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US / EUROPEAN NETWORK November 21, 2005

Competitiveness in the Mexican Market. US / EUROPEAN NETWORK November 21, 2005. Overview. Roberto Arena. Overview. General Information on Mexico Population: 103.8 Million people GDP: 676.5 Billion USD GDP Growth: 4.4% Exports of Goods and Services (GDP%): 30.1

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US / EUROPEAN NETWORK November 21, 2005

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  1. Competitiveness in the Mexican Market US / EUROPEAN NETWORK November 21, 2005

  2. Overview Roberto Arena

  3. Overview General Information on Mexico • Population: 103.8 Million people • GDP: 676.5 Billion USD • GDP Growth: 4.4% • Exports of Goods and Services (GDP%): 30.1 • Imports of Goods and Services (GDP%): 32.2 • Foreign Direct Investment: 10.8 Billion USD Source: World Bank All data is referred to 2004, except for foreign direct investment, which is referred to 2003.

  4. Overview Main competitors in the international arena: • Brazil • China • India

  5. Overview

  6. Overview

  7. Overview

  8. Overview

  9. Overview

  10. Overview

  11. Overview Some actions taken: • 11 Free Trade Agreements (+40 Countries) • 19 Double Taxation Treaties in force • 18 Double Taxation Treaties in formalization processes or under negotiation

  12. Overview Some actions taken: • 18 Investment Protection and Promotion Agreements • 3 Investment Protection and Promotion Agreements under negotiation • Undertaking substantial deregulation processes

  13. Overview Growth Competitiveness Index Country 2004 2005 Variation (2004-2005) Finland 1 1 --- United States 2 2 --- Sweden 3 3 --- China 46 49 -3 India 55 50 +5 Mexico 48 55 -7 Brazil 57 65 -8 Source: World Economic Forum

  14. Overview Hot Legal Topics: • Hospitality Industry • Labor • Fiscal • Competition Law • Piracy / Contraband • Limitation of liability under procurement contracts • Natural Gas Market

  15. Hospitality Industry Alejandro Ortiz

  16. Hospitality Industry Agenda: • Quick Snapshot of Hospitality & Leisure Industry in Mexico • Legal Framework • FONATUR’s Role

  17. Hospitality Industry Quick Snapshot of Hospitality & Leisure Industry in Mexico

  18. Hospitality Industry • According to SECTUR, Mexico’s tourism promotion agency, there were 20.6 million international tourism arrivals in 2004. • Mexico occupies the eighth place on the World Tourism Organization’s list of most visited tourist destinations in the world.

  19. Hospitality Industry • With over 376,450 hotel rooms, the World Travel & Tourism Council reports that the travel and tourism industry generated approximately 73.3 billion USD of economic activity in 2004. • This demand is expected to grow by 7.1% per annum, in real terms, between 2005 and 2014.

  20. Hospitality Industry • The industry is expected to contribute 2.7% to the Gross Domestic Product in 2005. • In 2004, employment in the broader tourism sector was estimated to encompass 2,865,700 jobs, representing 10.0% of total employment. • Capital investment in the sector was estimated at 14.7 billion USD or 10.8% of total investment in 2004. By 2014, this should reach 43.2 billion USD, or 11.1% of total investment.

  21. 25,000 22,169 21,864 20,000 17,517 16,156 15,000 11,099 Room Supply 10,480 8,259 10,000 7,118 6,378 6,269 5,000 - Mexico City Cancun Acapulco Guadalajara Puerto Vallarta 1995 Hospitality Industry Number of Hotel Rooms Gran Turismo, Five-and Four-Star Hotels Selected Cities in Mexico, 1995 compared to 2004 2004

  22. Hospitality Industry Occupancy & Average Daily Rates Selected Cities in Mexico 2004

  23. Hospitality Industry Legal Framework

  24. Hospitality Industry • Restricted zones – 100 kilometers from the Mexican border and 50 kilometers from the coastline • Beach concessions • The figure of trust for real estate projects • Role of Notario Público

  25. Hospitality Industry • Registry System • Ejidos • Environmental issues • Lease vs management agreements • Title Insurance

  26. Hospitality Industry • Gambling • Recent court decisions having an impact on the hotel industry: a) Calculation of mandatoryprofit-sharing b) Discretional faculties of SEMARNAT * Environmental risks * Temporal or permanent suspensions c) Labor liability derived from outsourcing

  27. Hospitality Industry FONATUR’s ROLE Institution that promotes tourism projects through consulting services, financing programs, and sale of real estate

  28. Hospitality Industry • Mexico has one of the most stable, open and deregulated developing economies in the world, and it currently has the highest proven level of foreign reserves, totaling 51 billion dollars. The world’s three leading credit rating agencies have given Mexico investment grade status, upgrading the nation’s sovereign debt to long-term foreign currency debt guaranteed by the state. • FONATUR has developed five Integrally Planned Resorts (IPRs): Cancun, Los Cabos, Ixtapa, Loreto and the Bays of Huatulco, seaside resorts that today enjoy worldwide recognition and competitive advantages over other national and international tourist destinations, such as having a Master Plan, urban-resort planning mechanisms, an Annual Construction Program operated by FONATUR and an Annual Maintenance Program operated by its affiliate, Baja Maintenance and Operation (Baja Mantenimiento y Operación, BMO).

  29. Hospitality Industry • Serving as a determining factor in the growth of the tourism sector and its future outlook, FONATUR has over a period of 30 years developed tourist destinations that have contributed significantly to boosting overnight tourism to Mexico six-fold. • The five destinations developed by FONATUR together offer more than 245 hotels and more than 36,800 rooms, with occupancy rates that reached 61.7% in 2002, or 7 percentage points above the country’s other beach resorts.

  30. Hospitality Industry • These five destinations are examples of developments that spark regional growth. In 2002, the states of Quintana Roo and Baja California Sur, where Cancun and Los Cabos are located, ranked in 4th and 8th place respectively in per capita GDP.

  31. Labor Eduardo Pizarro-Suarez

  32. Labor • “Static” and “Social” elements that characterize Latin American Labor Laws. • Basic Principles under Mexican Labor Law: - Minimum Benefits - Burden of Proof - Interpretation of Law

  33. Labor Minimum Benefits under Mexican Law: • Mandatory profit sharing • Social Security • Minimum Wage • Overtime • Vacation and Vacation Premium • Christmas Bonus • Termination Rights

  34. Labor Recommended Hiring Practices in Mexico: • Screening of Candidates • White Unions • Trial Period and Temporary Employment • Independent Contractors

  35. Labor • The Written Rule • Internal Employment Regulations • Employment of Foreigners • Service Company • Resignation Scheme • Confidentiality and Intellectual Property

  36. Labor Proposed Amendments to the Mexican Labor Law: • Hiring Flexibility • Burden of Proof • Termination Provisions • Unions

  37. Fiscal Jorge San Martin Fernando Camarena

  38. Fiscal • Along with other changes to legal frameworks, Mexico needs structural tax reforms to trigger its economic development.

  39. Fiscal • SCOPE OF THE REFORMS • Broadening the tax base • Tax culture (fiscal discipline) • Legal framework

  40. Fiscal • BROADENING THE TAX BASE • Informal business activities • Mexico’s tax system: full of complications

  41. Fiscal • TAX CULTURE • Trust in the government (expenses) • Red-tape • No real incentives

  42. Fiscal • LEGAL FRAMEWORK • General description of the system • Lack of efficiency

  43. Fiscal • INCOME TAX • Mexican vs International rates • System full of exceptions

  44. Fiscal

  45. Fiscal • VALUE – ADDED TAX • Mexican vs International rates • System full of exemptions

  46. Fiscal

  47. Fiscal • PROPOSAL Income Tax • Rates reduction • Elimination of exemptions

  48. Fiscal • VALUE – ADDED TAX • Increase of rates • Elimination of exemptions

  49. Fiscal • INNOVATIVE STRUCTURES • Pass – through entities • Holding companies

  50. Competition Law Marco A. Najera

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