Doing_business_in_mexico_2010_HSBC

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Doing business in Mexico

Contents Executive summary

Disclaimer

Foreword

Introduction – Doing business in Mexico

This document is issued by HSBC Mexico (the ‘bank’) in Mexico. It is not intended as an offer or solicitation for business to anyone in any jurisdiction. It is not intended for distribution to anyone located in or resident in jurisdictions which restrict the distribution of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient.

Conducting business in Mexico

Taxation in Mexico

Audit and accountancy

Human Resources and Employment Law

Trade

Banking in Mexico

HSBC in Mexico

Country overview

Contacts

The information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. This document is produced by the Bank together with PricewaterhouseCoopers (‘PwC’). Whilst every care has been taken in preparing this document, neither the Bank nor PwC makes any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and/or PwC only and are subject to change without notice. The materials contained in this publication were assembled in November 2010 and were based on the law enforceable and information available at that time.

Executive summary Mexico offers an attractive business environment, legal certainty, one of the world’s largest free trade agreement networks, as well as highly developed economic sectors that offer very competitive costs. The country is committed to developing its infrastructure in order to create a world-class logistics platform suitable for international businesses. The government of Mexico is also investing in initiatives to simplify regulations applicable to international businesses. Specifically, the Mexican Government supports foreign investments through different public institutions which advise, support and facilitate various business transactions in Mexico. In 2010, Mexico has been favoured by large amounts of foreign direct investment, in the automotive, manufacturing, aviation, information technology and tourism sectors.

Mexico is today´s opportunity • Strategic geographic location. • Competitive labour costs. • Accessibility to large markets. • Low operation and transportation costs. • Young, talented and highly qualified population. • Economic stability and its favourable business environment. • Wide network of free trade agreements. • Legal certainty for foreign investment. • Strong and dynamic manufacturing industries. • Internal market. • Infrastructure and logistic abilities for industry.

Foreword According to HSBC’s Report ‘The World in 2050’, Mexico will be the eigth largest economy of the world in 2050. Free Trade Agreements with 47 nations all around the world support Mexico’s status as a very attractive trade hub. A strategic geographic location in the North American region provides a reduction in cost of inventory, transportation and shipping for companies located in NAFTA countries. Trucks can deliver merchandise and products to any point in the U.S. within 24 hours. Mexico’s policy objectives to increase its productivity, efficiency and quality standards, have transformed Mexico into one of the world’s leading manufacturing countries. Highly developed telecommunications systems, including domestic and international fibre-optic and satellite systems, keep businesses connected on a national and global scale to meet business demands. Government macroeconomic policies encourage foreign investment and a stable economic and political environment sought by investors worldwide.

Mexico represents a potential consumer base of 112 million individuals whose average yearly income continues to rise steadily, as does their appetite for consumer products of all kinds. Its employment rate is also on the rise, contributing to the economic growth of the nation. Foreign and domestic demand is increasing, and GDP per capita doubles the average of GDP per capita in the BRIC countries. The country’s young, skilled and plentiful workforce (60% under age 25) performs at world-class productivity levels. An abundance of valuable raw materials throughout the country supports a healthy ’bottom line’ for investing firms. Mexico is the perfect location for companies desiring to cost-effectively sell products and services to consumers living in North, Central and South American as well as the Caribbean. Mexico has provided HSBC with the opportunity to create a solid platform for further expansion of the business in Latin America, a region that is almost comparable to China in terms of GDP and consumption. HSBC has made Mexico its financial hub for Latin America,

where it headquarters its Latin American business. HSBC Mexico is the fourth largest bank in deposits. It has 1,186 branches and 6,500 ATMs, the largest network in the country. Currently, HSBC has 8 million customers and more than 19,500 employees. Mexico is, and will continue to be, an important player in the global economy due to its openness, size and opportunities. We at HSBC are excited about the prospects to continue growing our business, and we would encourage you to do the same.

Luis Peña-Kegel Chief Executive HSBC Mexico

Introduction Doing business in Mexico Located in the North American subcontinent, Mexico is framed by the U.S. to the North, Guatemala and Belize to the south, the Gulf of Mexico to the east and the Pacific Ocean to the west. The country’s official name is Estados Unidos Mexicanos (United States of Mexico), its official language is Spanish, with only a small portion of its population boasting a command of English, and its functional currency is the Mexican peso. Mexico is a Federal Republic comprised of 31 States and a Federal District (Mexico City) with its political system made up of three levels of government, federal, state and municipal, and government made up of three powers, executive (President), the legislative power (congress and the senate) and judicial. For over 50 years, the main engine powering Mexico’s economy has been crude extraction and exportation; however, more recently, other factors have emerged that have grown over time, such as remittances sent back to Mexico by Mexican residents in the U.S., and also the transformation industry (e.g. automotive, textile, electronics) tourism, construction, telecommunications has been growing in the last decade.

Economic environment Nearly 25 years ago, Mexico embarked on a path towards greater economic openness, with an emphasis on opening itself to foreign trade and on attracting foreign investment. Throughout this period, many significant changes were made to the Foreign Investment Law. Free trade agreements were signed with the most important economies worldwide (the North American Free Trade Agreement, the Free Trade Agreements with the European Union and Japan, among others), as well as a number of tax treaties to avoid double taxation, signed with more than 30 countries. Mexico has reached a consistent, solid and stable macroeconomic framework, as a result of the monetary policy implemented by Banco de Mexico (Central Bank) and the Finance Department, thus allowing for certainty in the decision making of companies seeking to invest in Mexico. In addition, the country is moving forward in terms of infrastructure, towards becoming a worldclass logistics platform to further facilitate business operations by taking advantage of its geographic location.

According to the most recent report on global competitiveness issued by the World Economic Forum (WEF), in terms of the macroeconomic stability subindex rank, which measure five variables (public finances, domestic savings rate, interest rate differential and public debt), Mexico improved its position by 20 places between 2008 and 2009, moving from 48th place (of an overall 133 countries) to 28th. In summary, Mexico boasts: 85 airports (26 national and 59 international), 16 international sea parts, 27,000 km of railways and 123,000 km of main highways. In order to contribute to increasing the country’s competitiveness, the Federal Government increased its investment in infrastructure from 3% of the GDP to 5% over the past three years, through its most important infrastructure programme in decades. Mexico recorded a population 112.4 million in 2010, 45.7 million of which is classified as the country’s Economically Active Population. The forecast is for the number to double over a 30-year period.

One of the most important

A challenge for the Mexican economy is to consolidate the country’s recovery in production and employment. To strengthen this process, Mexican products must be better positioned in international markets and greater foreign investment must be attracted.

Opening a business The procedures and time required to open and close a company, as well as the red tape and time required to obtain construction permits are key and possibly critical factors in the success of international businesses. In Mexico, an investor is only required to conduct eight procedures taking no more than 13 days to open a company, and obtaining a construction permit only takes 12 procedures over a period of 138 days, which, is favourable compared to other jurisdictions. Closing down a company requires only a two-day period. Additionally, th e recovery rate related to closing down of a business is 64.3%, which is also a comparable favourable rate. Favourable exchange performance Within the next few years, Mexico will enjoy better exchange performance in real terms than many of the countries with which it competes in international markets, as the exchange performance of the Mexican peso to the US dollar and the Euro has remained stable, as compared to Asian countries. In light of the above, a wide range of business opportunities is opening up in the short and 10

medium term that will allow for increasing profitability and positioning of Mexico’s products in international markets, by considering Mexico as a base for operations and exportations. Competitive labour costs Mexico offers significant savings in terms of labour costs with respect to other investment alternatives in America, Europe and Asia. The transfer of operations from the US to Mexico, for example, could generate savings of nearly 90% in labour costs. Free Trade Agreements network and commercial procedures Twelve commercial agreements signed with 44 nations make Mexico one of the countries most open to international trade in the world and with preferential access to more than a billion potential consumers (with income equivalent to 60% of the world’s GDP). Low Transportation Costs Another advantage is its proximity to the world’s main consumer centres. This is relevant, as it allows companies to respond more rapidly to changes in demand and reduces the cost of inventories.

Incentives for foreign investors • Corporate tax rate: Mexico has a competitive tax rate (30%) compared to other territories. • Number of tax payments: Mexico requires only 6 payments a year. • Trained personnel: In Mexico, approximately 90 thousand students graduate with engineering and technological degrees every year. Mexican universities offer more than 900 engineering and technology-related postgraduate programmes. • Tax Depreciation: The Mexican government allows for accelerated tax depreciation in the production of materials of 92% of the investment value. Regulatory framework of Foreign Investments in Mexico In Mexico, there is a law that regulates Foreign Investment, which also establishes the economic activities that are exclusively reserved to the State, and also establishes those activities reserved to Mexican nationals or companies and activities subject to specific regulation to allow for foreign investment.

Activities reserved to the State The activities reserved exclusively to the State, as established by law are: • Oil and other hydrocarbons. • Basic petrochemicals. • Electrical power. • Generation of nuclear power. • Radioactive minerals. • Telegraph service. • Radiotelegraph services. • Mail service. • Issuance of bank notes. • Coin minting. • Control, supervision and surveillance of airports and heliports. Activities reserved to Mexican nationals The following economic activities and entities are reserved exclusively to Mexican nationals or Mexican companies, with a clause for the exclusion of foreigners: • Domestic land transportation of passengers, tourism and cargo, not including courier services. • Radio broadcasting services and other radio and television services, other than cable television. • Credit unions. • Retailing of gasoline and distribution of liquefied petroleum gas. • Development banking institutions, in the terms of the corresponding law

AMIA (Mexican Association of Automotive Industry).

• Professional and technical services, expressly indicating the applicable legal provisions. Activities subject to specific regulation Activities subject to specific regulation must be authorised by the Foreign Investment National Commission. Depending on the activity, the shareholding percentage in the investment may vary from 10% to a 100% interest. Key Markets and trade Mexico’s most significant industries are: • Automobile industry – manufacturing more than 1 2.260 million vehicles (2010) , 7 of the 10 largest makers in the world have plants in Mexico, and there is a presence of more than 90% of car-parts manufacturers. • Aerospace industry – there are more than 200 companies related to this industry, with exports valued at 3.1 billion dollars, and competitive and specialised labour. • Processed foods – Added value in this industry reaches more than 42,560 million dollars (2008), exports exceed 9 billion dollars. Over the past 10 years, Mexico has attracted direct foreign investments in excess of 18.9 billion dollars.

• Tourism – There are over one million Americans living in Mexico. There is the potential of having 10% of U.S. retirees moving to Mexico, availability of modern services, access to quality health services, good real estate opportunities and a wide range of attractions. • Mining – A production value in the neighbourhood of 11,200 million dollars in 2008, exports of 1.9 billion dollars, the main products in Mexico are copper, gold, silver, zinc and gravel, over 3.6 billion dollars in direct foreign investment in 2008. Aerospace, automobile manufacturing and tourism remain the most attractive industries for the future in Mexico, aside from renewable energy, Life Sciences, Professional Services, Software and Digital Contents industries. Business Etiquette Mexican business people are used to conducting business on a personal basis, as they consider it important to meet the person with whom they are to maintain a commercial relationship. In addition, it is also customary to formalise the commercial relationship by signing an agreement requiring that both parties comply with the obligation set out therein.

Conducting business in Mexico Forms of business For purposes of the FIA, foreign investment is considered to be: a. The

participation of foreign investors to any extent, in the capital stock of Mexican companies; b. Most Mexican companies with foreign capital; and c. Foreign investor participation in the activities and events covered by FIA. Overall, there are three recognised ways of carrying out investment projects: a. By

setting up a foreign investment entity in Mexico, which can take the form of a branch or representative office. These are entities legally constituted abroad and legally recognised in Mexico. b. By establishing a Mexican company with up to 100% capital stock held by foreigners. The Corporations Law (GLMC) acknowledges six types of companies. • General Partnership. • Limited Partnership. • Limited Liability Corporation. • Corporation. • Limited Liability Partnership. • Cooperatives.

Any of those companies can be incorporated as a company with variable capital stock. In corporations and limited liability corporations, the partners will be liable only to the extent of their contributions. There are other mixed liability companies, such as limited partnerships and limited liability partnerships, where some members are liable without limitations for the company’s obligations and others are only to the extent of their contributions. c. Through a Mexican corporation that is subject to specific regulation. The participation of foreign individuals or legal entities as minority shareholders or through a Neutral Investment Scheme is a possibility in the event that economic activity is intended to be conducted, subject to ceilings on participation. The Ministry of Commerce and Industrial Development may authorise trusts to issue investment instruments, provided they have no voting rights. Activities subject to specific regulations Foreign investment allowed in the following areas and companies is as follows:

Setting up a business Up to 10%

Cooperative companies for production.

General requirements

Up to 25%

Domestic air transportation.

The first steps that a potential investor or business visitor to Mexico must take are as follows:

Aero taxi transportation. Specialised air transportation. Up to 49%

Insurance companies. Bonding companies. Currency exchange houses. Bonded warehouses. The companies referred to in article 12b of the Mexican Securities Market Law. Retirement Fund Administrators. Manufacture and marketing of explosives, firearms, cartridges, ammunition and fireworks, not including acquisition and use of explosives for industrial and extracting activities or the preparation of explosive blends for use in said activities. Printing and publication of newspapers for circulation solely throughout Mexico. 'T' class shares of companies owning land for agricultural, livestock and forestry purposes. Fishing in fresh water and coastal areas and exclusive economic zones, excluding aquaculture. Integral port management. Port pilot services for coastal navigation of vessels pursuant to the applicable laws. Shipping companies engaged in the commercial exploitation of vessels for coastal shipping or coastal trade, except for tourist cruise ships and the exploitation of drills and naval devices for the construction, conservation and operation of ports. Oil and lubricant supply for ships, aircraft and railroad. Telecommunications Concessionaires as provided by articles 11 and 12 of the Federal Telecommunications Law.

More than 49% (once approval has been secured from the National Foreign Investment Commission)

Port services for inland navigation of vessels, such as towing, mooring and barging. Shipping companies exclusively operating on the high seas. Companies with a concession or permit for public service aerodromes. Private education services for pre-school, elementary, middle school, high school, college or any combination thereof. Legal Services. Credit Information companies. Securities rating institutions. Insurance agents. Mobile telephony. Construction of pipelines for oil and oil by-products. Drilling oil and gas wells. Construction, operation and exploitation of railroads (general means of communication) and public railway services.

1. An

invitation on letterhead stationery must be issued, written in or translated into Spanish, by the respective trade or industry chamber, business association, public or private organisation, or by an industrial or business company or a financial institution, stating the purpose of the visit and declaring that the foreign party has sufficient financial back-up to cover their expenses in Mexico at any location within the country where business is to be conducted (company affiliates). 2. Financial solvency must be proven with a bank letter demonstrating that the party in question will have available, every month during the year in question, an amount equal to 500 days of the minimum wage in effect in the Federal District, or a financial solvency letter from the party’s principal employer for the term of his/ her stay in Mexico. 3. If the applicant is a business entity or an individual with business activities, he/she/it must submit: • The company’s articles of incorporation. • A certificate issued by a notary public stating the company name, business purpose and official tax domicile.

• The most recent tax return filed (e-receipt of the last tax return filed). • A certificate from the National Foreign Investment Registry. • Registration at the respective chamber, association or organisation. • These requirements are not applicable to government entities or agencies or to public higher education institutions. • In the event that the individual with business activities is a foreign national, he/she must submit valid immigration papers.

Incorporation of a company Companies will be incorporated in the presence of a notary and the amendments to the by-laws shall also be recorded. The notary public will not authorise the deed when the by-laws or the amendments thereto contravene the provisions of the General Law of Mercantile Corporations. The General Law of Mercantile Corporations acknowledges legal standing of foreign mercantile corporations that are duly incorporated.

• Hold equity in Mexican corporations or partnerships;

Foreign companies can only carry out business in Mexico upon registration in the Public Registry of Commerce, which registration shall take place prior authorisation of the Ministry of Economy pursuant to Articles 17 and 17a of the Foreign Investment Law.

• Acquire fixed assets;

Corporations

• Enter new fields of economic activity or manufacture new lines of products;

The S.A. and S.A. de C.V. must have a minimum of two shareholders. The minimum capital amount for a S.A. is Mex$50,000, which must be fully subscribed within one year of the establishment of the company. At least 20% of the value of each share must be paid in cash; the balance may be paid with any other assets.

Establishing a Mexican operation Foreign investment may:

• Open and operate establishments (branch offices, agencies); • Expand or relocate existing establishments (joint ventures).

Five percent of a corporation’s annual net income must be allocated annually to a legal accounting reserve until the reserve equals 20% of the value of all issued and outstanding capital stock. If the reserve is reduced for any reason, it must be restored to the 20% level. Any resolution taken by the Management of the Corporation (Board of Directors or Sole Director) or by the Shareholders that resolves not to allocate the 5% as minimum to a legal accounting reserve is invalid. If this is the case, the Management of the Corporation has unlimited liability and liability in whole for the amount not allocated. Partnerships A minimum number of two partners is required for the S. de R.L. and S. de R.L. de C.V., with a maximum of 50 partners. The minimum capital amount for a S. de R.L. is Mex$3,000, which must be fully subscribed at the establishment of the partnership. At least 50% of the value of each partnership interest must be paid in cash; the balance may be paid with any other assets.

Joint ventures Business enterprises or individuals may form joint ventures (asociación en participación or A en P) to pursue a common business goal. A joint venture is conducted in the name of an active associate (asociante), who manages operations and has unlimited liability for the debts of the operation. The active associate grants the contributing associate (asociado) the right to participate in profits. Contributing associates are liable only to the extent of their contributions. Jointventure contracts must be in writing, but they need not be recorded at the Public Registry of Commerce. Public notice of formation of the joint venture is also not required. For Mexican income tax purposes, the A en P is considered a tax entity when it carries on business activities in Mexico. Branches of foreign companies Foreign companies may establish a branch in Mexico by performing the following: • Obtain prior authorisation from the Ministry of Economy (this may be obtained easily); • Register the by-laws of the foreign head office with the Public Commerce Registry;

• Register with the National Foreign Investment Registry; and • Obtain a federal taxpayer identification number. Representation offices shall follow the same procedure applicable to the Branches, apart from the requirement to register with the Public Commerce Registry and with the National Foreign Investment Registry. Branches are subject to federal corporate income tax and generally have the same obligations as Mexican corporations. In addition, branches are subject to tax if they pay dividends from sources other than from a ‘net tax profit’ account, which is a retained earnings account for profits on which income tax has already been paid. Structures most often used by foreign investors The forms of enterprise most commonly used by Mexican and foreign investors are the S.A. or its variant, the S.A. de C.V. and, under certain conditions, the S. de R.L. and S. de R.L. de C.V. partnerships. Other authorisations that need to be considered by foreign investors • Authorisation for the Incorporation of Companies.

• Authorisation for an amendment to company by-Laws (change of corporate name). • Notice of Authorisation for the Incorporation of Companies and of Amendments to their by-laws (change of corporate name, amendment to the foreigner’s exclusion clause for an admission clause; Merger or Spin-off). • Purchase of real estate by foreign nationals outside the restricted area referred to in the General Agreement published on 2 March 1998 in the Federal Official Gazette. • Purchase of real estate by foreign nationals outside the restricted area referred to in Article 10A of the Foreign Investment Law. • Concessions for the exploration and exploitation of mines and waters in Mexico referred to in the General Agreement published on 11 May 1998 in the Federal Official Gazette. • Issuance of authorisation for the incorporation of a trust in the restricted area. • Submission of each notice of purchase of real estate in the restricted area, to be used for non-residential purposes by Mexican companies that have a foreigner’s admission clause.

Taxation in Mexico Corporation Income Tax Income Tax Income Tax is a federal obligation. The corporate tax rate is 30%, which will remain in place for another two years. Taxpayers must file monthly estimated payments no later than the 17th of the month following that in which income is received. Payment must be made at a bank or via the internet. The full tax return must be filed by 30 April in the following year. Tax legislation deems the following persons to be residents abroad: 1. Nationals and foreign individuals not resident in Mexico. However, if they reside in Mexico, they are deemed to be residents abroad if their primary centre of interest is not located in Mexico; i.e. when more than 50% of their annual income arises from a source of wealth located outside Mexico, or, when the centre of their professional activities is not located in Mexico, among other cases; and 2. Entities (companies, associations or partnerships, among others) not incorporated under Mexican law, as well as those that have not established their main place of business or their management centre in Mexico, but maintain one or more permanent establishments in Mexico.

Individuals or entities resident abroad in the foregoing terms must pay taxes in Mexico in any of the following cases: • When they obtain income from any source of wealth located in Mexico. • When they have a permanent establishment in Mexico, in which case, tax is payable on the income attributable to such an establishment.

• • • • • • • • • • • • • • • •

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Based on the above, individuals and entities must pay taxes in Mexico when they obtain income derived from the following: Salaries; Professional fees; Compensation paid to board members, administrators, statutory auditors and managers; Leasing of real estate; Leasing of goods; Time share tourist service agreements; Sale of shares; Financial leases; Royalties, technical assistance and advertising; Interest; Prizes; Artistic and sports activities, as well as public shows; Distributable surplus of nonprofit entities; Dividends, profits, remittances and earnings distributed by entities; The sale of real estate; Building site construction, installation, maintenance or placement, inspection or supervision of real estate; or Other income from a source of wealth located in Mexico.

Deductions

Calculation of Income Tax

Business expenses are deductible if they are properly documented and supported. The following deductions are permitted:

It is first necessary to calculate taxable income, on which the corporate income tax rate is then applied. Taxable income is the difference between taxable revenue and expenses. Revenue and expense recognition is on an accrual basis. Lastly, the accrual basis is multiplied by the income tax rate.

• Returns received or discounts or rebates made in the tax year; • Cost of goods sold; • Expenses, net of discounts, rebates and returns; • Investments (depreciation by the straight-line method, adjusted for inflation); • Bad debt credits and losses resulting from acts of God; • Profit sharing paid to employees; • Contributions for the creation or increase of employee pension or retirement funds; and • Accrued interest, subject to the thin capitalisation rule.

Tax incentives Tax reductions are available to corporations engaged in agriculture, stock-breeding, forestry or fishing activities. Accelerated depreciation is available for certain types of capital investments, such as machinery and equipment, starting the year in which the investment is made. Additionally, in the last 25 years, Mexico has signed agreements to avoid double taxation in order to standardise tax concepts with those of the tax jurisdictions of the countries involved in the negotiation. This promotes the exchange of tax information, allowing the contracting parties to follow the tax laws effectively and to more effectively combat tax evasion and avoidance. Likewise, the agreements provide for the elimination of double taxation. Both countries must see that the other’s tax obligations are complied with and taxpayers must calculate the tax according to the country

where they reside, and accept that there are maximum tax withholding rates in the country in which the source of wealth of dividends, interest and profits is located. Tax withholding is the amount that individuals or entities making payments to parties resident abroad must subtract for income tax. Although the parties required to withhold the tax are not constituents, they are required to pay taxed owed by the taxpayer. When the person from whom foreign nationals obtain income does not fall under the foregoing assumptions, and consequently does not withhold tax, the taxpayers themselves must make the payment directly to the Tax Administration Service. When the party making the payment withholds taxes, he/ she/it must pay such taxes on a monthly basis no later than the 17th of the month following that on which the tax is withheld. Payment must be made at a bank or via the internet. When payment is made by the taxpayer receiving the income, he/she/it must do so at the authorised office within 15 days following receipt of said income.

Personal Income Tax Transfer Pricing Mexican transfer pricing legislation did not comply with international standards until 1997. However, in December 1996, the Mexican Congress enacted significant tax reform introducing transfer pricing rules consistent with guidelines issued by the Organisation for Economic Co-operation and Development (OECD), controlled foreign company legislation, and other antiavoidance measures. These changes represented a critical stride in bringing Mexico’s tax rules closer to the international regimes of more developed countries. To date, several minor reforms regarding transfer pricing have been enacted, although the bulk of the Mexican rules are mainly incorporated by reference in the Mexican Income Tax Law (MILT) which requires the application of the OECD Transfer Pricing Guidelines to the extent consistent with the MILT.

Most of the transfer pricing rules are included in Articles 86 (Sections XII, XIII and XV) 215, 216 and 216 BIS of the MILT. Under these rules, taxpayers are required to produce and maintain documentation demonstrating that gross receipts and allowable deductions for each fiscal year (FY), arising from international company transactions are consistent with the amounts that would have resulted had these transactions taken place with unrelated parties under similar conditions. Moreover, documentation of inter-company transactions should be based on a transactional basis. All inter-company transactions between related parties must be reported at arm’s length prices for income tax purposes. This general rule makes the arm’s length principle the cornerstone of the income tax system since it covers transfers of tangible and intangible property, services, domestic and cross-border transactions, transfers of shares whether publicity traded or not, entered into by individual and corporate taxpayers.

The article 216 specifies the following six Transfer Pricing methods: • Comparable uncontrolled price method (CUP); • Resale price method (RPM); • Cost plus method (CPM); • Profit split method (PSM); • Residual profit split method (RPSM); and • Transactional net margin method (TNMM). Taxpayers have the obligation to pay income tax in accordance with the arm’s length principle. Additionally, taxpayers have three important transfer pricingrelated obligations: • To prepare and maintain transfer pricing documentation; • To file an information return on transactions with non-residents related parties with the timely filing of their income tax return for the previous fiscal year; and • The transfer of shares and quotas in Mexican companies between related parties is subject to special reporting requirements.

Scope Resident individuals are taxed on worldwide income. Non-residents are taxed on Mexican-source income only (see above). Individuals who establish their home in Mexico are considered residents if their principal centre of interest is located in Mexico. An individual’s centre of vital interest is considered to be located in Mexico when: • More than 50% of the individual’s income in a calendar year is derived from Mexican sources; or • The centre of the individual’s professional activities is located in Mexico. A taxpayer may be a salaried employee or self-employed with business income. The first kind of income includes salaries, wages, director’s fees, bonuses, gratuities, allowances, certain fringe benefits in kind and statutory employees’ profit sharing distributions.

The second kind, i.e. parties earning income from business activities or professional services, including real estate rental activities, is subject to tax at the rates established in the law and published by the tax authorities. The individual tax rate is graduated with a maximum rate of 30% for the next two years (2011 and 2012). For individuals, the fiscal year in Mexico is the calendar year. Tax returns must be filed in April (no later than 30 April) of the following year. Selfemployed individuals and those with rental or business income must file monthly returns no later than the 17th of the month following that in which the income is received. Payment must be made at a bank or via the Internet, as applicable. Employees of foreign companies who work in Mexico must make monthly estimated tax payments if their companies do not have permanent establishments in Mexico.

Parties receiving salary and interest income exceeding Mex$400,000 are not required to file annual tax returns. However, if the real amount of interest exceeds Mex$100,000 and tax is withheld on that interest, the individual must file an annual tax return. Personal income taxes of resident and non-resident employees are frequently withheld. An individual resident taxpayer may elect to pay the remaining tax due either when the annual return is filed or in instalments with interest over a six-month period. Resident individuals must include all information with their annual income tax return, including exempt and nontaxable income. In addition, resident individuals must include information regarding their income from donations, prizes and loans received during the calendar year, when it exceeds separately or in the aggregate. The employer must pay Social Security dues and Workers’ Housing Fund dues, as well as the mandatory pension plan, as a minimum under Mexican law.

VAT

Other Taxes

Income from the sale of goods or the lease of real estate other than residential property is subject to value-added tax. Hotels and hostels, as well a real estate leased furnished, are also subject to value added tax.

Flat Tax

Cash Deposit Tax

Flat tax is calculated on a cash flow basis, with the tax base determined by subtracting specific deductions from taxable revenue. Interest, salary and royalty payments are not deductible, with some narrow exceptions (e.g. royalties paid to independent third parties). Under the flat tax rules, investments and inventory are fully deductible when purchased and paid for, rather than being deducted under the depreciation or cost of goods sold rules. The corporate flat tax rate is 17.5% from 2010 onwards.

Individuals and legal entities must pay this tax with regard to all deposits in cash in foreign or Mexican currency made into any nominative account in institutions of the financial system.

Individuals or business entities making payments to parties resident abroad for services utilised in Mexico and for leased tangible and intangible assets, among others, are deemed to be importers, and are required to pay the respective value added tax. The standard VAT rate is 16% (reduced to 11% in border regions).

This tax is applied to amounts exceeding 15,000 pesos in cash deposits made into institutions of the financial system, whether for one deposit or the sum of several deposits per month. This tax is calculated by multiplying the amount exceeding 15,000 pesos by the 3% rate. Deposits for individuals or business entities made via internet transfers are not considered to be cash deposits; neither are account transfers, credit titles or any other document or system agreed with institutions of the finance system according to the applicable laws, even though such deposits are charged to the same entity that receives them.

Audit and accountancy Companies listed on the Mexican Stock Exchange, government-owned companies and companies in the finance sector regulated by The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV), the National Commission for the Protection and Defence of Users of Financial Services (CONDUSEF) or the National Insurance and Bonding Commission, such as banks and brokerage firms, are required to have independent auditors perform annual audits of their financial statements. In addition, companies meeting any of the following threshold requirements must have independent auditors conduct annual audits and file a tax report. The following bases are currently valid: • Annual revenues of at least Mex$34,803,950; • Total assets of at least Mex$69,607,920; or • Three hundred employees or more in each month of the preceding year.

Annual audits are required in the year after a company reaches any of the above conditions. Audited financial statements are presented at the annual shareholders’ meeting, to the tax authorities, and if the company is publicly held, to the CNBV. Audits of financial statements prepared under Mexican GAAP are conducted under Mexican Generally Accepted Auditing Standards (GAAS). These financial statements must also be filed with the tax authorities along with a tax compliance report. These reports are filed electronically with the tax authorities via the internet. When a company has lost two-thirds of its capital stock, a going-concern paragraph must be attached to the report, because it is considered a technical bankruptcy. In a worstcase scenario, the audit opinion may be modified.

The CNBV and the National Insurance and Bonding Commission (CNSF) are statutorily authorised to issue accounting and reporting standards for the companies they regulate. Banking, stock brokerage houses, investment funds, financial leasing, factoring and other financial institutions are subject to regulations issued by the CNBV. Insurance and bonding companies are subject to regulations issued by the CNSF. The primary differences between the accounting practices established by the CNBV and the IMCP refer to the valuation of repurchase transactions (repos) and nonconsolidation of non-financial subsidiaries. The accounting practices issued by the CNSF differ from Mexican GAAP primarily in the following areas: partial recognition of inflationary effects and deferred taxes; certain capital reserves shown as liabilities; the equity method used for investments instead of consolidation; and the assumptions used for determining employee compensation at retirement.

Local GAAP The financial statements must be presented at the annual shareholders’ meeting and approved by the shareholders. All companies under a S.A. form of organisation must have a statutory auditor (comisario) appointed by the shareholders. Because of the statutory auditor’s functions and responsibilities, he is usually an independent public accountant, and generally a representative of the company’s independent auditing firm. The statutory auditor may not be an employee or executive of the company. Each year, the statutory auditor issues a report stating whether the financial statements have been prepared in accordance with Mexican GAAP. The statutory auditor also determines whether the company’s board of directors has informed the shareholders of all significant matters. Professional auditing standards require that a public accountant acting as a statutory auditor rely on an annual examination conducted in accordance with generally accepted auditing standards.

All Mexican corporations must maintain detailed accounting records in Spanish using Mexican pesos and in accordance with Mexican GAAP. Mexican companies must maintain the following: • a general ledger; • a general journal; • an 'inventories and trial balances' record; • books of minutes of board of directors’ and shareholders’ meetings; • a record of investments in shares; • a record of debts in foreign currency, credits and cash; and • a record of registered shares. The principal books and records, together with all supporting documentation, must generally be maintained at the official domicile of the business and remain available for 10 years.

The Mexican Corporations Act and the Income Tax Law only include general accounting requirements and do not specify the form or content of the books and accounts that a company must maintain. Each company is required to keep the records necessary to support the amount of gross income, deductions and tax credits contained in the taxpayer’s Mexican income tax return on an accrual basis. Management determines the exact form of the records.

Human Resources and Employment Law It is important to mention that, in order to comply with Mexican labour regulations, companies wishing to invest in Mexico must proceed as follows, among other steps to be taken: • Analyse the location where the company will be set up, the specific characteristics of the trade union environment, as well as the working conditions; • If applicable, execute a Collective Bargaining Agreement with the trade union of the production branch of the Company’s main line of operation; • Execute Individual Labour Agreements with the employees to be hired; • Register the employees at the Mexican Social Security Institute; • Pay Social Security dues; • Abide by the provision regarding the legal ceiling on the number of foreign workers that may work for a company in Mexico, as established in the Federal Labour Law; • Organise training and education programmes as required by the law and fit out factories, workshops, offices and other locations following security and hygiene principles to avoid occupational hazards;

• Comply with the security and hygiene provisions established in the laws, rules and regulations in order to avoid workplace accidents and illnesses; • Prepare the Internal Labour Regulations of the Company, which govern the working environment of companies in Mexico; • Register the Company’s Internal Labour Regulations with the labour authorities; • Register the Collective Bargaining Agreement with the labour authorities; • Register training and education programmes with the labour authorities. Amendments and additions to the Social Security Law were published in the Official Gazette on 9 July 2010 which altered the treatment applicable to corporate personnel working on a fee basis, in order to ensure the payment of the respective Social Security dues.

Maximum number of permitted foreign employees. In all Mexican companies the owner must employ a minimum 90% of Mexican workers in accordance with Mexican Federal Labour Law (MFLL). In the case of technicians and professional workers, they must be Mexican; in the event that Mexican technicians or professional workers are not available, the business may temporarily hire a foreign worker, but both will then have the obligation of training a Mexican technician or professional worker in order to comply with the MFLL. For management or director levels the rule does not apply. Employee benefits The Mexican Federal Labour Law (‘FLL’) applies to all employees in Mexico, regardless of their nationality or place of work.

Minimum wage The FLL establishes a minimum wage payable in cash to employees on a weekly or bi-weekly basis, without deductions or withholdings. That minimum wage is determined every year by the National Minimum Wage Commission. Mexico is divided into three economic regions and the daily minimum wage varies for each of these regions. The economic regions for the purposes of the minimum wage for the year 2011 are: • Economic Region ‘A’, with a daily minimum wage of MxP$59.82; • Economic Region ‘B’, with a daily minimum wage of MxP$58.13; and • Economic Region ‘C’, with a daily minimum wage of MxP$56.70. The minimum wage applies to all employees within an economic region, except those that fall within a series of specific categories.

Maximum working hours The maximum number of hours an employee is required to work, without the need to pay overtime, is 48 hours per week. Employees may work in three different shifts, i.e. the day shift, the night shift and the mix shift. The number of hours per day depends on the work shift of each employee. The maximum number of hours in the day shift is eight, seven hours for the night shift, and seven and a half hours for the mixed shift. The employee must be allowed a rest break of at least 30 minutes during each shift. Employees are entitled to at least one day of rest per week. In some cases, the normal work hours may be distributed throughout the week as necessary; most employees distribute them over five days in order to provide for an extra day off.

regardless of any overtime premium that may apply whenever Sunday is part of the regular working week. When Sunday is not part of the regular working week (day of rest), it must be paid at 200% of the standard pay per hour. Year-end or Christmas bonus Before 20 December of each year, all employers must pay their employees a year-end bonus equal to at least fifteen days’ wages. Paid holidays The following are the legal paid holidays in Mexico: • 1 January (New Years Day); • The first Monday in February (in exchange for the 5 February); • The third Monday in March (in exchange for the 21 March);

Overtime

• Labour Day 1 May;

In the event that the employees are required to work more hours than their regular shift, the employer must pay the first nine hours of overtime (these hours are computed on a weekly basis) at 200% of the standard pay per hour, and overtime exceeding those nine hours must be paid at 300% of standard pay per hour. Sunday work is subject to a premium equal to 25% of the wage,

• Independence Day 16 September; • The third Monday in November (in exchange for the 20 November); • 1 December (every six years upon inauguration of a new president); and • 25 December.

Vacations Employers with more than one year of seniority are entitled to six days of paid vacation. That six-day period is increased by two days per subsequent year of seniority up to twelve days. After the fourth year, the minimum paid vacation period is increased every five years of services thereafter. Vacation premium Vacation days, as set above, must be paid to the employee plus an additional 25% of the employee’s normal wage. Profit sharing As of the second year of operations, all employers must distribute among their employees an amount equal to ten percent (10%) of the employer’s pre-tax profits; that percentage is established by the National Profit Sharing Commission. Fifty percent (50%) of that ten percent is to be distributed in proportion to the number of days worked by each employee throughout the year. The other fifty percent is distributed according to each employee’s wage. Profit sharing must be paid to the employees within 60 days after the employer is required to file its year-end income tax

return. Certain managerial employees, such as directors, managers and administrators, are not entitled to profit sharing.

exposure to toxic substances and employee protective equipment.

Work permits and self-employment

Working tools

Training

Employers are required to provide working tools and working materials in order for their employees to perform their work efficiently. Those working tools and materials should be in acceptable condition and be replaced by the employer, with no additional charge to the employee, as soon as they wear out due to regular wear and tear.

Work permits are generally granted for periods of one year; however, they may be extended.

All employers are required to provide training to their employees in order to increase the employee’s productivity and opportunities. The employer must have training programmes approved by the Ministry of Labour and Social Welfare. A Joint Commission comprising an equal number of representatives of the employees and of the employer must revise and implement the company’s Training and Instruction programme. Health and safety All employers are required to provide a safe environment for employees to render their services and a place of work that complies with sanitary standards. A Joint Health and Safety Commission must be created to investigate the causes of illness and accidents and to propose resources to avoid them. Employers are also required to comply with Federal Health and Safety regulations and with a number of Official Mexican Standards regarding a number of different topics such as fire and accident prevention,

Immigration procedures All foreign nationals entering Mexico must have entry permits or visas, depending on the specific circumstances of their stay. The required documentation may be obtained from Mexican foreign service offices abroad, including embassies and consulates, and from the immigration authorities in ports of entry. Additionally, certain tourism offices authorised by the Department of the Interior (Secretaria de Gobernacion) may issue tourist visas.

In general a prospective employee must provide the following documentation in order to obtain the work permit: • Invitation letter of Mexican company with the offer of position (employment contract); • Sufficient resources while working in Mexico; • Passport; • Photos; and • Other identification.

The period of time to obtain the work permit is around 6 weeks In case of foreign nationals who will be self-employed in Mexico, the following requirements exist:

• No minimum capital investment is required; and • Expatriates must apply for investor status and must be able to show sufficient economic capability and practical experience to undertake a business operation.

Trade The General Customs Administration is the authority in charge of enforcing the laws regulating customs clearances, as well as determining customs systems, methods, and procedures; it also takes part in the study and development of projects related with duties, countervailing duties, and other foreign trade regulation and restriction measures; complies with agreements; orders and carries out the verification of foreign trade merchandise in transport; handles intransit verification of foreign vehicles; establishes taxes on foreign trade and other taxes in accordance with the Law Importation and Exportation Law and other ordinances, as well as the customs value of merchandise based on the Customs Law (CL); and determines the nature, state, origin, and other characteristics of merchandise, in order to establish tariff classifications.

Mexicoâ&#x20AC;&#x2122;s anti-trust law prohibits monopolies and certain horizontal restrictive practices deemed to be â&#x20AC;&#x2DC;absolute monopolistic practicesâ&#x20AC;&#x2122;. Price fixing, restrictions on production and distribution market sharing and concerted bidding in public tenders are strictly prohibited. The law also prohibits the following practices by firms that have substantial power in the market place and that restrain or attempt to restrain competition: vertical market sharing; restriction on resales; tie-ins; exclusivity contracts; refusal to deal; boycotts; and certain other practices.

Banking in Mexico The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores CNBV) establishes operating and accounting rules for banks. The Ministry of Finance, the CNBV and the Central Bank are the principal regulators in Mexico. Foreign participation in the financial sector is increasing, and the flow of foreign capital has reinvigorated the banking system in Mexico. Types of bank accounts; • Individuals debit account. • Corporate debit account. • Credit for Industry and SMEs Credit rating simple. • Credit revolving. • Mortgages receivable. • Automotive Dealers. • Credit to Equipment or Fixed Assets. • Credit to Working Capital (variable or fixed rate). • Corporate credit card. • Financial Leasing.

Ability to access local financing (e.g. local lending) The Mexican government in conjunction with private sector facilitated the access to local financing in order to improve relations with the international investor for setting up a business, invest in development of new core business, and renovation of equipment and technology. Additionally, Mexico has a large list of Free Trade Agreements in order to obtain cost reduction in the investment initiatives. Development banks provide credit to priority sectors, including agriculture, fishing, importing and exporting, industrial development, public works and tourism. Additionally, development banks provide technical support. One of the key issues in accessing local financing is the timing and extensive requirements from the banks. In some cases this issue is key to deterring investment from foreign investors. Different government and private organisations exist to support the process.

HSBC in Mexico Overview Our international proposition is designed to meet the needs of our commercial customers conducting business in more than one country (either in a parent/subsidiary structure or as a trader of goods or services).

Historical Milestones August 1941

Banco Internacional, S.A. is established in Mexico City. It is the founding member of Grupo Financiero Bital, S.A. de C.V.

1980

Banco Internacional merges with 11 other major Mexican Banks. It becomes known as Grupo

HSBC has been present in Mexico since the opening of its Representative Office in 1970 which in 2000, following the acquisition of Republic National Bank, was merged with this bank’s local subsidiary and renamed as HSBC México, S.A. On 25 November 2002, HSBC acquired control of Grupo Financiero Bital, S.A. de C.V. and in January the group was rebranded as Grupo Financiero HSBC S.A. de C.V. HSBC Holdings plc owns 99.99% of the financial group. HSBC México is a broad banking franchise which offers a wide range of corporate, business and personal banking services. HSBC Mexico is one of leading banking and financial services institutions in the country.

Financiero Bital, S.A. de C.V. 2000

HSBC acquires Republic National Bank of New York (Mexico) S.A., and changes the name to HSBC México, S.A.

November 2002

HSBC acquires Grupo Financiero Bital, S.A. de C.V., with a network of more than 1,300 branches and 6 million customer accounts; the biggest customer base in Mexico.

December 2002

HSBC injects new capital of US$800 million into

In order to meet the needs of our customers, HSBC has different customer segments divided by Personal Financial Services (PFS), Commercial Banking (CMB) and Global Banking and Markets (GBM). The network in Mexico includes more than 1,100 branches, 6,500 ATMs, and a presence across the 31 Mexican states. Awards for Excellence ‘Best Personal Banking Internet Site 2010’ – Global Finance ‘Best Information Security Initiatives in Latin America 2010’ – Global Finance

HSBC México, S.A. to fortify and guarantee its

October 2003

financial strength.

Corporate Social Responsibility

Grupo Financiero Bital, S.A. de C.V. (‘GFBital’),

For HSBC, Corporate Sustainability is about bringing social and environmental issues together with financial performance to maintain and grow a successful business for the benefit of our stakeholders.

acquires the remaining 49% of shares in Seguros Bital. November 2003

Grupo Financiero Bital, S.A. de C.V. (‘GFBital’), acquires 100% of the shares of Afore Allianz Dresdner, S.A. de C.V., which it renames to HSBC Afore.

January 2004

Grupo Financiero Bital, S.A. de C.V. changes its name to Grupo Financiero HSBC S.A. de C.V.

July 2004

Grupo Financiero HSBC S.A. de C.V. acquires Allianz Rentas Vitalicias.

Network

• We apply clear policies and processes to manage potential social and environmental risk in our lending and other financial activities in sensitive sectors. • We help our clients to seize the opportunities presented by the shift to a low-carbon economy. • We try to reduce our own environmental footprint and share good practice on this with our clients and other stakeholders. • We focus our community investment (philanthropic activities) on education and the environment. Our education programmes help to lift people out of poverty, build financial literacy and promote environmental awareness. Our environmental programme focuses on the HSBC Climate Partnership – a five-year environmental programme to reduce the impact of climate change on people, forests, freshwater and cities. HSBC’s programme partners are carrying out original scientific research, developing demonstration projects, creating working models, and proving clear solutions so that governments can enact legislation for the adoption of low-carbon policies.

HSBC Mexico supports several programmes in commitment with its community and environment. According to HGHQ policy of supporting education, environment and community, HBMX donated in the first semester of 2010, more than $21m. Lazos Foundation, experts in education nationwide to support underprivileged children that most likely will drop school in case they don’t receive a scholarship in the next school year. HSBC signed an investment of 40 million pesos to four years with the National DIF with Prevention and Treatment of Children and Adolescents Migrants and Returnees Unaccompanied. Our head office in Mexico City, the HSBC Tower, will continue implementing processes for energy saving to reduce atmospheric emissions, water consumption measures and recycling water as well as developing policies and processes for a better waste management.

We are a LEED certified company granted by the U.S. Green Building Council, which means to be the first building of this type in Mexico and Latin America. HSBC Mexico makes partnership with different NGO麓s for the Green Insurance like WWF, Probosquede Chapultepec Trust and Cosejo Civil Mexicano para la Silvicultura Sostenible. Through our ATM donation campaign, HSBC clients donated in the months of April and May to support 6 different NGOs that support children with cancer around the Country (Fundaci贸n Rebecca de Alba, AC). HSBC Mexico is also awarded, for the fourth year running, Socially Responsible Company, award given by the CEMEFI (Mexican Centro for Philanthropy).

Country overview Capital city

Mexico City

Area and population

Area of 1,964,375 sq km and population size of 112 million

Language

Spanish

Currency

Peso

International dialling code

National Holidays

Scheduled Public Holidays for 2011 1 January

First Monday in February

in exchange for the 5 February

Third Monday in March

in exchange for the 21 March

Labour Day

1 May

Independence Day

16 September

Third Monday in November

in exchange for the 20 of November

Every six years upon inauguration of a new president

1 December

Christmas Day

25 December

Business and banking hours

8 hours

Major Stock exchanges

BMV

Political structure

Democratic republican government based on a congressional system according to the 1917 Constitution

Economic statistics (2009)

GDP US$875billion1 FDI US$11.4billion 2

1 2

New Yearâ&#x20AC;&#x2122;s Day

www.imf.org www.reuters.com

Contacts Hector Macias Noriega Advisory Tel: +52 (55) 5263 5854 Email: hector.macias@mx.pwc.com http://www.pwc.com/gx/en/ worldwide-tax-summaries Website: www.hsbc.mx Phone: +52 (55) 5721 3150 Head Office: HSBC Mexico Torre HSBC, Av. Paseo de la Reforma, 347 Col. Cuauhtémoc, C.P. 06500 Mexico City, Mexico 1st Edition: December 2010 Copyright Copyright 2010. All rights reserved. ‘PwC’ and ‘PricewaterhouseCoopers’ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.