International Business Guides Mexico

Together we thrive HSBC International Business Guides | Mexico 2

01 Welcome 02 Mexico: A growing Welcome to Mexico international hub

03 Country profile Located between the USA and South America, Mexico is rich in history and tradition. 04 Society & culture The largest Spanish-speaking country in the world and the second most populated in 05 Working practices & values Latin America, it brings significant opportunities for multinational businesses. 06 Business etiquette

07 Economy Mexico’s considerable growth potential, and large population with a high proportion of young workers, also help 08 Labour & business position the country as an ideal international business hub. 09 Taxes & wages Often ranked as one of the world’s top emerging markets, the country’s enviable climate, picturesque coastlines, 10 Investment & trade world-renowned cuisine, deep cultural roots and relatively low cost of living all add to its appeal. 11 Infrastructure

12 Cost of living Grupo Financiero HSBC is one of the leading financial and banking groups in Mexico. Our 16,000 employees operate from over 980 branches, offering banking services to more than 8.5 million customers throughout the country. 13 HSBC in Mexico

Local knowledge is vital to help tap into the vast potential that Mexico has to offer. HSBC’s strong on-the-ground presence in the country, alongside 150 years’ experience and a wealth of global capabilities, make it the perfect partner to enable international businesses to thrive.

We look forward to welcoming and doing business with you!

Nuno A Matos Chief Executive Officer, HSBC Mexico

Contact: Head office address: Ave. Paseo de la Reforma 347, Col. Cuauhtémoc, 06500 Mexico DF, Mexico HSBC International Business Guides | Mexico 3 Essentials Mexico: A growing international hub

Monterrey City

GDP Currency Consistent growth Manufacturing leader Guadalajara USD9,707 per capita2 Mexican Peso Mexico has been a stable Mexico continues to grow its global Puebla City economy for a number of years. manufacturing base in a wide range Mexico City It has maintained consistent slow of industries including automotive, Main languages Time zone growth with a variety of reforms flat-screen TVs, computers and Spanish is the official UTC -6 to manage debt and invite foreign telephones due to its relatively low Capital city language, though English investors for an increasingly open cost of labour, plentiful industrial Mexico City is widely spoken economy. space in the North and attractive Typical office hours government incentives. 8.00am – 6.00pm, Well connected Other major cities Top exports Monday to Friday Mexico is connected to 60% of the Ideal trading partner Guadalajara, Puebla, Monterrey, Tijuana, Manufactured goods, world’s GDP with overland access Trade agreements and partnerships Querétaro, Juarez vehicles, automobile to the US and Central America that extend around the world, and Unemployment rate parts, oil and oil as well as to the East and West ongoing conversations with more 3.4%2 products, silver, fruits, with ports in both the Pacific and countries, makes Mexico an open Population vegetable, coffee, and Atlantic oceans. and ideal trading partner. 124 million1 cotton3 Corporation tax Focus on innovation 30%4 Mexico has increased its research Size Top imports and development (R&D) budgets 1,964,375 sq km Metalworking machines, Dialling code by 42% in less than a decade steel mill products, +52 and offers tax incentives for R&D agricultural machinery, spending and investment. electrical equipment, Sources: 1World Bank Group, 2018 automobile parts for 2 Emergency numbers Trading Economics, 2018 assembly and repair, 3Central Intelligence Agency (CIA), 2017 911 (police, fire and 4PwC, 2018 aircraft, and aircraft * ambulance services) Map shows cities of economic significance according 3 to the CIA, 2017 parts HSBC International Business Guides | Mexico 4

Country profile

Mexico is known for its rich history, strong The country still has internal and external challenges. At home, there is cultural blend and distinct cuisine. But it’s a high rate of poverty, a low percentage of women participating in the workforce and some ongoing corruption and crime. Externally, there is also a significant international trade hub and uncertainty about future trade policies with the US. manufacturing powerhouse. All of that aside, the government has been successful at containing inflation and has put reforms in place to attract foreign investors, Mexico has signed 12 Free Trade Agreements (FTAs) with 45 which has led to steady growth and a positive outlook. countries around the world which are members of the Trans-Pacific Partnership (TPP). The country also has 32 Reciprocal Investment Mexico’s economy is divided into four geographic regions – the North, Promotion and Protection Agreements (RIPPAs) with another 33 North-Central, Central and South regions. countries and an additional nine agreements within the scope of the Latin American Integration Association. Read on to discover more about the dos and don’ts of doing business in Mexico. Also find out how trading in or with the country could help Mexico can provide a connection to over boost the future growth of your business. one billion consumers and 60% of the world’s GDP. HSBC International Business Guides | Mexico 5

5 reasons to do business in Mexico1 5 key challenges2

01 Well-educated workforce 01 Reliance on the US economy Mexico has a young and well-educated workforce, with a The US is Mexico’s main trade partner, its biggest market for exports and its key median age of 27.5 years. supplier. As a result, Mexico’s economic stability and growth depends a good deal on the state of the US economy. 02 Low labour costs The low cost of labour in Mexico, combined with higher 02 Crime rate productivity, is attractive to many manufacturers. While violence and organised crime has been on the decline in recent years, there are still concerns. This includes a rise in the theft of gas and oil from 03 Gateway to consumers Mexican pipelines and a 37% increase in highway freight robberies. Mexico has the Freest Trade Agreements of any country, providing a gateway to one billion consumers. 03 Gaining permits There are 10 procedures involved in getting a construction permit, which takes 04 Ripe for foreign investment around 69 days. Connecting to the water and sewerage systems alone is a Government reforms focused on encouraging foreign month-long process, and obtaining land-use and feasibility certificates can be investment have been introduced in Mexico. complicated. 05 Encouraging growth 04 Electricity access Mexico has the greatest estimated economic growth rate in Mexico is ranked 130th by the World Bank and the International Finance Latin America, projected at 2.4% for 2018. Corporation (IFC) for ease of getting electricity. The process requires a number of steps, including submitting applications for certificates and inspections from the Comisión Federal de Electricidad.

05 Paying taxes Although there are only six payments, it takes an average of 337 business hours each year for businesses to pay their taxes. The corporate tax, which is 30%, takes 155 hours alone.

Sources: 1UK Government, 2017 2TMF Group, 2017 HSBC International Business Guides | Mexico 6

Society & culture

In this section

Language Food Religion Customs & celebrations Useful phrases HSBC International Business Guides | Mexico Society & culture 7

Language Religion

Today, Spanish remains the country’s dominant language. Mexico is a secular state and an open and tolerant society that welcomes people of all faiths. While Interestingly, however, the Mexican government doesn’t recognise churches of most major religions can be found in cities, those in the provinces are typically Catholic Spanish as its official language. Instead, it has named 68 reflecting the fact that around 89% of the population is Roman Catholic. indigenous Native American languages as the country’s official ones in an effort to preserve the customs and cultures connected to them. The most common of these is Nahuatl, spoken in various dialects by 1.5 million people – primarily in Central Mexico. Other Customs & celebrations important languages are Maya, Mixteco and Zapoteco spoken by 14%, 7% and 7% of Native Americans respectively. Mexico’s Independence Day is 16th September and commemorates the “cry of independence”, which 80% of people who speak an indigenous language in Mexico also launched a revolt against Spanish rule in 1810. speak Spanish. The Day of the Dead, on 2nd November, is when Mexicans celebrate loved ones who have passed away. Also known as All Souls’ Day, people plan throughout the year for the annual fiesta by creating altars as Food well as gathering gifts and preparing food to offer up to the dead. Our Lady of Guadalupe is the country’s patron saint, and the Feast of Our Lady of Guadalupe on 12th December is Mexico’s most important religious holiday. It is believed that this was the day in 1531 that a Mexican food is so much more than tacos accompanied by a shot peasant named Juan Diego first encountered the Virgin Mary on the Hill of Tepeyac. of tequila. The country’s cuisine is steeped in tradition. Techniques for farming and preparation as well as ancient customs and manners surrounding dishes and meals have been passed down from generation to generation. As a result, Mexican cuisine was Useful phrases added to UNESCO’s Representative List of the Intangible Cultural Heritage of Humanity in 2010. English Good morning Good afternoon Good evening Goodbye How are you? Mexico is responsible for introducing chocolate, corn, tequila, and Spanish Buenos días Buenos tardes Buenos noches Adiós ¿Cómo estás? chillies to the world. HSBC International Business Guides | Mexico 8

Working practices & values

Family is an important part of Mexican society and the traditional hierarchal familial structure also carries over to business. Seniority and authority are respected and Mexicans pay close attention as to how each person fits into the hierarchy – whether family, friends or business.

There’s nothing faceless about conducting business in Mexico – it’s all about personal relationships. You will often need a reliable contact in Mexico who can introduce you to potential business partners. Choosing the right person is critical because you can be judged by the status of your contact.

Initial meetings will include a senior executive, whom you may never see again. You should have an executive of equal rank with you at the first meeting as a show of respect to the Mexican culture.

The Mexican culture is also male-oriented, with business still dominated by men – especially in positions of power. In 2016, only 45.5% of women were in Mexico’s workforce compared with nearly 79.5% of men. In 2015, less than 15% of firms had women in top management roles. While the trend is shifting, the environment can be difficult for foreign businesswomen who don’t face this kind of disparity in their home countries.

Although Mexicans are more formal in their business dealings, the society is a warm and friendly one. Because of this, Mexicans tend to stand closer to one another when talking, which can be uncomfortable for people from other cultures. It’s also not unusual for Mexicans to hold a handshake for longer than other nationalities might. HSBC International Business Guides | Mexico 9

Business etiquette

In this section

Greetings Dress code Negotiations Business cards Sealing the deal Entertaining Golden rules HSBC International Business Guides | Mexico Business etiquette 10

Greetings Negotiations

Business relationships are formal in Mexico, especially at the start. The key to business negotiations in Mexico is patience. Negotiating is a lengthy process that can Don’t address your Mexican counterparts by their first name until involve several meetings, preferably face-to-face. What’s more, deadlines are considered flexible. invited to do so. Instead, use their title and their first surname. Leave yourself room for haggling, which is always part of the process. Mexicans use two surnames, the first is their father’s and the second their mother’s. If you choose to speak Spanish, use the formal ‘usted’ In this highly class-conscious society, it’s important to have an executive on the negotiating team. way of saying ‘you’, rather than the informal ‘tú’.

Mexicans are sociable, friendly and warm. The standard greeting for men or women is a handshake, although this may extend to a hug Business cards between men or a kiss on the cheek between women.

Business cards are exchanged by all attendees at the start of meetings. It’s perfectly acceptable to print your cards in English. Including your professional credentials may also be useful, but not Dress code essential.

Business is a formal affair in Mexico, so men tend to dress in dark suits and generally wear a tie. Similarly, women wear conservative Sealing the deal suits or dresses.

When negotiations have come to an end, put your final agreement in writing. Be sure to note any specific results or actions that came out of the negotiations, especially if there is no formal contract. Both sides should sign the document and keep a copy for their records. This will help avoid the risk of any communication being misinterpreted or misunderstandings in the future. HSBC International Business Guides | Mexico Business etiquette 11

Entertaining Golden rules

Breakfast and lunch meetings can last for two hours or longer, and 01 Make an appointment often very little business is conducted. Instead, these meetings are Appointments are necessary and should be made at least two weeks in advance, and then geared towards developing the vital personal relationships that ‘oil the confirmed a week beforehand. Most meetings are considered tentative until you arrive in wheels’ of business dealings in Mexico. Pay in advance to avoid any Mexico, so reconfirm once you do. Make appointments between 10.00am and 1.00pm to arguments when you take your Mexican counterparts out for a meal. avoid lengthy breakfast or lunch meetings. And don’t be surprised if meetings are postponed or even cancelled without much warning.

Sobremesa takes place after lunch or dinner and is a time to relax and 02 Arrive on time rest, so expect the conversation to continue after the meal is over and It’s important to arrive on time – but equally important to realise that your Mexican the plates are cleared away. counterpart may be up to 30 minutes late.

03 Consider an interpreter You may be invited for a meal at your Mexican colleague’s home once If you aren’t fluent in Spanish, and the people you are meeting with don’t all speak a common they are at ease in your company. Wear business attire unless told language with you, it’s a good idea to hire an interpreter. However, making an attempt to otherwise - and it’s traditional to take flowers as a gift. speak Spanish will be seen as a gesture of goodwill.

04 Show respect Rank is important in Mexican society and business. Always know who the senior person in the room is, and be respectful. Not acknowledging their seniority and authority could be a costly business mistake.

05 Prepare to get personal Mexicans prefer to do business in person with people they not only trust, but like. It’s not uncommon for meetings to start off with questions about your personal background, family and interests. It’s respectful for you to do the same.

06 Be patient Negotiations can take a long time, especially if you are still building a strong business relationship. Deadlines are often considered more of a ‘target date’ and therefore flexible. Your counterpart may say they will get something to you ‘mañana’ (tomorrow) – but may not actually mean tomorrow specifically, but soon. HSBC International Business Guides | Mexico 12

Economy

In this section

Highlights Regional economies Exports & imports Innovation HSBC International Business Guides | Mexico Economy 13

As one of Latin America’s economic and political leaders, Mexico Highlights is now the world’s 11th largest economy. Free trade is the cornerstone of the economy, and its proximity to the US and position as America’s third largest trading partner is a key competitive ®® Mexico’s economy is characterised by low inflation, an open economy, reasonable levels of debt and growing advantage. competitiveness.

®® Mexico is the 13th largest exporter in the world, and Structural reforms and monetary policies have helped keep inflation in check while the country’s manufacturers and exports are equal to encouraging trade openness and foreign direct investment. As a result, there has been growth that of the rest of Latin America combined. in certain sectors including energy, financial services and telecommunications. Japanese car manufacturers have also invested in Mexico, boosting the positive outlook. ®® Agriculture contributions to the economy are increasing, representing 4% of the gross domestic In 2017, GDP per capita stood at USD9,707. Despite uncertainty over the future of its trade product (GDP) even though only 13% of the country policies with North America, the International Monetary Fund (IMF) says the economy will works in the sector. continue to grow by an estimated 1.9% by the end of 2018. Beyond that, future growth rates are expected to range between 1.85% and 2.73% up until 2022.

GDP (Current USD) GDP Per Capita $1.1 trillion1 $9,7072

Real GDP Growth Inflation Rate Exports Imports 2.3%1 4.65%2 Global Ranking 133 123 Value USD409.5 billion1 USD420.4 billion1 (% of GDP) 37%4 39%4 Economic Structure

Services (% of GDP) 63%1 Industry (% of GDP) 33%1 Agriculture (% of GDP) 4%1 Sources: 1World Bank Group, 2018 2Trading Economics, 2018 3World Trade Organization, 2017 4Organisation for Economic Co-operation and Development, 2017 HSBC International Business Guides | Mexico Economy 14

Regional economies

At the end of 2017, the Mexican economy expanded significantly and Cars are Mexico’s top export followed by vehicle parts, delivery performance improved across all regions. trucks, computers and telephones.

The North, with its heavy manufacturing base, has grown the fastest and most consistently. The Central region, which focuses on services – Mexico’s economy depends on its exports, and although the manufactured products lead the way Mexico’s largest sector – is also growing. – the country also exports silver, fruit and vegetables, coffee and cotton.

The greatest disparity occurs in the North-Central (agriculture) Top imports to Mexico include vehicle parts, refined petroleum, integrated circuits and computers. and South (energy) regions. Here, the standards of living have not advanced at the same rate as in other regions, and many families still Although Mexico’s largest trading partner remains the United States (48%), the country also trades live in poverty. with China, Japan, Guatemala, Honduras, El Salvador and the European Union, among others.

One of the most significant factors to slow growth in the South has been a decrease in oil production. The reforms to open up the energy sector, which has historically been government-controlled, will likely Innovation bring in foreign investment and increase competition to spur growth in the region.

According to the Organisation for Economic Co-operation and Development’s (OECD) 2017 Science, Technology and Industry Scoreboard, Mexico is one of the organisation’s member Exports & imports countries that has increased R&D budgets consistently: 42% between 2008 and 2016. Mexico was also one of the countries that increased spending on post-secondary education, up 23% between 2005 and 2014. In the information industries, the country has the third-highest level In 2015, Mexico became North America’s leader in car assembly and of labour productivity compared with other non-agriculture sectors – with Ireland in first place and export, and it has continued to grow since. Israel second.

Through August of 2017, exports were up 11% from the previous year. HSBC International Business Guides | Mexico 15

Labour & business

In this section

Highlights Productivity Bankruptcy Audit & accounts HSBC International Business Guides | Mexico Labour & business 16

Mexican workers benefited from a series of important reforms Highlights introduced by the 2012 Labour Law. These included anti- discrimination rules and increased regulations around outsourcing jobs as well as more flexibility in hiring and paying wages. ®® The unemployment rate currently stands at 3.4%.

®® In terms of employment, around 61% of people aged In 2017, the average annual income in Mexico was MXN241,386 (USD15,571). In December 15 to 64 in Mexico have a paid job, below the OECD 2017, Mexico raised its daily minimum wage to MXN88.36, up from MXN80.04. employment average of 67%.

®® Nearly 30% of employees work very long hours, compared In Mexico, employment is regulated in two ways – individual and collective. With individual with the OECD average of 13%. employment, there is a contract between the employer and the employee. Collective employment means there is a collective bargaining agreement between the employer and a union. There is also a large informal labour force comprising people who work but are not formally employed. This includes unregistered vendors and street-stall owners, domestic and construction workers and artisans. Population Hours Worked (Per Year) 124 million1 2,2552 The employment rate of 61% is one of the lowest among OECD countries. This may be because of the relatively low number of women in the workforce. Although increasing, only 45% of Mexican women are formally employed, ahead of Turkey and Greece. The 2012 Workforce Unemployment Rate Labour Law reforms specifically address this problem and it is now illegal to discriminate 53.6 million2 (as % of Labour Force) based on gender, marital status and pregnancy in addition to ethnicity or nationality, age, 3.4%5 disability, social or economic position, health and religion. This is combined with better maternity leave policies and paid paternity leave.

Human Capital Report (Rank) Minimum Wage (Per Day) 653 MXN88.36

Labour Productivity (Rank) Maternity Leave (Weeks) 364 12 Sources: 1World Bank Group, 2018 2Organisation for Economic Co-operation and Development, 2017 3World Economic Forum, 2017 4Expert Market, 2017 5Trading Economics, 2018 HSBC International Business Guides | Mexico Labour & business 17

The working week in Mexico is six days long. Employees whose jobs require them to work on a Sunday earn an Productivity additional 25% of their normal daily wages. By law, people must have one full day of rest for every six days they work. If they choose to work on their day off, they receive triple pay. Based on OECD data, Mexico had the longest average workweek of any country – 41.2 hours. This covers both full-time and part-time employees, placing them as the least productive of the Under Mexican law, employees can’t be asked to work more 38 countries included. than 48 hours a week for day shifts or 42 hours for night shifts. Overtime is worked only in exceptional circumstances. The OECD believes that further education reform is the key to improving productivity in the country. Investment in vocational training, as well as an increased focus on science, technology Mexican employers are required to provide employees with and maths in schools, would help address the current skills gap. The OECD also recommends 10% profit-sharing of taxable income, a Christmas bonus and that Mexico investigates ways to create opportunities for employees to develop their skills paid public holidays. or learn new ones. Perhaps the biggest roadblock to productivity and upskilling the Mexican labour force is the issue of informality. Although this issue is on the decline, more than half of The Christmas bonus, referred to as an ‘aguinaldo’, is Mexican workers have an informal employment relationship. equivalent to 15 days’ salary and must be paid no later than 20th December each year.

Only 37% of 25-64-year-olds have completed a secondary education, well below the average of 74% among OECD countries. Enrolment is up, however, in all schools including higher education – which more than doubled from 15% in 1991 to 31.2% in 2016. HSBC International Business Guides | Mexico Labour & business 18

Bankruptcy Audit & accounts

Mexico’s bankruptcy law, the Reorganisation and Bankruptcy The Mexican Financial Reporting Standards (MFRS) are overseen by the Mexican Council for Law of 2000 (Ley de Concursos Mercantiles), was amended in the Investigation and Development of Financial Reporting Standards. These standards are 2014. Up until that time, the laws had been more favourable to very similar to the Generally Accepted Accounting Principles in the US and the International debtors, and the updates sought to bring more balance by also Financial Reporting Standards (IFRS). protecting the right of creditors. In addition, the amendment shortened procedural filing times. As a general rule, all companies are required to follow the accrual method of accounting. Public companies are required to apply IFRS. They must also conduct an annual external audit Any private citizen, business or individual business partner can and provide the audited financial statements to their shareholders as well as publish their declare bankruptcy. Debtors, creditors or the Attorney General balance sheets and income statement in newspapers with significant circulation. The fiscal can file a bankruptcy claim. Mexico ranked 10th out of 190 year is from 1st January to 31st December. countries in the World Bank’s Doing Business Index 2018 for resolving insolvency, with the average filing taking 1.8 years to be completed. HSBC International Business Guides | Mexico 19

Taxes & wages

In this section

Highlights Corporate taxes Individual taxes Withholding taxes Wage taxes Indirect taxes Tax incentives HSBC International Business Guides | Mexico Taxes & wages 20

Recent tax reforms, which came into effect on 1st January 2017, Highlights give companies tax breaks for subcontracted labour and add deductions for machinery and equipment. The more than 50 measures put forth also allow for personal tax deductions and ®® Based on OECD data, Mexico’s tax-to-GDP ratio was 17.2% in 2016 – well below the OECD average of 34.3%, placing it last energy-saving incentives such as using electric and hybrid cars, among member countries that reported. bicycles and motorcycles.

®® New tax reforms give companies a 30% credit for R&D expenses and investment. The reforms, which were intended to stimulate the economy, also provide ‘repatriation’ or amnesty relief. Under the new law, assets or resources returned to Mexico from abroad and ®® Because Mexico has signed FTAs with so many different invested for the benefit of the Mexican population for at least two years will be taxed at 8%. countries, there is 0% duty for nearly 90% of goods imported This applies to both companies and individuals on income earned and held outside the country into the country. before 31st December 2016.

Ease of doing business – Personal Income Tax (Rate) Corporate taxes Paying Taxes (Rank) 15%-30%2 1151 A company is considered a Mexican tax resident if the majority of its administration or management takes place in Mexico. That means foreign companies established in Mexico Corporate Income Tax Value Added Tax (Rate) are subject to the same tax system as national companies, however they do enjoy some (Rate) 16%2 exemptions and incentives. 30%2 The corporate tax rate is 30%, and is levied against the company’s worldwide income. Taxable income is considered any cash, goods, services, credit or any other payments received during the fiscal year. It’s important to note that capital gains are treated as normal income.

Sources: 1World Bank Group, 2018 2PwC, 2018 HSBC International Business Guides | Mexico Taxes & wages 21

Individual tax

Regardless of nationality, all Mexican residents are taxed on their worldwide income. Non-Residents Non-residents are only taxed on income earned from Mexican sources, however. Personal income tax is calculated on a sliding scale. There is no special expatriate regime. If an employee is a non-resident, the tax rate will typically vary from 15% to 30%. The first MXN125,900 of employment income received in a 12-month period, however, is tax exempt. Non-residents are also subject to withholding Tax Rate taxes on interest income earned from Mexican sources. This includes capital gains, sales Residents of shares or property, rent, royalties, etc.

The annual tax rate for Mexican residents varies from 1.92% to 35%.

Taxable income (MXN) Basic tax Taxable income (MXN) Tax rate (%)

Over Not over Tax on column 1 (MXN) Tax on excess (%) Over Not over

0.01 6,942.35 0 1.92 0 125,900 Exempt

6,942.36 58,922.27 133.28 6.40 125,900 1,000,000 15

58,922.28 103,550.51 3,460.01 10.88 1,000,000 and above 30

103,550.52 120,372.95 8,315.57 16.00

120,372.96 144,119.39 11,007.14 17.92

144,119.40 290,667.83 15,262.49 21.36

290,667.84 458,132.39 46,565.26 23.52

458,132.40 874,650.11 85,952.92 30.00

874,650.11 1,166,200.07 210,908.23 32.00

1,166,200.08 3,498,600.11 304,204.21 34.00

3,498,600.12 and above 1,097,220.21 35.00

Mexican states may also levy local income taxes on earnings related to professional fees, rent and the sale of real estate, for example, although few do. HSBC International Business Guides | Mexico Taxes & wages 22

Withholding taxes Wage taxes

Mexican companies and permanent establishments (PE) typically Most Mexican states require employers to pay relatively low payroll taxes. These typically range withhold income tax from payments to non-resident corporations between 1% and 3%. As an example, companies in Mexico City pay a 2% payroll tax. Employers and individuals. This includes professional service fees, lease are required to contribute an amount equal to 23% of an employee’s salary to the Mexican payments, time-sharing services, real estate sales, interest, Social Security Ministry. Employees must contribute an additional 3%. Similarly, employers must royalties, dividends, retirement income and reinsurance premiums, contribute 5% of an employee’s salary to the Housing Fund, which finances low-cost housing among others. The withholding rates vary based on a number construction projects. of factors, including the type of payment made and the country where the payee resides. Rates can vary significantly from one In addition, employers and employees are also both required to contribute to an Individual treaty country to another, but generally follow the table below. Savings Account for retirement. The employer pays 3.15% of the employee’s salary and the employee pays another 1.125%.

Taxable income (MXN) WHT (%) Although not a tax, companies are also expected to share profits with their employees – From To amounting to 10% of the employee’s adjusted taxable income. Companies in their first year of 0 125,900 0 business are exempt and other special rules may apply based on industry.

125,901 1,000,000 15

1,000,001 and above 30

There is no tax due on income paid to a non-resident by another non-resident that does not have a PE in Mexico, even if the income is Mexican-sourced.

A 40% income tax with no deductions is withheld on most payments made to non-residents who are subject to a PTR. Plus, any income earned based on negotiations on behalf of third parties – commissions, for example – are also subject to the 40% withholding tax. HSBC International Business Guides | Mexico Taxes & wages 23

Indirect tax Tax incentives

A Value Added Tax (VAT) of 16% applies to most sales, leasing and In Mexico, all federal, state and local taxes are considered deductible expenses, except for importing of goods and services. This includes temporary imports those withheld from other parties. Start-up expenses may also be deductible under certain under the Manufacturing, “Maquila” and Export Service Industry conditions, and charitable contributions up to 7% of a company’s income can also be (IMMEX) programme, although they may qualify for a credit. There deducted. is no VAT on the sale of medicines and most food products, and certain types of transactions including the sale of land, interest There are also a few tax incentives available. Companies involved or investing in R&D can paid to banks, and education are exempt. The current tax law apply a 30% tax credit to those expenses. Companies or individuals investing in movie or also gives companies a VAT credit on pre-operating expenses and theatre productions are eligible for a tax credit of up to 10% of related expenses. There are investments, under certain conditions. also incentives for real estate and capital investments.

In addition to FTAs that include the North American Free Trade Companies who hire people with certain disabilities may be eligible for a credit for 100% of Agreement (NAFTA) and the European Free Trade Association the employee’s salary. A deduction equal to 25% of the employee’s salary is also available, (EFTA), among others, Mexico is a member of the World Trade but cannot be applied in the same fiscal year. Organization (WTO), the Asia-Pacific Economic Cooperation Mechanism (APEC) and OECD. As a result, there are no customs duties on 90% of imports coming into Mexico under most FTAs.

General Import Duties range from 0%, as noted, to 35%. The majority of imports fall in the 3% to 20% range. Temporary imports are typically exempt from any customs duties. HSBC International Business Guides | Mexico 24

Investment & trade

In this section

Highlights Ease of doing business Foreign investment Competitiveness Government incentives Capital markets & banking Intellectual property rights HSBC International Business Guides | Mexico Investment & trade 25

With the majority of Foreign Direct Investment (FDI) coming from Highlights and exports going to the US, the outlook for 2018 remains uncertain with the recent US tax reform and talks of renegotiating NAFTA.

®® Reforms have opened up the energy sector, which now allow private domestic and international firms to bid on Renegotiation, though, may not be all bad news for Mexico. Interestingly, US agriculture hydrocarbon projects that were once controlled by the exports to Mexico have grown five times compared with the figure at the time the NAFTA was state oil company Pemex. first signed. In 2015, 13% of the US corn crop was exported to Mexico – and estimates are that almost all the corn Mexicans use comes from the US. ®® Mexico is a top global exporter of cars and flat-screen TVs, among other manufactured goods and products. The threat of renegotiating NAFTA has Mexico looking to new trading partners, particularly ®® The US was the largest foreign investor in Mexico in 2016, for food products. This includes Brazil and Argentina, who export beef, wheat and soybeans. with FDI flows of USD10.4 billion, accounting for nearly Mexico is also exploring bilateral agreements with other food-exporting countries such as 40% of inflows. Australia and New Zealand.

The result could prepare the groundwork for new agreements and partnerships that extend beyond food, helping further strengthen the economy and reduce its reliance on the US. FDI Net Inflows Ease of doing business - (Current USD) Starting a business (Rank) $33.9 billion1 901

Ease of doing business Enabling Trade Index - Trading across borders (Rank) (Rank) 512 631

Sources: 1World Bank Group, 2018 2World Economic Forum, 2017 HSBC International Business Guides | Mexico Investment & trade 26

Ease of doing Foreign investment

business

According to World Bank’s Doing Business Index 2018, Mexico In recent years, the Mexican government has made significant efforts towards economic reform ranked 49th out of 190 economies. This is down slightly from and is one of the emerging economies that is most open to FDI. As a result, FDI was up in the first 47th in 2017. That’s due in part to the number of procedures and quarter of 2017 – climbing to USD7.95 billion despite forecasts to the contrary. While this number length of time it takes to start a business, obtain construction went down in the third quarter (USD5.72 billion), it still outperformed 2016’s Q3 (USD4.32 billion). permits and connect to water and sewerage systems. Starting The largest investors bringing money into Mexico included the US, Spain, Canada, Germany and a business in Mexico, for instance, takes an average of eight Australia. procedures and about 15 days. Leading sectors for FDI in Mexico include automotive components, software and IT services, That’s not to say, however, this is the case across all of metals, industrial machinery, equipment and tools and transportation. The slow-down in the Mexico. Certain cities ranked well. It’s easiest to do business economy, partly due to low oil prices that have, in turn, reduced government income and in Aguascalientes, Estado de Mexico and Colima. Colima in expenditure, could also make Mexico less attractive to foreign companies. Plus, political uncertainty particular ranks among best practices in the world for obtaining around the 2018 Mexican elections may also cause investors to pause until the results are clear. construction permits, on a par with Australia and Germany. Competitiveness

According to the World Economic Forum’s Global Competitiveness Index 2018, Mexico ranks 51st. This is an improvement, but the country’s growth has been slower than others. This may be due to a reduction in government spending as well as poor performance from private institutions in the area of ethics and responsibility. Both are clear indications that Mexico’s reforms need to go deeper and faster to improve competitiveness, especially where innovation is concerned. HSBC International Business Guides | Mexico Investment & trade 27

Government Capital markets & banking

incentives

With new policies that encourage foreign investment, Mexico’s Mexico’s capital markets are generally open and foreign entities can invest in federal Ministry of Economy has launched various programmes in support government securities as well as hold capital stock in Mexican companies or partnerships, with of the effort. Among the most important are IMMEX and the some restrictions. Programme for the Advancement of Specific Industry Sectors (PROSEC): Mexico has a relatively low banking penetration rate at 30%. With legislation that permits banks to provide basic financial services through third parties, such as retailers, the Mexican ®® Companies with an approved IMMEX programme can potentially government hopes to raise this to 40% by the end of 2018. In addition, the National Banking receive a credit on VAT for raw materials, machinery and and Securities Commission (CNBV) has approved a number of banks to provide limited financial equipment they need to manufacture and export their product as services through partner banking correspondents. The government has also implemented they are considered temporary imports. financial reforms geared toward increasing competition between banks, improving access to credit for small and medium sized businesses and enhancing transparency and regulatory ®® PROSEC provides duty rates of between 0% and 5% on raw oversight. materials, machinery and equipment being imported into Mexico as long as they will be used to produce a limited range of Foreign exchange accounts and domestic currency (MXN) accounts can be held by residents products. both domestically and abroad. However, only the following can hold foreign exchange deposits domestically: Other federal programmes provide reimbursement on import duties and VAT under certain conditions. The country’s many FTAs mean ®® Companies established and/or residing in Mexico. Mexican products have preferential duty access to the world’s largest ®® Residents of Mexico’s Northern border area. markets. Mexican companies also enjoy low or no import duties when working with FTA countries. ®® Residents of Baja California or Baja California Sur. HSBC International Business Guides | Mexico Investment & trade 28

Non-resident bank accounts are permitted in domestic currency. Non-residents can also hold foreign exchange deposits in current Intellectual property rights accounts, registered with the relevant Mexican authority. Non- resident domestic currency accounts are convertible into foreign currency. Interest can be offered on current and demand deposit Protecting intellectual property can be a complicated process in Mexico. accounts. Overdraft facilities are available to both residents and non-residents. Generally, the Industrial Property Law (Ley de la Propiedad Industrial) and the Federal Copyright Law (Ley Federal del Derecho de Autor) map out Intellectual Property Rights. Several government There are many payment options available in Mexico, although agencies, however, are responsible for enforcing different parts of the laws: cash remains important – especially for low-value retail purchases. However, the use of debit and credit cards is ®® The office of the Attorney General (PGR) oversees IPR crimes becoming more prevalent. ®® The Mexican Institute of Industrial Property (IMPI) administers patents and trademark For businesses working with Mexican buyers, it’s important registrations, and also handles the administration of enforcement cases of IPR infringement to know that 54.8% of domestic invoices and 56% of foreign ®® The National Institute of Copyright (INDAUTOR) deals with copyright registrations and invoices were paid late. The average Days Sales Outstanding was mediates disputes 47 days, much higher than the regional average of 35. ®® The Federal Commission for the Protection from Sanitary Risks (COFEPRIS) is responsible for regulating pharmaceuticals, medical devices and processed food

The process for trademark registration takes between six and eight months. Anyone wanting a trademark must file an application with IMPI, which is then published in the Official Gazette.

For patents, Mexican law recognises only intellectual property that has industrial uses. Simply put, ideas cannot be patented – only the processes that result in a final use can. HSBC International Business Guides | Mexico 29

Infrastructure

In this section

Highlights Transport infrastructure Digital infrastructure Infrastructure investment HSBC International Business Guides | Mexico Infrastructure 30

Mexico has excellent transportation routes. Its extensive road Highlights network and railroad system connects not only the regions of Mexico to one another, but also to the US, Guatemala and Belize. At the same time, the West and East coasts are joined by ®® With reforms and investment in R&D and technology, mobile broadband subscriptions in Mexico increased by 390% in just a seaports on the Pacific Ocean, Gulf of Mexico and the Caribbean four-year period. Sea at the Atlantic Ocean.

®® Under the current administration, the National Infrastructure Program (NIP) has planned investment of MXN7.75 trillion for a According to the World Bank, Latin American countries invest 3.3% of GDP on total of 743 projects across communications and transport, as infrastructure projects on average. Asian and Pacific countries invest an average of 7.7%. well as other key sectors. In the World Economic Forum’s Competitiveness Index 2018, the quality of Mexico’s ®® About 60% of products in Mexico are transported through infrastructure ranked 62nd of 190, down from 57th in 2017. Yet Mexico has specifically its highway and road system, and by mid-2017 the federal spent only about 1.58% of GDP on infrastructure. government had invested more than MXN28 billion in improvements.

Railway Network Quality of Overall Quality of Port 15,389 km1 Infrastructure (Rank) Infrastructure 712 (Rank) 622

Inland Waterways Quality of Roads Quality of Air Transport 2,900 km1 (Rank) Infrastructure (Rank) 522 672

Motorway Network Quality of Railroad ICT Infrastructure – 7,176 km1 Infrastructure (Rank) Network Readiness 652 Index (Rank) 712 Sources: 1Central Intelligence Agency, 2017 2World Economic Forum, 2018 HSBC International Business Guides | Mexico Infrastructure 31

Transport Digital infrastructure infrastructure In 2013, Mexico launched a much-needed Telecommunications Reform based on recommendations made by OECD in its 2012 Review of Telecommunication Policy and Regulation in Mexico. The goal was to increase competitiveness and make services more affordable for people across the country by In 2017, the NIP in Mexico had put upgrading or maintaining easing restrictions on FDI in telecom and satellite communication services. the country’s roadways at the top of its list of priorities. That’s because the majority of the country’s goods have historically been According to the OECD, the result has been nothing short of astounding: mobile broadband transported across Mexico by truck. Important projects underway subscriptions grew by 390% between 2012 and 2016. Average data use has also grown, by about focused on 15 highways, 29 roads, 16 beltways, seven junctions 91%, and 20 million more people now have access to the internet. In 2016, the telecommunications and bridges and nine rural routes. By the middle of 2017, they had regulatory body also successfully made the switch over to digital, and a third national network also completed 59 of these. started up in the same year.

In an effort to boost transportation of cargo by rail by at least This, in turn, has driven up revenues for telecom and broadcast providers. There is more work to be 10%, the government is also turning its attention to making done, however, to enhance competition in television and broadband as well as increase digital reach improvements to the rail system. Currently only 12% of cargo is to Mexico’s rural areas. transported by rail.

Mexico’s port system includes more than 40 cargo and passenger ports on the Pacific, Atlantic and Gulf coasts. In 2013, the Infrastructure investment government announced 28 major projects that included building new container, passenger and specialty terminals as well as ore- and grain-processing plants. Pier expansion in several ports and To help fund infrastructure projects, the Sectorial Communications & Transport Program 2013-2018 modernisation projects were also planned to increase capacity focused on promoting Public Private Partnership (PPP) schemes. The goal was to attract more and strengthen competitiveness, particularly important as the participation from the private sector, and investments are expected to reach MXN200 billion. For country is a member of the TPP. instance, in 2016 MXN11.33 billion was invested in port infrastructure – 51.5% from the private sector and 48.5% from the public sector. Meanwhile, there are several airport expansion projects either under way or in the works including terminal expansions, updates and renovation of cargo platforms. HSBC International Business Guides | Mexico 32

Cost of living

In this section

Highlights Accommodation Quality of life Relocation Commercial real estate HSBC International Business Guides | Mexico Cost of living 33

Generally speaking, the cost of living in Mexico is low compared with the US, Highlights Canada and Europe. Housing costs are very reasonable, depending on the location, as is insurance and medical care.

®® In addition to being an attractive destination for retirees with its low cost of living and warm climate, Mexico Beach and tourist areas such as Puerto Vallarta and Los Cabos, as well as the country’s major cities, tend also attracts expats looking for work due to its growing to be more expensive for just about everything – housing, groceries and shopping. However, services such industry. as a gardener or domestic cleaner are typically an affordable luxury in Mexico.

®® Private healthcare in Mexico is inexpensive and very good, especially compared with the US.

®® Housing will be the largest percentage of individuals’ Accommodation monthly expenses in Mexico. (average monthly rent in Mexico City)

Cost of Living Country Index (Rank) One-bedroom apartment in city centre MXN8,900 1041 One-bedroom apartment outside city centre MXN5,700

The cost of public transportation is usually lower than the US and Canada, and significantly lower than in Quality of Living City Index (Rank) Europe. Monterrey 1122 Mexico City 1292

International Property Rights Index (Rank) Utilities/household expenses 673 (average monthly rate)

Mobile call rate (per minute – mobile to mobile) MXN1.54 Internet (uncapped ADSL or cable) MXN400 Basic utilities (for standard household) MXN800

Sources: 1Numbeo, 2018 The cost of electricity is relatively high, and most people buy bottled water to drink – an added but small 2Mercer, 2018 3Property Rights Alliance, 2017 expense. HSBC International Business Guides | Mexico Cost of living 34

Quality of life Relocation

People in Mexico have seen the quality of life improve over the last When relocating to Mexico, there are a few essential steps to take: decade, especially where education, health and jobs are concerned. Yet, except for a few areas, Mexico fell below the average OECD 01 Register at your local Immigration Office.Upon arrival in Mexico, you have 30 days to country in the organisation’s Better Life Index. register on the foreign resident’s register at your local Immigration Office. It will take about a month for you to be registered, and you’ll need a special exit/entry permit if you need to leave Where Mexico exceeds is with a higher-than-average rank in civic the country before then. After your visa is processed, you’ll receive a residency card. This is for engagement and subjective wellbeing, 6.7% and 6.5% respectively Temporary Residency. You can also apply for Permanent Residency if you plan to live in Mexico indefinitely. out of 10. Plus, according to HSBC’s Expat Explorer Survey 2017, Mexico ranked high for its culture and social life as well for as ease of 02 Consider healthcare insurance. Some private hospitals in Mexico do not accept international making friends. health insurance. That means you may have to pay upfront and request reimbursement. Alternatively, you can opt for private health insurance in Mexico.

03 Open a bank account. Most bills are still paid in cash, and anyone relocating to Mexico will need a local bank account. You’ll need to do this in person and present your visa, identification and proof of a Mexican address. Banks also require foreign residents have two referees who will vouch for them financially. American and Canadian citizens can open accounts using US dollars.

Commercial real estate

In the second quarter of 2017, NAI Mexico’s market report showed that commercial office space had remained stable, although vacancy rates had inched up while rents decreased slightly with fluctuations in the value of the peso. Industrial space, on the other hand, continued to be in high demand and vacancy rates decreased. HSBC International Business Guides | Mexico 35

HSBC in Mexico

In this section

Highlights Profile Key products & solutions Next steps HSBC International Business Guides | Mexico HSBC in Mexico 36

Highlights Key products & solutions

HSBC is one of the leading banking and financial groups in ®® Investment Banking: Financing Solutions; Capital Markets; M&A Advisory Mexico and is rated the leading trade bank in Mexico and Latin ®® Global Markets America by Euromoney. ®® Transactional Banking: Global Liquidity and Cash Management (GLCM); Global Trade and Receivables Finance (GTRF); Securities Profile

Operating from over 980 branches and 5,940 ATMs throughout Next steps the country, our 16,000 employees serve over 8.5 million customers across the following business lines: If you have any questions relating to our services or would like any further information: ®® Global Banking & Markets ®® Speak to your local HSBC Relationship Manager ®® Commercial Banking ®® Visit www.hsbc.com/mx ®® Retail Banking & Wealth Management

®® Private Banking To view the HSBC International Business Guides landing page and explore other countries please visit www.business.hsbc.com/business-guides

This document was last updated in August 2018 HSBC International Business Guides | Mexico 37

DISCLAIMER

This document is issued by HSBC México, S.A., Institución de Banca Múltiple, Grupo Financiero HSBC (“HSBC”). We make no representations, warranties or guarantees (express or implied) that the information in this document is complete, accurate or up to date. We will not be liable for any liabilities arising under or in connection with the use of, or any reliance on, this document or the information contained within it. It is not intended as an offer or solicitation for business to anyone in any jurisdiction. 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 document without obtaining your own independent professional advice. The information contained in this document has not been independently verified by HSBC.

This document contains information relating to third parties. The information does not constitute any form of endorsement by these third parties of the products and/or services provided by HSBC or any form of cooperation between HSBC and the respective third parties.

Under no circumstances will HSBC be liable for (i) the accuracy or sufficiency of this document or of any information, statement, assumption or projection contained in this document or any other written or oral information provided in connection with the same, or (ii) any loss or damage (whether direct, indirect, consequential or other) arising out of reliance upon this document and the information contained within it.

HSBC does not undertake, and are under no obligation, to provide any additional information, to update this document, to correct any inaccuracies or to remedy any errors or omissions.

No part of this document may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of HSBC and the third-party contributor. Any products or services to be provided by HSBC in connection with the information contained in this document shall be subject to the terms of separate legally binding documentation and nothing in this document constitutes an offer to provide any products or services.

Copyright: HSBC Group 2018. ALL RIGHTS RESERVED.