Mexico’s opportunities outweigh tax complexity and regulatory uncertainty

Tax lawyer Luis Gerardo Del Valle Torres explains how international investors can best approach Mexico

March 23, 2020

Luis Gerardo Del Valle Torres is managing director of Mexican Law Firm Jáuregui y Del Valle, and author of The Mexican Federal Tax System – Its review under Economic and Legal Principles. In the book he identifies a number of Mexican taxes that disincentivise investment, and suggest they should be revised – but far from easing the compliance burden, Mexico is making international investment more complex. But so is the rest of the world, argues Luis; and Mexico offers greater foreign investment returns that outweigh the uncertainty.

World Finance: Luis, Mexico’s tax system is notoriously complex – what do international investors need to understand?

Luis Gerardo Del Valle Torres: Well, that is right Paul – but all tax systems are complex in the world. And the bad news is that it’s just getting worse.

The OECD has come up with BEPS – Base Erosion Profit Shifting – and that just makes the rules much more complex everywhere.

But Mexico offers higher returns than many other countries do.

Mexico does offer less regulations than other countries do – and that creates more uncertainty. But if you have the right advice, the system is not necessarily more uncertain, because then you’ve got the experience of people that know and understand how the system works.

World Finance: How do international investors typically approach Mexico? What investment vehicles are popular?

Luis Gerardo Del Valle Torres: We have to consider that Mexico is a civil law country. Certain features exist so that international vehicles – JV, Joint Venture vehicles – may be used for investors to participate in, have non-Mexican law applicable, and so get the internal rate of returns that are expected, and still have foreign law applicable.

Investors generally feel more comfortable applying the law of their own jurisdiction – so generally the idea is to find a jurisdiction that is friendly to the country where the investors are based, and that actually has the appropriate links with Mexico. That is what we generally focus on.

World Finance: In your book you identify a number of taxes that disincentivise investment, and suggest they should be revised?

Luis Gerardo Del Valle Torres: That’s right, Paul. For example, there is this provision in the OECD Base Erosion Profit Shifting actions that disallows interest deductions with related parties when they exceed a certain percentage of EBITDA. Mexico is now disallowing interest deductions – but not necessarily with related parties or when paid abroad, but in any situation. So that just puts companies that are in favour of leveraging in a difficult position.

Mexico is as well frequently revising the tax treatment of foreign vehicles that are treated as tax transparent. This transparency is actually key to create joint venture vehicles that will then invest in Mexico – and when these provisions are revised, sometimes this is not taken into consideration.

So you have to learn to navigate in the tax system, as in any other country.

World Finance: But despite these complications, Mexico does remain a jurisdiction full of investment opportunities?

Luis Gerardo Del Valle Torres: Definitely. There are huge investment opportunities; tax systems are complicated everywhere, and Mexico offers foreign investment greater return than many other countries do.

The US is still the largest economy in the world – that proximity gives us certain advantages.

Mexico still has salaries that are lower than those in the US, and that represents an advantage. But it’s not only that: we’ve created a workforce that is very talented, and that has grown in its technical capabilities. So there is a lot of investment in manufacturing, aerospace, automotive; fintech is quickly growing in Mexico. But also when you see the returns, for example, that you get when investing in real estate projects, hotels, condos; these greater returns make up for that complexity and that uncertainty that you can navigate when you have the right advice.

World Finance: Luis, thank you very much.

Luis Gerardo Del Valle Torres: Thank you Paul.