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COVID-19: the legal impact for companies in Mexico

COVID-19: the legal impact for companies in Mexico

19/03/2020

 

*Consultar versión en español

 

As COVID-19 spreads rapidly around the world, and countries take steps to deal with the crisis, the consequences related to health are relevant, but also the impact on the economy and the possible legal implications for organizations.

With clearly foreseeable monetary repercussions, below we examine some initial scenarios from the Mexican legal perspective, in order to determine the impact of COVID-19 and, even more importantly, provide elements to adopt a resilient and responsive position to present and future threats that this situation could generate in different areas, including international trade, contracts, insurance and bonds, M&A transactions, compliance, legal and fiscal issues, as well as transfer pricing.

 

International trade matters

The potential delay in shipping merchandise could imply an increase in storage and handling costs. These aspects must be re-evaluated with the suppliers in accordance with the applicable business terms.

There is also a validity extension of two more months for the official letters of security matrix (when the term is between March 18 and May 31, 2020) meaning that the companies with international trade operations will continue receiving Datastage,[1] and may request a renewal after the contingency measures end.

 

Contractual matters

All contracts with customers, suppliers and business partners, or documents supporting the company’s legal and commercial relationships must be reviewed to identify the implications in the event of a breach of contract and establish remedial measures.

In contracts with force majeure or fortuitous event clauses or provisions, the following should be reviewed: i) the scope and content of said clauses, ii) whether epidemics or pandemics are considered, iii) if said clause contains special rules for enforcement and , if applicable, iv) confirm whether there is any immediate action or obligation to which the company or organization is compelled.

In an event of a breach of contract, evaluate informing the counterpart in a timely manner and consider your contractual and/or commercial options.

Where appropriate, the possibility of renegotiating some business obligations or conditions in situations wherein the aforementioned assumption could give rise to defaulting on the contractual terms should be explored.

In financing contracts, reviewing the currency fluctuation implications with other currencies and the depreciation of the Mexican peso, as well as the impact on interest rates is pertinent.

Finally, strengthening business relationships with customers and suppliers to overcome this period of global crisis under mutually accepted conditions to the benefit of the parties involved is necessary.

 

 

Insurance and bonds

In this matter, reviewing the specific terms and conditions of the insurance policies and contracted bonds to identify the impacts of COVID-19 and the event of it being declared as a pandemic.

In the case of credit insurance, meaning those that guarantee the default or late payment of accounts receivable, the specific conditions under which a claim is to be filed need to be reviewed.

 

M&A transactions

In addition to what the previous section indicates regarding contractual aspects, the terms and obligations of transactional operations should be reviewed to identify whether any mitigation measures established by the government or any of the parties involved: i) impact any obligation or action at closing or post-closing of the transaction; ii) causes an event of default in a contract or purchase or sale transaction or transaction event, or iii) gives rise to a material adverse change or has a material adverse effect under the terms agreed in a purchase or sale transaction or a transaction event.

Moreover, evaluating the Impact in closing and post-closing obligations: price adjustments and/or revisions, default events, postpone of signing and closing sessions, floating currency and exchange rates, review of specific risk allocation contract structure and trigger contractual solutions.

 

Compliance

If the supply chain has been affected by COVID-19 and the company needs to change suppliers, it must ensure that the compliance team has an evaluation process capable of responding urgently and with a risk-based approach.

Identifying the short, medium and long-term compliance obligations with local, state and federal authorities, which could be affected by an eventual interruption of operations due to COVID-19, and draft an action plan to mitigate its impacts.

 

Legal procedures

The Federal Judicial Power (PJF, per Spanish acronym) authorities have determined that the jurisdictional duties at the PJF bodies are suspended as of Wednesday, March 18 and through Sunday, April 19, 2020, so there will be no procedural deadlines.

As for judicial procedures, the Federal Court of Administrative Justice determined that jurisdictional and administrative functions are suspended from March 18 to April 19, 2020 and, and, similarly, the current procedural times are suspended.

 

Compliance with tax obligations

Based on the effect of COVID-19 worldwide and in Mexico, it is imminent that it will be essential for all companies to begin evaluating different internal and external mechanisms to cope and get ahead in the current economy. Therefore, the following aspects, among others, need to be reviewed:

· Decrease in monthly Income Tax payments as of the second half of the year

· Financing mechanisms, observing issues such as back to back loans, thin capitalization and interest limitations, contained in the tax reform for 2020

· Prepare an intense plan and a detailed list of tax balances in favor, in order to claim before tax authorities as soon as possible; interaction with the tax authorities will be fundamental

· Evaluate the cost reduction due to the slow movement of all financial operations in the country

· Evaluate procedures that could allow some tax deferral

 

If the employees are working remotely from a country other than the company’s, evaluating the permanent establishment risks will be important.

Additionally, is important reviewing the information that arises to provide for possible extensions on tax payments, both estimated and annual, among other topics.

 

Transfer pricing

It is reasonable to assume that, due to the impact of the pandemic on the supply chain of products and services, as well as the possible existence of extraordinary expenses to face the health contingency, the operating profit of many multinational groups and their subsidiaries as well as the cash flow generation will be affected.

In such a situation, it is possible that special negotiations between third parties and between related parties may be carried out to face adverse effects, such as: i) renegotiation of contracts; ii) modifications to the terms of payment; iii) adjustments to sales prices; iv) credit extension requests, among others. Such circumstances must be taken considered to later justify the impact caused, from a transfer pricing perspective; for example, a potential generation of losses, the need to obtain financial resources through financing or other methods, among others.

Furthermore, an in-depth analysis is necessary of the considerations to take into account when generating supporting transfer pricing documentation in order to comply with the obligations established in our regulation for the current period, specifically, but not limited to: the set of potentially comparable companies since their financial information is generally used a year behind, realistically possible interest rates and financial options under the current situation, the re-estimation of income projections company and budgets to properly reflect the current market conditions and the direct impact this situation will have on the determination of the value of intangible property of multinational groups affected.

 

[1] Series of files sent by the Authority – upon request – that include information on the petition filings for the international trade operations processed in a specific period.

 

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