coelum

COELUM MAY 2021

 

May 2021

  • Outsourcing in Mexico, (lights and shadows of the newly approved legal reform).
  • by Carlos Sierra 
  • April NEWS on Mexican Aviation

Coelum is our contribution to the development of the industry in which we participate. Through this monthly publication we strive to provide analysis, opinion and insight to the aviation community that we serve.

Coelum’s purpose is to become a reliable source of air industry law amendments and up-dates, and also a source in which major or relevant developments in aviation can be found. Whether on the legal field, commercial or industrial sectors, our Newsletter will bring the latest and major updates, developments and news, in the Air transport industry and Air Law fields, because a dynamic industry requires even a more dynamic approach.

 

  • COELUM MARCH 2021

     

    March 2021

    • New Tax Realities for 2021.
    • by Jessi Saba 
    • February NEWS on Mexican Aviation
     
  • COELUM FEB 2021

     

    February 2021

    • AFAC’s alleged digitalization.
    • by Pablo Arandia 
    • January NEWS on Mexican Aviation
     
  • Downgrading of Mexico’s Safety Oversight System: Concerns and Required Actions.
    by Juan Manuel Estrada.

    As a consequence of an excruciating audit which took place between October 2020 and February 2021, whereby the U.S. Federal Aviation Administration (“FAA”) reassessed the compliance of Mexico’s safety oversight system’s with the minimum international safety standards put forward by the International Civil Aviation Organization (“ICAO”), the U.S. Department of Transportation (“DOT”) determined to downgrade Mexico’s safety rating to Category 2 from Category 11. This arising from the multiple infractions and shortcomings identified in the International Aviation Safety Assessment (“IASA”) process with regards to the provisions of Annexes 17 and 18 of the Convention on International Civil Aviation (“Chicago Convention”)2.
    Despite the appalling downplayed rhetoric of Mexico’s President, Andres Manuel López Obrador3, several industry stakeholders have raised their concerns asking the Federal Government to address this situation as a matter of “State Priority”, fearing that the repercussions will substantially hamper the recovery of our national industry4. While the effects of this de facto sanction will continue to unwind in the near future, the preliminary consequences can be resumed as follows:
     
    • Mexican airlines will be authorized to continue with the operation of current flights to the United States, however they will not be allowed to add or initiate any new services, aircraft, or routes. This will likely have the same implications to any newly leased aircraft bearing foreign registration marks (even if such will be used to operate previously authorized routes).
     
    • Codeshare agreements will no longer be effective for US carriers on Mexican operating carriers.
     
    • Scrutiny of Mexican operators’ flights to the United States will increase.
     
    • Maintenance and Repair facilities (MROs) will not be authorized to provide maintenance services to foreign registered aircraft, unless these MROs have a separate foreign authorization (such as an FAA certification).

    "Despite the appalling downplayed rhetoric of Mexico’s President, Andres Manuel López Obrador3 , several in dustry stakeholders have raised their concerns asking the Federal Government to address this situation as a matter of “State Priority.”

    Actions required to regain the Category 1 classification

    In order for the Federal Civil Aviation Agency (“Agencia Federal de Aviación Civil” or “AFAC”) to achieve the minimum compliance with ICAO safety standards, several actions have to be taken. Such actions have been addressed by the Ministry of Communications and Transportation (“Secretaría de Comunicaciónes y Transprotes”) who made public a comprehensive plan of action which include the execution of a collaboration agreement with the FAA and a comprehensive amendment to the provisions of the Civil Aviation Law (“Ley de Aviación Civil”).

    "The main objective of the reform is to achieve uniformity between the Civil Aviation Law and its Regulation (“Reglamento de la Ley de Aviación Civil”), the Regulations for the Issuance of Permits, Licenses and Certificates of Capacity of aeronautical technical personnel, and the Regulations of the Mexican Aeronautical Registry (“Reglamento del Registro Aeronáutico Mexicano”), with ICAO’s international standards.

    As of the date in which this article has been written, the only action that has been effectively adopted is the amendment to the Civil Aviation Law. The main objective of the reform is to achieve uniformity between the Civil Aviation Law and its Regulation (“Reglamento de la Ley de Aviación Civil”), the Regulations for the Issuance of Permits, Licenses and Certificates of Capacity of aeronautical technical personnel, and the Regulations of the Mexican Aeronautical Registry (“Reglamento del Registro Aeronáutico Mexicano”), with ICAO’s international standards, while also adopting higher safety standards and incorporating safety oversight regulations.
     
    A summary of the relevant amendments included in such Amendment Decree are as follows:
     
    a) Incorporation of the Commission for the Investigation and Assessment of Aviation Accidents
     
    The amendment gives way to the incorporation of the Commission for the Investigation and Assessment of Aviation Accidents (“Comisión Investigadora y Dictaminadora de Accidentes Aéreos”). This commission will be composed of members of the Ministry of Communications and Transportation (“Secretaría de Comunicaciónes y Transportes”) along with a select group of experts in the field of aviation as well as accident and incident investigators and analysts5, which will have the authority and autonomy to investigate aviation accidents and incidents.
     
    The main authorities of the Commission for the Investigation and Assessment of Aviation Accidents are the following6:
     
    • Coordinate, request and receive information, and carry out the investigations of any incident or accident;
     
    • Conduct a medical examination of the person or persons who have been directly or indirectly involved in the operation of an aircraft involved in an accident or incident and, if applicable, to the passengers;
     
    • Classify information deemed essential to properly conduct an accident and incident investigation assessment while the investigation is on process.
    • Coordinate the investigation in civil aeronautics at the accident site, with accredited representatives, investigators and technical experts; and
     
    • Issue a final accidents and incidents report.
     
    b) Costs associated with Accident and Incident Investigations
     
    Article 80 of the Civil Aviation Law is amended in order to incorporate the obligation of all concessionaires and permit holders to assume the costs of any rescue and salvage operations, despite the fact that such will be conducted under the supervision and oversight of the Ministry of Communications and Transportation7.
     
    c) Cabotage
     
    Despite the previous existence of an express prohibition of cabotage practices by foreign operators, the Civil Aviation Law is further amended to include Article 17 Bis, which restates the prohibition of cabotage practices by foreign permit holders within Mexican territory.
     
    This article further provides that Foreign owners of non-Mexican registered aircraft destined for private use are barred from performing cabotage practices. This particular amendment was introduced as a consequence of certain accidents that took place within Mexican territory with foreign registered aircraft. Which impaired the Mexican authorities from having an adequate safety oversight of such aircraft, despite being used within Mexican territory.
     
    d) Revocation of licenses
     
    Article 90 is amended in order to state that the aircraft commanders will have their license revoked in the following cases:
     
    • If they operate an aircraft under the influence of alcohol or any drug.
     
    • If they traffic or facilitate the trafficking of illegal substances.
     
    • If they presents forged documentation associated with the operation of the aircraft.
     
    As mentioned, the amendment to the Civil Aviation Law represents only an initial step that must be undertaken by the Mexican authorities towards regaining the Category 1 rating of the FAA. However, despite the substantial economic implications arising as a consequence of such degradation, I do believe that the main concern for all should be the possible safety implications arising from the lack of compliance of our Civil Aviation Authority with ICAO’s minimum aviation safety oversight standards. It should therefore be, of the essence that Federal Government endows substantial technical, human and budgetary resources to the AFAC, in order to both, achieve the compliance with the minimum safety requirements of ICAO and to revitalize the AFAC, an institution that has seen its deficiencies increase in recent years due to the lack of technically capable personnel and budgetary cuts.

    1.- It is important to highlight that the audit limits the assesses to the compliance of international standards, and not the applicable FAA regulations. https://www.faa.gov/news/press_releases/news_story.cfm?newsId=26142
    2.https://www.faa.gov/about/initiatives/iasa/, access on May 20, 2021.

    3.- “AMLO desestima degradación en calificación de seguridad aérea mexicana”, available at https://www.jornada.com.mx/notas/2021/05/27/economia/amlo-degradacion-en-calificacion-de-seguridad-aerea-mexicana/
    4.- “Prioridad de Estado” en México, recuperar la categoría 1: IATA, available at https://www.jornada.com.mx/notas/2021/05/27/economia/prioridad-de-estado-en-mexico-recuperar-la-categoria-1-iata/
    5.- Article 2 subsection XIV of the Civil Aviation Law.
    6.- Article 81 of the Civil Aviation Law.
    7.- Article 80 of the Civil Aviation Law.

     
  • COELUM JAN 2021

    January 2021

    • 2020: THE UNPRECEDENTED YEAR.
    • by Misael Arellano 
    • December NEWS on Mexican Aviation
     
  • COELUM APRIL 2021

     

    April 2021

    • And the challenge continues¡¡ transfer of title and vat exceptions.
    • by Viridiana Basrquin 
    • March NEWS on Mexican Aviation
     
  • Outsourcing in Mexico, (lights and shadows of the newly approved legal reform).
    by Carlos Sierra.

    Only a few weeks ago, on April 20 of this year the Mexican congress approved the controversial reform to regulate outsourcing activities. The reform, which amends several provisions of the Federal Labor Law, the Social Security Law, the Law of the National Institute of the Workers Housing Fund, the Federal Fiscal Code, the Income Tax Law and the Value Added Tax law, among other regulatory laws associated with government employment, imposes substantial limits to the practice of subcontracting personnel through the use of companies, created specifically in some cases, to supply workers to other companies which, in turn, avoid hiring employees and hence avoid the costs associated with seniority, pension plans, social security payments, profit sharing and other responsibilities that the law imposes on employers for the benefit of employees.
     
    "The practice of outsourcing mechanisms became so widespread that the limitations now imposed will have severe repercussions on the profitability of certain labor-intensive businesses that use to staff their operations with outsourced personnel.”
     
    The reform in question however has been largely debated. The practice of outsourcing mechanisms became so widespread that the limitations now imposed will have severe repercussions on the profitability of certain labor-intensive businesses that use to staff their operations with outsourced personnel.
     
    No one can deny that any person employed must be provided the benefits to which it is entitled in accordance with law. In that regard, while outsourcing could be practical for several reasons and, when conducted appropriately could be beneficial to companies that avoid having to deal with the large administrative burden of managing hundreds and in many cases thousands of employees outside of their core activity, it is also true that its widespread practice was also used to dodge the compliance of benefits to which the workforce is entitled by law.
     
    By outsourcing employees, certain companies prevented the workers, which were employed by a separate company, to receive the 10% of profit sharing, known as PTU or ‘Workers Participation in Profits’, that workers would be entitled to receive from the company for which they actually conduct the work. If the actual employer of these workers (company B) did not turn out a profit -which in many occasions they were designed to avoid-, while the company that retained the outsourcing service (company A) did turn out a profit, the employees of company B would not receive a share of the profits produced by company A since they did not actually work for the latter.
     
    In addition to this, certain outsourcing companies would charge a lumpsum to supply a determined number of workers, while paying these workers merely a portion of such amount and to avoid providing social security and other benefits by constantly changing the company that supplied the outsourced work to prevent the workers from accumulating seniority at any individual company.
     
    Employers in Mexico are also obliged by law to contribute one third of the amount payable for each employee for social security and workers housing benefits1, this contribution was dodged by several companies by outsourcing their labor force, or at least was diminished by causing the outsourcing company to register such workers at very low salary levels to reduce the amounts payable for social security in each case. This resulted in the negative impact on the accumulation of retirement benefits of the workers and substantially reduced the amount withheld for income tax that the workers would have paid with higher salaries.
     
     
    In summary, these abusive practices resulted in the tarnished reputation of the outsourcing practice at large, which without seeing its benefits was recently regarded as a form to prevent the compliance of obligations and benefits that all workers are entitled to receive.
     
    "Employers in Mexico are also obliged by law to contribute one third of the amount payable for each employee for social security and workers housing benefits1, this contribution was dodged by several companies by outsourcing their labor force, or at least was diminished by causing the outsourcing company to register such workers at very low salary levels to reduce the amounts payable for social security in each case.”
     
    On the positive side, the outsourcing of workers, when compliant with the law, has been an efficient form to manage large numbers of employees allowing companies to concentrate on their core activities rather than on complex human resource management. Professional outsourcing companies provided flexible staff distribution and supply, training of workers on specific areas and the ability to retain a specific number of workers to develop a particular project for a limited period. Outsourcing is also the adequate form to retain a labor force with specialized skills or training to conduct a certain task, to launch a product, operate a call center, to conduct certain market or production activities, etc.
     
    While the recently implemented reform then attempts to more profoundly resolve a problem that was only partially addressed in the previous reform to the Federal Labor Law that was enacted in 2012. The extent of this reform could have a negative effect on companies that provide healthy and law compliant outsourcing services, as well as on companies that provide specialized services that other companies need. In this modern globalized world, no company alone can have all kinds of employees for every single activity it performs. Companies should be able to dedicate to their core business efficiently, while being able to outsource the conduction of ancillary tasks to outside suppliers that can perform a better and more specialized job at lower costs. For example, an airline, which core business is the provision of air transportation services for passengers and/or cargo, should be able to outsource non-core activities such as aircraft maintenance, ground handling or reservations, for instance, from specialized companies that can conduct a better job at lower costs and in full compliance of all legal obligations towards all workers involved.
     
    There is no debate that the abusive practices that have tarnished the reputation of outsourcing should be prevented and eliminated by restricting the same and imposing hefty penalties. No practice that attempts to prevent workers from receiving legal benefits should be allowed. The controversial aspect of this reform however has been its extent and its potential effect on healthy outsourcing practices. The perverse side of it as well results from the ill conception that the current administration has of private businesses and the extensive regulation that it intends to impose on private endeavors that under this left-wing administration are regarded as “neoliberal”, “capitalist” and “greedy”.
     
    It is no secret for instance that this reform was largely promoted by the leader of the mining workers who seeks to cause the thousands of employees that work in the mining industry to become affiliated to its labor union, which was not a requirement to the extent that these workers were largely outsourced from other companies by the large mining companies that operate in Mexico. The effect of this new reform in this case is likely to cause a severe impact on the mining industry and in the investment of foreign companies in this field.
     
    The outsourcing reform has been highly debated since the first initiative was sent to congress by president Lopez Obrador in December of 2020. Its final version resulted from an agreement reached on April 5, 2021 between the government and the private sector among other stakeholders. The government’s original intent was to ban outsourcing practices altogether. The result under the agreement reached with the private sector, while permitting the outsourcing of specialized services or activities and ad-hoc projects, is still far from ideal is confusing in its implementation and imposes severe penalties and requirements that can be gravely damaging for companies and workers alike.
     
    "In summary, these abusive practices resulted in the tarnished reputation of the outsourcing practice at large, which without seeing its benefits was recently regarded as a form to prevent the compliance of obligations and benefits that all workers are entitled to receive.”
     
    Since its approval by the Mexican congress, the reform package, has been enacted by presidential decree published on April 23, 2021. The Ministry of Labor, still has a few days left of a 30 day period within which it is required to publish the guidelines under which companies that conduct outsourcing activities must become registered and obtain approval from the ministry to conduct their activities as such. Companies will have a vacatio legis period of slightly over three months (through August 1, 2021) from the date of publication of the presidential decree to formally hire any employees that are being outsourced and to make any other applicable adjustments; certain other aspects will become effective from January 1, 2022. To comply with this reform, every company that provides services to another must register to be authorized. To register, it must demonstrate that it is in full compliance with its tax, social security and other obligations. Companies that wish to outsource certain activities from others would only be permitted to do so when such activities would not be contemplated in their social purpose2, and when such activities would be specialized or would not be possible to be conducted by the companies themselves at a certain location or facility.
     
    The fines for breaching these new obligations can be imposed on both, the company seeking the outsourcing and the company that could provide such services and can reach up to MXP $4,400,000 (approximately USD $220,000) per occurrence.
     
    Any company that retains the services of any other company that fails to become registered in accordance with the law and the Labor Ministry guidelines (to be issued soon -hopefully-) will not be able to deduct the payments made to this company for tax purposes, in addition to the fines and other sanctions that could be imposed.
     
    "Companies that wish to outsource certain activities from others would only be permitted to do so when such activities would not be contemplated in their social purpose , and when such activities would be specialized or would not be possible to be conducted by the companies themselves at a certain location or facility.”
     
    It remains to be seen whether the implementation of this reform can result in the benefit of thousands of workers that were deprived of benefits by the abuse of illegal outsourcing activities. It remains to be seen as well whether this reform might have a negative effect on legal and productive outsourcing practices that are essential for the cost-effective integration of services and productivity around the world.

    1.- Under Mexico’s social security system, the contributions payable to the Mexican Social Security Institute, which are based on a percentage of a person’s salary are paid one third by the workers as a withholding of its salary that the employers must make; one third by the employer; and one third by the government.
    2.- The social purpose (‘objeto social’) of any Mexican company is contemplated in the company’s bylaws and is generally written in broad sense to contemplate the conduction of several activities or services. 

     
 

 

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