Doing Business in Mexico: A 2021 Look at the GBCI

The level of complexity of a potential business destination is a critical factor for investors when deciding on a location to start or expand their business. It is possible that the complexity comes from aspects related to the main business functions or from other non-strategic but, nevertheless, necessary areas.

TMF Group recently published its annual Global Business Complexity Index (GBCI) 2021, which focuses on the complexity of regulatory and compliance factors required to operate in different countries or jurisdictions, according to the experiences of its own experts in 77 jurisdictions.

In addition to listing countries by their level of complexity, the index identifies three major trends in regulatory and compliance aspects around the world and highlights important aspects of these trends that are specifically reflected in the areas that impact all industries: accounting procedures, tax compliance, human resources and payroll standards, and corporate management of entities.

It should be noted, although it is not surprising, that in this edition of the study the effects and influence of the pandemic play an important role in the levels of complexity for countries, based on what their governments have facilitated to continue promoting new businesses during this  period.

Mexico surprised us this year, moving from 13th to the third most complex jurisdiction in the index. Although we will analyze this in more depth, this shift is due largely to the absence or slowness of the Mexican government to incorporate modifications to the regulations themselves or the processes that would help to speed up or digitize them, while other countries responded more effectively to this need emphasized by the pandemic, helping them in the ranking.

The Importance of Responsible Governance

The GBCI 2021 demonstrated that transparency in business – from its structure to how the operation's regular processes are executed – remains a priority for governments. One of the relevant aspects measured is the need to present Ultimate Beneficial Owner (UBO) records before central registries, which 70 percent of the jurisdictions surveyed reported as necessary, with Mexico being one of these jurisdictions. 

The practice of penalties, ranging from fines to license suspension, resulting from non-compliance with the requirement to register entities with government agencies was adopted by 10 percent more jurisdictions between the 2020 and 2021 studies. Mexico, as in past years, only applies fines in these cases, with the exception of non-compliance with the deadlines for filing tax returns, in which case the suspension of commercial licenses can apply.

In response to the pandemic, some jurisdictions promoted regulation to protect employees. In Mexico, despite much emphasis by the government on employers' social responsibility, there was no concrete action to prevent workers from losing their jobs during this period.

Does Digitalization Mean Simplification?

The study identified, again this year, that governments are increasingly orienting their efforts to achieve the digitalization of different regulatory processes in an effort to attract foreign investment. Some have decided to choose a gradual transformation where others have preferred the rapid adoption of digital systems that integrate all processes. On either route, the experience of companies has usually been impacted by the complexity of the transition and meeting regulatory requirements has become a time- and resource-absorbing process.  

In some jurisdictions, COVID-19 induced the implementation of some digital processes to replace the need for physical presentation. In the case of Mexico, there were organizations with a high degree of digitalization in the compliance processes, such as the electronic accounting required by the tax authority (or SAT by its acronym). Despite the fact that the authority has a robust digital platform that is enabled for many requirements, the procedure for the registration of the legal representative continues to be face-to-face, this due to the requirements of biometrics to complete the registration, which has represented a crucial bottleneck for the creation of new companies since the agency, applying prevention measures due to the pandemic, is working under limited operation. The average time of registration for a company before the SAT is around two months.

Delicate Balance

According to the findings of the study, the adoption of supranational rules aimed at regulating international trade remains stable, precisely because of the interest of many governments in positioning favorably in these international trade networks and attracting investments to their countries. Initiatives aimed at making structural changes to local legal frameworks to facilitate international trade activities were also identified. In other cases, the measures were not of such a large magnitude but contributed toward achieving the same objective, such as including the acceptance of documentation in languages other than the local.

Even though Mexico is a party to international treaties with more than 45 countries, it remains on the conservative side of the spectrum, applauding and promoting international standards but implementing them inconsistently. On issues of easier resolution, such as the acceptance of documentation in another language, in this case, English, Mexico has not made changes, despite its proximity and extensive business relationship with the United States. It also maintains the same strict standards regarding the validation of personal documentation, many times required during UBO identification, through the apostilling process.

Although the pandemic accelerated transformation processes aimed at facilitating the creation or expansion of new businesses worldwide, not all jurisdictions execute changes at the same speed or with the same priorities and interests, influencing our assessment of the levels of complexity involved in creating or establishing new businesses in those geographies. As I mentioned in the introduction, Mexico's third-place ranking in the GBCI 2021 does not mean that it has regressed in simplification. What it means is that the country has barely transformed its processes or rules to accommodate a reality that increasingly requires digitalization and flexibility. As in previous articles, the key is to know the processes and how to navigate through them while being in strict compliance with the rules, for which local support and knowledge is essential. Only with the proper support from individuals or teams with local knowledge will you be able to keep your focus on your business.