Navigating New Business Complexities with Good CompanyBy Monica Vera Ibañez | Thu, 11/19/2020 - 09:00
I started my own business in Mexico about four years ago, barely one year after I arrived here. At first, I struggled to understand the pros and cons of the different structures that I could use to form my company. Then, I was overwhelmed with the different procedures that I had to follow, with everyone giving me their own description of how things work. And then … compliance during on-going operations. All accounting and tax notions that I may have learned in previous experiences and different places – that level up to basics – didn’t resemble what needed to be done in Mexico. I wish I had had someone leading the way through all of this and I could have really focused on the core operations of my business.
With time, I learned that there are companies that specialize in that: providing local knowledge while supporting you from a global perspective. I am no longer running operations in that business I helped found after changing gears to be part of one of these companies dedicated to helping businesses grow internationally.
Expanding around the globe poses a major challenge to business owners because each jurisdiction has its own rules and, more importantly, its own way of doing things. From rules and regulations to tax and labor compliance, there are trends that are followed globally to a certain extent but executed in very particular ways depending on the specific jurisdiction.
The Global Business Complexity Index, recently published by TMF Group, analyzed more than 70 jurisdictions around the world and ranked them according to the most complex jurisdictions for doing business at the top of the list to more simple ones. Mexico ranked 13th.
The study identified three major trends in all jurisdictions, observing confrontation between internationalization and localization, modernization versus tradition and technology versus simplification.
Countries struggle between adopting standards that facilitate global transparency, e.g. CRS or FATCA, and maintaining their own local norms. In general, when more internationalization is adopted, less complexity is perceived in businesses. In alignment with this, between modernization and tradition, the most complex jurisdictions continue to favor existing customs. Finally, between technology and simplification, more than a confrontation, we noticed a complex transition because the adoption of technology ends up creating hybrid environments in which processes are complicated for some time, combining both paper and technology as well as duplicated and redundant processes.
From these three perspectives, Mexico can be identified as a semi-regulated jurisdiction in which we adopt international standards but only apply them to the most vulnerable and with highest propension to money laundering activities, such as real estate and financial services.
We also implement these standards with a combination of the uses and customs that already exist. That is, we implement them with some degree of "tropicalization."
Mexico has also started to adopt technology, although in a slow fashion. A good example is taxes and electronic accounting. While the tax authority has enabled – and requires – electronic accounting, invoicing and tax declarations, there is an important number of processes that require paper trails and, in a more encumbered way, physical presence. There are also regulatory bodies where all processes remain mostly paper-based.
As for rules and regulations, Mexico has adopted global trends such as residency requirements. While other countries are requiring directors to be residents in order to facilitate a legal basis to deal with cases of non-regulatory compliance, Mexico requires a legal representative, who is not necessarily a director, to be resident.
There is no global standard for the time that the onboarding process takes. It can vary from days or weeks to months. Bank accounts, on the other hand, take a long time in almost all jurisdictions because of the need to ensure a thorough KYC process. In Mexico, the entire process until you have your bank account open takes three to four months. The incorporation before a notary takes one to two weeks, registration with the tax authority is three to four weeks and finally, the process with the banks is about two months, mainly because of KYC processes.
Relationships with workers have many aspects in common in most jurisdictions. For example, more than 90% of jurisdictions require a minimum wage, which in the case of Mexico is in the order of US$6 in the general territory and US$8 on the northern border, given its proximity to the US. Other benefits found in most jurisdictions include paid leave and maternity leave. Mexico follows this trend and effectively grants paid leave, maternity leave and the distribution of company profits.
Another important aspect of the employment relationship is the possibility that the employer may have to terminate the employment relationship and how far in advance it has to give notification. In most countries in our study, the employer can notify with almost immediate effect, as in the case of Mexico, which requires the payment of compensation.
The need to report payroll information and other demographic aspects in many of the countries analyzed is also very common. In our case, we must report payroll to the tax authority and social security authority, for which the information of those joining or leaving is also required.
Finally, in the accounting aspects, we could identify several trends. The first is related to the existence of various taxes – income tax, value added, etc. – and Mexico is no exception. In addition, there is an obligation in Mexico to withhold taxes and their corresponding declaration and payment to the authorities. Following the global trend of establishing electronic processes, in Mexico all tax accounting is done electronically, with mechanisms provided by the authority or by ecosystems of suppliers authorized by it. wh
As a last trend, it is important to highlight the increasing ease in different jurisdictions to voluntarily correct errors in tax information. In Mexico, the authority allows it but the taxpayer is subject to paying interest and surcharges as well as undergoing additional scrutiny.
While there are global trends, there are also local details and process execution and businesses will continue expanding around the globe. Certainly, challenges will continue to show up. The key to sorting them out is having local knowledge, understanding of the local way of doing things and the expert guidance to avoid losing time-to-market advantages.