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MEXICO: Franchises and the New Law of Transparency, Prevention and Elimination of Unlawful Practices in Advertising Services.

On June 3rd, 2021, the Law of Transparency, Prevention and Elimination of Unlawful Practices in Advertising Services (hereinafter “Law”) was published in the Official Gazette and entered into full force and effect on September 1st, 2021.

Eduardo KLEINBERG - 15.12.21
Country expert

This Law is intended to promote transparency in the advertising market, as well as to prevent and eliminate commercial practices constituting an unlawful advantage in favor of certain parties to the detriment of advertisers, and indirectly, consumers.

The Law regulates interactions between “Advertisers”, “Media” and “Agencies” and its object is to limit the existence of intermediation between “Media” and “Advertisers”. 

Therefore, the “Agencies” have been banned from buying advertising spaces to resell them later on to “Advertisers”. They can only buy advertising spaces acting pursuant to a mandate and on behalf of the “Advertisers”.

 

Franchise Aspect

An important aspect of a Franchise System is Marketing and Publicity. Usually, Franchisors establish an Advertising Contribution for local and Institutional Publicity. That is, additional to payment of monthly fees, such as royalties and technology fees, Franchisees will designate a percentage over gross sales (established by Franchisor) for Marketing and Advertising purposes, which may include market research, newspapers, radio and Television advertising, internet advertising such as, social media (Facebook, Instragram, TikTok), signs, packaging and bags and other, as determined in the Franchise Agreement.

The Publicity must reflect the image, values and standards of the Franchise. In some cases, the Franchisor will provide Franchisee with the material, in others, Guidelines and Standards.

Therefore, in a Franchise System, Advertising material and promotions may be:

  a) Developed and used by Franchisor for a global campaign;

  b) Provided to Franchisee by Franchisor for a global or local campaign; and

  c) Developed and designed by Franchisee using the Standards and Guideline Franchisor for local advertising.

 

New restrictions for Advertisers

According to the new Law an “Advertiser” is considered as the person in whose interest advertising is carried out to promote the characteristics or benefits of its products and / or services. Consequently, Franchisor or Franchise, whomever contracts with “Agencies” in Mexico regarding advertising spaces in Mexico, is considered as an “Advertiser”.

As such, according to the new regulation, new restrictions would apply to those advertisements used in the media (e.g. television and radio advertising). The new obligation imposed to “Advertisers” when hiring an advertising Agency is to execute a Mandate Agreement for purchasing advertising spaces on behalf the Advertisers.

 

Sanctions

Additionally, the Law establishes penalties for the lack of compliance.

In such regards, the articles that provide on sanctions to be imposed to the “Media” and the “Agencies” due to lack of compliance, determine that the base for the calculation of the 2% and 4% respectively would be the “income”.

Since the Law does not provide a definition as to what “income” shall be understood, it must be calculated pursuant to the Law of Income Tax in Mexico. That is, as a utility obtained for commercial activities resulting in the existing modification (not future) of the assets of a person.

The penalty that would apply to Advertisers if they do not execute a Mandate Agreement when purchasing the advertising space with the corresponding Agency, if of 2% over income, this would include the entire company´s revenue. 

This sanction may represent a considerable amount, in case of a Master Franchisee or a Franchisor, since the 2% penalty would be over the entire company´s revenue, including the total Royalty collections.

 

Final considerations

Franchisor´s or Franchisee´s, whomever is considered as the “Advertiser” shall comply with this new Law and execute a Mandate Agreement, in order to avoid sanctions over its income, especially since the income includes all the company´s revenues and would affect the image and operation of the Franchise System.

 

Eduardo Kleinberg, IDI Country Expert for franchising in Mexico

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