Mexico Steps Into The 21st Century

Wednesday, February 26, 2014 - 12:47

The Editor interviews Ignacio Dominguez Torrado, L.L.M., head of the corporate department of Uhthoff Gomez Vega Uhthoff in Mexico City. (The article is made available through the auspices of King & Spalding LLP, a correspondent firm.)

Editor: Please describe the origins of your firm’s practice in intellectual property.

Dominguez: Our practice was started in 1905 as an agency for patents and trademarks by one of our founding fathers, Carlos Uhthoff, whose name we still use in the firm’s title. In the beginning he started registering local brand names here in Mexico. Those were very hectic times in Mexico because it was during the Revolution. In the late 1930s Carlos passed away, and Javier, his brother, took over his practice, joined some years later by Bernardo Gomez Vega. When World War II began in Europe, because of the conflicts among nations, they made certain that the IP rights of those countries were maintained with full legal effect, paying whatever government charges were needed to keep those rights valid. Because there were communication problems during the war, it was hard to contact the owners of that IP – in fact, it was sometimes impossible to communicate with German or other European companies. Also, when Mexico joined the Allies, there were controversial issues regarding the nationalities of the owners.

After the war, Javier and Bernardo were approached by a New York-based law firm that was searching for a Mexican firm to assist it with foreign clients in Mexico. Meanwhile, those clients whose IP rights were preserved by Uhthoff during the war were extremely grateful, and in turn brought business to the firm. With this new foreign business and the venture with the New York-based law firm, the two of them began to build a very large IP practice.

The partners started building the most successful and largest law firm with an IP practice in Mexico at that time. Several of our colleagues who are competitors were educated within our firm. In the 1980s, the firm began expanding, with new partners ascending to the position, forming the largest IP practice in Mexico. In 2000, the partners decided to open a corporate department, thinking this service was closely integrated with their IP practice. Over the past 14 years we have had an active corporate practice, which I have been supervising for the past 10 years.

Editor: What aspects of corporate law are included in your practice?

Dominguez: Throughout these years, we have been able to expand our corporate practice, beyond the scope of IP, to include a wide variety of services, including antitrust, foreign investment, incorporation and day-to-day management of corporations, subsidiaries, all kind of agreements, franchises, immigration, regulatory affairs, entertainment and sports law and personal data protection.

Editor: Do you expect to see a groundswell of foreign investment in Mexico if the recent reform legislation passed in December 2013 is passed a second time?

Dominguez: Attracting foreign investment is the main reason behind this legislation. The big reforms that are happening in Mexico are at the constitutional level. Reforming the Constitution is necessary in order to form a basis for the new secondary laws to be drafted and thus come into effect. For example, in terms of the energy reform, we still do not have secondary laws, which the president has to present before Congress, something he will do shortly. Once this secondary level has been reached, we will see the larger issues appearing. Currently, we have the basis for the rules, but we need the rules to be effective. We do expect more foreign investment in the next few years, although not immediately in the first semester of this year, since companies are reviewing and evaluating the benefits of investing in Mexico. The reforms appear to be good for businesses, for both foreign and domestic companies.

Editor: Which of these reforms will have the greatest impact on your practice?

Dominguez: I believe it would be energy reform, because it comes with a twist for our IP practice. For example, for a company to contract with Pemex (the government-owned company that regulates oil issues), it would be an advantage for a foreign or local company to have IP rights duly protected and secure in Mexico and thus the need of a local firm with a strong IP practice. Although public bids will be held to award contracts, there may be some cases where direct awards will be granted based on the intellectual property rights held or owned by such a company involved. This will certainly increase the filing and protection of patents and other IP rights in Mexico. It is also worth mentioning that changes in antitrust law and telecom should also impact our business.

Editor: What does the recent passage of the bill ending Mexico’s oil monopoly mean for your foreign clients? Are there estimates as to when the regulations prompted by this action will finally be in place?

Dominguez: The Pemex oil monopoly will still exist because the owner of the oil will still be the Mexican State – not the government, but the people of Mexico. The legislation will open new channels as to how local and the foreign companies can contract with Pemex. There will be contracting with Pemex under servicing and licensing agreements, as well as profit-sharing and production-sharing agreements. A foreign or local company can go into the production of oil using its technology and help Pemex exploit our resources, since currently we don’t have the technology to do so. That is one of the main reasons for this reform. There are many changes to be made within the structure of Pemex in order to make it a productive state enterprise rather than just another government-owned company. The main point is that the oil industry will be open to private parties, within its limits.

Editor: While foreign companies may explore and develop the fields, will the proceeds all flow through Pemex?

Dominguez: While the specific rules have not been spelled out, the monies will flow under a profit-sharing agreement. Right now all the profits go to the Ministry of Finance, which distributes them to the federal and state governments. Under the new provisions, all the profits will go into a fund that will be managed by a body different from the Ministry of Finance, allocating monies for payment of taxes and internal expenditures and allowing Pemex to have funds for new development and exploration. The new body will be constituted by Mexican officials, consisting of representatives of Pemex, the state bank and the Ministry of Finance.

Editor: Have you heard of international oil companies that are anxious to get into Mexico alongside Pemex?

Dominguez: Yes. International companies such as Shell and Mobil have shown interest. Not only is there reform in the oil industry, but there is also interest on the part of several financial companies. Time magazine has heralded President Peña Nieto as the savior of Mexico, which may be overstating the case, but he has successfully gotten agreement among the parties in Congress to undertake these reforms.

Editor: Other reform initiatives besides oil have also taken place in education, telecom, tax and electricity. What is your analysis of how these reforms will affect your business?

Dominguez: The telecom reforms will not affect our practice because we don’t handle that kind of business. We may have some issues regarding copyrights (more related to content), but we don’t see a lot of issues in telecom. We only have two big networks that handle telecom, but the effort is being made to open the arena to new players to provide competition. All these reforms are aimed towards creating a new kind of economy for Mexico. Public education costs Mexico more than twice per student what it costs in the U.S., and it’s not even close to the kind of quality of education that we need to provide. We have had a problem with teachers’ unions. The teachers go on strike every year, but the strike is focused on certain states. After President Peña Nieto took office one year ago, the leader of the union – who had been there for 20 years or so and became extremely rich – is now in jail, facing charges of using union money for her own purposes. I believe that this was the first movement toward education reform. There are also changes in the law prohibiting teachers from having salaries from two separate education positions within the union. Teachers have to undertake additional education to be better prepared.

The tax reforms are complex, resulting in an increase in personal rates and in a decrease in corporate and personal deductibles. This has been the major controversial reform that the public did not agree with. On incomes over $50,000, the tax increased from 30 percent to 35 percent, and the deductible remains the same for all income brackets, at around $9,000.

Editor: Is there a danger that foreign companies will pull out of the maquiladoras along the border owing to increased taxes?

Dominguez:  The value added tax (VAT) was 10 percent for all businesses along the border while the rest of the country paid 16 percent, but the VAT has now jumped to 16 percent for all businesses. There was also a change in the way these foreign businesses importing goods were taxed. Heretofore, if the business brought in raw products to be transformed and then exported, there was no tax. Today, our IRS charges a tax for importing the product even though the business plans to manufacture or process it and export it. After the exportation of the finished product, the money will be refunded. This is a burden on cash flow.

Editor: Do you think the recent reform measures will bring large-scale economic expansion and stimulate foreign investment?

Dominguez: That is the whole idea of the reforms. We believe we will see expansion in the mid-term rather than the short term. I believe it will bring foreign investment in large quantities and industries that are very important in the world. Under the regulations that we had for 70 years or more, foreign investors could not invest in Mexico in some areas or their business was limited in those specific businesses.

As to the confidence of foreign investors, we are so close to the United States in so many ways. The country has to change and is trying to change. Hopefully, these reforms will help us get there to help the middle class and lower classes to increase their income, to use that money to invest and to expand. I see little or no risk for foreign companies to invest in Mexico.

 

Please email the interviewee at ignacio@uhthoff.com.mx with questions about this interview.