A new government and legislation means that the wealthy are leaving Mexico. Read on to discover why this is happening.
In the spring of 2018 I suddenly began to receive inquires from wealthy Mexicans and their advisors. The simple reason was the upcoming July Presidential election and the increasing possibility that Andres Manuel Lopez Obrador would win.
Whenever a new source of inquires makes contact, I firstly try to understand the trigger that has caused their concerns. I had heard about AMLO from his very public protest of prior election results. Upon researching his most recent election promises I found the populist trend to ‘Blame the Rich’ for Mexico’s economic problems. Those who contacted me were the proposed targets of possible future ‘Tax the Rich’ policies. They wanted security for themselves and their families in case AMLO was elected and started to implement his policies.
Not surprisingly, every one of these clients had the same goal. They wanted their family and wealth to have access to the United States, but in a manner which did not subject them to US worldwide taxation. This was a very similar desire that I was already addressing for my Brazilian clients.
A New President
My Mexican clients’ concern became a reality on July 1, 2018 when AMLO won the Presidential election. Under Mexican law there is a 5-month period between the election and swearing in. During this period I was very busy. I ended up acting for a number of Mexican clients to put place a personalized Back-Up Plan. This was something that they could trigger to become non-resident within any moment. They would do this when they felt the hard and soft costs to stay were greater than the ‘life inertia’ that they and their families had in Mexico.
In the 11 months since being sworn into office AMLO and his government have struggled economically, but did not announce any policies which my clients found too troubling. However, that calm ended in late October. The Mexican government announced that they were proposing new laws which would equate ‘tax fraud’ with ‘organized crime’. This would allow tax authorities the unilateral power to immediate seize assets and jail individuals simply upon the announcement of suspicions.
‘The Risk of Failure’
Mexico’s lower house has already passed a bill that would make tax fraud of more than 7.8 million pesos ($400,000 USD) a national security threat. It is now viewed as a type of organized crime that could be punished with prison without parole during trial. Punishment could be up to nine years behind bars.
In the weeks since the announcement of this law several of my clients have decided to trigger their Back-Up Plans. Thus they began the process to leave Mexico and its tax regime. In a country with a relatively low level of trust in the honesty of politicians and bureaucrats, this is not surprising. Given the ‘risk of failure’ (being subjected to such a law), many of my clients prudently decided that the one-time effort of overcoming ‘life inertia’ was worth it. They triggered their Back-Up Plans.
How People have Responded
“This is the start of a new era of fiscal terrorism,” stated Reginaldo Esquer, head of the Tax Committee at business group Coparmex. He added that “… honest businessmen could end up in jail for errors. The lack of clarifications in this bill will generate a justified fear in the county’s established companies of arbitrary acts by authorities that endanger one’s personal integrity and assets…To invest, individuals and businesses need certainty.”
Armando Santacruz, head of Mexico’s Banking Association, said: “They are eliminating . . . the right to freedom, to property, to a hearing, a fair trial and the presumption of innocence and replacing it with mandatory pre-trial detention based only on suggestions and not real facts.” He went on to speculate that the policy could lead to arbitrary asset seizures, the freezing of bank accounts based on suppositions rather than facts and business owners losing control of their companies even before being found guilty.
‘The Beginning of the End…’
Others also predicted dire consequences. “One CEO of a major corporation told me it’s the beginning of the end of private property in Mexico,” said a former senior government official. “And imagine in a country like Mexico how such sweeping powers could be abused for extortion. The price of extortion demands will soar.”
For those that think these warnings are exaggerated, Mr Santacruz explained that he had been targeted for tax audits before. Under the previous administration he had been singled out as a means of harassment after he had exposed graft scandals. He won all his cases in court, but he believes things would have been different in the current climate.
“I’ve had 100 audits and in 99 of them, I raised objections,” said Mr Santacruz. “With these new criteria, it would be jail and asset confiscation even before conviction. This government thinks all business people are gangsters. That’s how they treat us.”
The Advantage of a Back Up Plan
So where does this leave my clients? Those that have Back-Up Plans are pleased to have the freedom to trigger them…and some already have. In the meantime I continue to receive new inquires from Mexican businesspeople. For them, we will start to quote the timing and cost of creating their customized Back-Up Plans.
For Mexico, only time will tell whether this or future expected ‘Tax the Rich’ proposals will ultimately cause significant domestic wealth to join foreign direct investment in fleeing Mexico