Managing bureaucracy in the Latin American market
Article 5 minute read

Managing bureaucracy in the Latin American market

06 April 2016

It is no secret; bureaucracy limits competitiveness and both domestic and foreign investment. Despite high levels of red tape in Latin America, the region is a rich market full of opportunities for companies looking to establish or expand businesses.

Companies operating or looking to operate in countries with high levels of bureaucracy must be as strict with staying compliant, as local entities will be when auditing them, as this will help avoid significant penalties and reputational risks. Often regulations may seem unhelpful or even unnecessary but, the vast majority of compliance requirements translate into quality control and safety in business. 

Bureaucratic obstacles

In several Latin American countries the regulatory burden may be greater than what companies can manage if not adequately prepared; this can lead to inconsistency, delays, high costs, low productivity and extensive processes.

Peru: The process to incorporate a business can take up to three months, regardless of the company type. Sectors such as the communications, energy, oil and mining, can take two to three years to complete and receive permits for operations. Another factor to consider is social bureaucracy; projects that have a socio-environmental impact require additional permits, especially if the local community perceives any kind of risk.

Colombia: Factors to consider include the devaluation of the peso against the dollar, money laundering and terrorist financing – especially when it comes to opening bank accounts or accessing financial products – and the lack of infrastructure. The local tax law and fiduciary system can be confusing, for example, cancelling the tax number of a closing company can take about eight months.

Mexico: At times business processes and criteria lack formality and uniformity. Specific laws and regulations that assist companies meet local corporate compliance requirements are somewhat limited, which can lead to misinterpretation. Establishing a company takes 4 to 6 weeks (in the traditional model). While an increasing number of transactions can be performed electronically, there are still many processes that must be completed manually at the entity office.

Argentina: The country’s relations with the world have been re-established, with significant changes expected, including progress and growth by 2017. To date, bureaucratic problems have been accompanied by high operating costs, unemployment and inflation rates. In countries such as Argentina, El Salvador and Mexico, 12 to 34 authorizations are required for a construction permit, whereas in Denmark, Burkina Faso or the United States this ranges from six to 18 permits.

Taking action on the matter

Reducing or simplifying regulation is neither a simple nor quick process.

Peru: Local government efforts to ease the regulatory burden vary according to business activity. In terms of corporate compliance, there have been discussions to put processes in place to prevent counterfeiting designations and money laundering – which would increase security but could cause more red tape. In addition, unlike many of the payroll and tax processes that now can be made electronic, several legal and corporate compliance activities are still manual.

Colombia: Although there are business incentives in different jurisdictions, local governments are only empowered to make decisions under a regulatory framework on property tax, vehicle tax and local industry and commerce. The national government oversees decisions on company formation, taxation and corporate compliance; however changes to regulation for the creation and management of all types of companies are expected soon. Currently, it can take four weeks to process corporate entities and taxes; one of the requirements being to have a bank account, which can take about a month to open. 

Mexico: Initiatives that can control local bureaucracy are almost non-existent and required. For example, regulations on sole proprietorship – which allow the incorporation of companies in 24 hours – were recently made public. However, there are cases where authority criteria vary even though there are laws or explicit rules on the subject. Another area for improvement is giving power to local individuals to act as shareholders (to represent foreign shareholders), that entails completing a series of requirements before the actual paperwork starts, so that the company can begin to operate.

Argentina: Market has been facing increases in inflation, reduction in workers’ income and high unemployment rates. However, the incoming president Mauricio Macri, hopes to make several changes that could reduce bureaucracy and improve the business environment. For example, the possibility of simplifying the highly-bureaucratic incorporation process so it can be completed in fewer days is under evaluation.

In general, reducing bureaucracy in any country generates confidence and attracts international investors. Particularly in Latin America, mining, telecommunications and industrial activities could receive greater interest if business processes took less time; this would also likely see a faster return on investment.

Running a successful business in a bureaucratic environment

What do we want to achieve? How do we want to achieve it? What do we need to achieve this? These are basic questions that every investor should be able to respond to before launching a business. Just as importantly, as each jurisdiction will have different regulations, tax obligations, permits, certificates and requirements; companies must stay on top of local regulation, economic and social aspects as these constantly change.

The volume of compliance activities that businesses face is usually significant, even if it is a small business and especially if operating in a jurisdiction with high levels of bureaucracy. Having an action plan to identify and detail the regulations that apply to your business activities and the resources required to meet those compliance requirements within the time frame is very important. Assigning the planning and management of corporate compliance activities to an external professional team, keeps the company informed of the regulator's expectations, any change in the requirements or deadlines.

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Written by

Linda Negron

Former PR & Communications Executive, Americas

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