Section VII INVESTMENT CLIMATE Openness Mexico has significantly liberalized its foreign investment regime over the last decade. In December of 1993, the government passed a new foreign investment law that replaced a restrictive 1973 statute and more liberal implementing regulations for that law that were enacted in 1989. The new law is consistent with the foreign invesment chapter of NAFTA and will legally open more areas of the economy (not restricted by the Constitution) to foreign ownership. (Table 1 -- attached -- outlines the percentage of foreign ownership allowed in restrictied sectors of the economy including under NAFTA). It also provides national treatment for most foreign investment, eliminates all performance requirements for foreign investment projects, and liberalizes criteria for automatic approval of foreign investment proposals. NAFTA investors will receive both national and Most Favored Nation treatment in setting up operations or acquiring firms. Unless they have requested specific exceptions for certain types of industries, states, provinces, and local governments must accord national treatment to investors from any NAFTA county. Conversion and Transfer Policies Mexico's economy is open in this regard, due to the requirements of its membership in NAFTA and, most recently, its accession to the OECD. In general, capital and investment transactions, remittance of profits, dividends, royalties, technical service fees and travel expenses are handled at the market-determined exchange rate that floats within a band that is determined by the Central Bank. Expropriation and Compensation Under NAFTA, Mexico may not directly or indirectly expropriate property, except for a public purpose on a non-discriminatory basis. Expropriations are governed by international law, including rapid, fair market value compensation, including accrued interest. Investors have the right to international arbitration for violations of this or any other rights included in the investment chapter of the NAFTA. A NAFTA investor may choose either to seek monetary compensation through binding international arbitration or to use the domestic country's court system. Dispute Settlement If a dispute between governments can be addressed under either the NAFTA or the GATT, a country may choose either forum. The first step in dispute settlement is consultations. Should consultations fail to resolve an issue within 30-45 days, any country may call a meeting of the Trade Commission with all three countries present. In the absence of a satisfactory solution there, disputes will be resolved by evenly balanced and mutually agreeable 5-member panels of experts who will normally be chosen from a trilaterally- agreed roster of trade, legal, and other experts, including from countries outside of the NAFTA. Unless otherwise decided, the panel will issue its initial report within 90 days and a final report 30 days later. Once a panel decision has been made, either country may request the establishment of a 3 person extraordinary challange committee, comprised of judges or former judges from the two countries. If any of the grounds for the extraordinary challange are met, the panel decision will be overturned and a new panel will be set up. Protection of Property Rights Travelers should be aware that Mexican laws and practices regarding real estate are markedly different than those in the United States. Non-Mexican citizens cannot own property within fifty kilometers of the sea coasts or within one hundred kilometers of the Mexican border. Property within those areas can be leased through 30 year trusts held by Mexican banks. Foreign investors can acquire such property for commercial purposes by establishing a Mexican subsidiary. Because of these restrictions and the complicated rules governing the purchase of property, time shares, or condominiums, the U.S. Embassy strongly recommends that U.S. citizens obtain competent legal advice prior to any purchase of property in Mexico. Travelers may obtain a list of English speaking Mexican attorneys at the U.S. Embassy or any American Consulate in Mexico Performance Requirements The new foreign investment law eliminates such restrictions as export requirements, capital controls, and domestic content percentages, as required under NAFTA. Foreign investors already in Mexico may apply for cancellation of prior commitments. Failure to apply for revocation of performance requirements will result in their staying in effect. Right to Private Ownership Most foreign investors operate in Mexico through corporations Socieades Anonimas). Foreign-owned corporations are subject to the same laws as local companies as well as any special regulations governing foreign investment. A Mexican corporation must have at least five shareholders and, except in certain sensitive sectors, usually can be established within 1 - 2 months. Costs of incorporation vary depending on the structure of the company but the minimum cost is USD 1,500 - 2,000. Upon registration with the Ministry of Foreign Relations, Mexican companies with foreign participation will be allowed to own land in restricted border (within 100 kilometers) and seacoast (within 50 kilometers) areas for any non-residential purpose. The purchase of land for residential purposes in these restricted areas must still be done through a renewable 50 year trust. Protection of Property Rights As noted above, Mexico may not directly or indirectly expropriate property, except for a public purpose on a non-discriminatory basis. Regulatory System In all sectors not specifically covered (in Table 1), foreign investment applications are automatically approved unless they exceed USD 27.5 million (this amount will be determined annually), in which case they require approval of the National Foreign Investment Commission. The Commission is comprised of representatives of the ministries of Interior, Governance, Foreign Relations, Finance and Public Credit, Social Development, Energy, Mines and State Industries; Commerce and Industrial Development, Communications and Transport, Labor and Tourism. The Commission must act on applications within 45 working days. Criteria for approval include employment and training considerations, technological contributions, and contributions to productivity and competitiveness. The Commission may reject applications to acquire Mexican companies for national security reasons. The Foreign Relations Ministry must issue permission for foreigners to establish or change the nature of Mexican Companies. Sectors Reserved to the State - Table I Areas limited to the state include: 0l) Petroleum and other hydrocarbons 02) Basic petrochemicals 03) Telegraphic and radio telegraphic services 04) Radioactive materials 05) Railroads 06) Satellite communications 07) Electricity 08) Nuclear energy 09) Coinage and printing of money 10) Mail 11) Control, inspection and surveillance of maritime ports, inland port and heliports The last category is the only additional areas to those included in the 1973 Law. Sectors Reserved to Mexican Nationals 01) Retail sales of gasoline and liquid petroleum gas 02) Non-cable radio and television services 03) Credit unions, savings and loan institutions, and development banks 04) Certain professional and technical services 05) Land transportation within Mexico of passengers and freight (This restriction will be progressively eliminated with up to 49, 51, and 100 percent foreign investment permitted in 1995, 2000 and 2004, respectively), but not including messenger or package delivery services. Bilateral Agreements In addition to the NAFTA, Mexico and the United States have signed a tax exchange information agreement to assist the two countries in enforcing their tax laws. The agreement covers information that may affect the determination assessment, and collection of taxes, and investigation and prosecution of tax crimes. The two countries also have signed a bilateral tax treaty, the basic purpose of which is to avoid double taxation of income and to prevent tax evasion. OPIC and Other Insurance At this time, there are no Overseas Private Investment Corporation (OPIC) or other insurance agreements with Mexico. Labor Mexico's federal labor law, originally enacted in 1931 and revised in 1970, is based on Article 132 of the Mexican Constitution which specifies workers' rights and duties and the principles of employee relations. Mexican workers enjoy the right to associate, bargain and strike. The labor law sets a standard 48 hour work week with one paid day of rest. For overtime, workers must be paid twice their normal rate and three times the hourly rate for overtime in excess of nine hours per week. Employees are entitled to a number of holidays, paid vacation (after one year of service), vacation bonuses, and an annual bonus equivalent to at least two weeks pay. Companies also are responsible for additional costs on behalf of the employee in accordance with the federal labor law. These usually add about 30- 35 percent to the basic wage cost. Both employers and employees contribute to the Mexican social security system; employers' costs for the program range from 12 - 15 percent of salaries. Employers must also contribute a tax-deductible 2 percent of each employee's salary into an individual retirement account. The strength of organized labor in Mexico has generally been on the wane over the past decade, particularly during the economic crisis years of 1982-1987. The country's large labor unions generally have supported the government's economic restructuring program in part because real wages in most sectors of the economy have begun to rise. The Federal Labor Law provides that a union can be constituted with a minimum of 20 workers. For the past few years, strikes have been limited and they are usually settled quickly. Strikes which are more difficult will usually draw government mediators to help facilitate the settlement process. Foreign Trade Zones/Free Ports In an effort to expand employment and training opportunities, the Mexican government has established a maquiladora program, which allows duty free imports of machinery, parts and raw materials for the assembly and finishing of products in Mexico for re-export to the United States. Generally, if the parts are of U.S. origin and are not substantially tranformed abroad, U.S. import duties are levied only on the value added. Special incentives are available to companies which set up manufacturing plants in frontier strips (within 13 miles of the northern or southern border) and the free zones which include both states on the Baja California peninsula, Quintana Roo, and the northern part of Sonora bordering on the United States. Companies in these areas may obtain up to 100 percent reduction of import duties on machinery, equipment, spare parts and raw materials for a maximum of 10 years from the time they begin operations. To qualify, companies must manufacture products not produced elsewhere in Mexico. Mexico also has two free ports: Puerto Mexico (Coatzacoalcos) and Salina Cruz. Capital Outflow Policy As noted above, there are no restrictions on capital and investment transactions, which are handled at a market-determined exchange rate that floats within established band.