finance on a case-by-case basis.
36 IL&T MEXICO June 1987 Business International Corp
Firms that export products with 30-50% local content can ap-
ply for 100% financing of the Mexican part of the invoice for
terms up to one year, and 85% of the cost of Mexican parts for
terms that run from one to five years. Here again, Fomex will set
the amount if the term is over five years. Export credits up to two
years carry an interest rate equivalent to the rate of US bankers
acceptances plus one (currently 6.75%) on six-month opera-
tions. Interest must be paid in advance for credits up to 360 days;
in other cases, interest is charged on a quarterly basis.
Rates on medium- and long-term export credits depend on the
destination of these exports: Rates for goods sent to developed
countries range from 9.55% p.a. for two- to five-year terms to
9.8% p.a. for five- to eight-and-a-half-year terms. To countries
with an intermediary level of development, the charge is 8.25%
p.a. on two- to five-year export credits and 8.75% p.a. for five- to
eight-and-a-half-year credits.
Medium- and long-term credits for exports to developing
countries carry an interest rate of 7.4%. Bancomext, through
Fomex, makes credit available for nontraditional agricultural ex-
ports; the export bank took over this function from the central
bank. The central bank finances 100% of the total invoice for a
90-day term at a rate equivalent to 50% of LIBOR plus two per-
centage points; 180-day financing for these exports is also avail-
able at 75% of LIBOR plus two percentage points. Companies
can apply for this credit through their regular commercial bank
or through Bancomext.
Bancomext also makes financing available to foreign com-
panies that import Mexican goods with at least 30% local con-
tent. These goods must be considered nontraditional exports
going to nontraditional export markets, and they must generate
net foreign exchange earnings of 30% of the shipment's value.
Rates and terms are the same as those given by Bancomext to
Mexican exporters.
When credit is sought before production starts, the prospec-
tive exporter must support its application with copies showing a
firm order and a commitment to produce, as well as a descrip-
tion of the manufacturing process, giving the time,required until
the shipment is ready. When financing for 70% or more of the
sale price is sought, a detailed and certified cost analysis must
be submitted. Exporters' experiences with such arrangements
have been favorable, especially since they are obtained through
their regular banks, minimizing red tape.
Although not widely publicized, individual bank financing for
exports is also available, and rates are set according to the bank-
client relationship. One major exporter of chemical products
was able to obtain a dollar-denominated loan paid out in pesos
at the controlled rate. The dollar rate was 7%. To this cost the
controlled rate's devaluation must be added. The company
must show its export invoices in order to guarantee export
revenues. With the expected hike in interest for export credit,
the rate of these dollar-denominated loans will also be raised to
international market rates.
Banks offer short- and medium-term export and import cred-
its at about the same rates as regular commercial loans. As with
all commercial bank credit, availability is limited. (Long-term ex-
port and import credit is only available through Somex.)
A credit facility supplying $100 million was made available to
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Mexico's private sector to finance large imports of machinery,
equipment and spare parts required for the production of ex-
ports and for import substitutions. The facility is provided by the
International Finance Corp, Morgan Guaranty Trust and the
Bank of America. Each loan from the facility is guaranteed by
Bancomer and Banamex. Companies may apply through any of
these four banks; they will jointly identify prime borrowers.
Credits range from $5 million to $6 million, with a maximum
maturity of eight years. Interest rates are payable on a quarterly
basis and fluctuate from 1.5% to 2.5% over LIBOR, depending
on the term, amount and the client's credit standing.
Fomex also provides exporters with foreign currency financ-
ing needed for imports. Through its Profide program, credits are
granted directly to the foreign supplier?up to 100% of the im-
port value. Officially, maximum credit is $15 million, or 60% of
the firm's total annual export plan, although exceptions have
been made to allow larger credits. Cost is two points over the
six-month bankers acceptance rate in New York, and the term
is from the time raw materials are imported up to the point at
which the finished product has been paid for.
Bancomext has opened $2 billion worth of foreign currency
credit lines to finance raw materials, spare parts and machinery
imports. In general, up to 85% of imports can be financed
through these credits, although funding may be up to 100% in
some cases. Companies must be found creditworthy by Banco-
mext, or any commercial bank, and must also be located in
Mexico (no minimum Mexican ownership is set). Imports must
be used in priority activities. Minimum financing, if required,
depends on the country with which the credit line is arranged.
Terms depend on the goods imported and fluctuate between 30
days and one year for raw materials and up to eight and a half
years for capital goods. Interest rates are often fixed and may
range from as low as 50/0 to 10.5%, depending on the term and
imported good.
Bancomext also manages a trade line with Brazil that provides
a revolving credit of $150 million in each direction. Brazilian
imports with at least 30% local content?calculated on a direct
cost basis?can be financed through this credit system for a
minimum amount of $1,500. Maturities range from two years to
eight years, depending on the goods imported. The interest rate
is set at 7.5% p.a.?except for loans to import steel products, for
which 9% is charged. Up to 85% of the purchase price can be
financed with these credits. All firms, including majority
foreign-owned companies, can apply through their regular
commercial bank, which charges a 2% commission. Similar
credit agreements are currently being worked out with Colom-
bia, Argentina and Venezuela.
Fomex and Bancomext also make available financing to the
in-bond industry, to firms located in the border zone (a 20-km
strip along the northern border) and to companies that supply
the border zone. To be eligible, firms must manufacture goods
with at least 30% local content and generate foreign currency
the equivalent of 30% of their total sales or avoid outflows of
that amount through import substitution. These companies
must be established in Mexico. Financing is available for the
purchase of machinery and equipment up to 85% of the invest-
ment cost in pesos or dollars. Terms and rates are the same as
Fomex import credits for exporters-9.5% on.two- to five-year
credits and 9.8% on credits over five years.
Fomex funds 100% of production costs for goods with at least
60% local content and 1000/o of the Mexican components for
goods with 30-60% local content. The term is from the moment
of purchase of raw materials until the goods are sold, and the
cost is CPP plus five percentage points, payable semiannually
during an amortization period set?by Fomex.
Fomex also provides working capital to majority Mexican-
owned companies that manufacture capital goods or products
with a high added value and contribute to import substitution.
Production financing is given for the period covering raw
material purchase to delivery of the final product?up to 100%
of the production cost or 70% of the invoice value. The
minimum amount is P10 million, and no ceiling is set. Interest is
CPP plus two percentage points.
Dollar financing for raw-material imports is also available at
LIBOR or prime plus a commission ranging from 0.50/0 to 2%,
based on the bank's cost of funds and the client's creditworthi-
ness. The ? Counter Receipt Financing program is available to
Mexican and majority foreign-owned Pemex suppliers. It allows
companies to borrow up to 85% of the amount of their Pemex
account receivable, up to a maximum of P1 billion annually at
CPP phus two. Firms are not permitted to participate in both pro-
_
?
grams for the same Pemex order. '
IL&T MEXICO Cs) June 1987 Business International Corp 37
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