Top challenges of doing business in Mexico
Mexico is one of the most competitive countries for investments at an international level, thanks to its political and macroeconomic stability, size and strength of its internal market, and predictable inflation. However, doing business here can be a time-consuming task, if you don’t have the relevant local knowledge to support your venture.
Mexico continues to be an attractive destination for investors, although with the Mexican government revising previously made reforms to sectors such as transportation, energy and telecommunications, the focus of investors may be changing. As a result, it now stands as the 15th largest economy in the world and 11th in terms of purchasing power.
One of the biggest changes for Mexico has been its trade policies. Mexico has free trade agreements with 46 countries and has become a global manufacturing base, with strong links to consumer economies in North and South America. The country offers a strategic location and proximity to these major consumption centres, allowing companies to respond quickly to changes in demand.
There are still many hurdles to overcome when doing business in Mexico. Having local knowledge of the investment environment and good information on the legal, accounting and taxation frameworks can therefore be an asset for any overseas venture.
Starting a business in Mexico was once a complex minefield, but thanks to tough government action, the procedure today is much more manageable. Mexico ranks 60th overall in the World Bank’s 2020 Doing Business report and 107th for ease of starting a business. Still, there are certain procedural aspects which can be tricky to navigate for firms unfamiliar with this environment, particularly registration with the Mexican Social Security Institute (IMSS) or the tax authority (SAT).
It takes around 76 days to deal with construction permits, which is by far more efficient than the Latin America and Caribbean average. Water and sewerage connection takes the most time to complete and obtaining a single zoning certificate stating specific land use and feasibility can be a complex task.
According to the World Bank, Mexico ranks 106th in the world for ease of getting electricity, underlining the complex nature of the procedure. It is a task laden with bureaucracy, and firms must submit applications, obtain certificates and inspections from the Comisión Federal de Electricidad (CFE), before a contractor can carry out the works.
Registering property is a long and arduous task, it can take almost double the time compared to the norm for OECD countries (24 days average). Dealing with the Public Registry of Property of the Federal District can be particularly time consuming, and obtaining a certificate of good standing with the water service and the zoning certificate of the property can also take some time.
Mexico’s well developed financial sector puts it in good stead in terms of getting credit, although it is still relatively difficult compared to most developed nations in the world.
It takes 350 days to enforce a contract, and there are approximately 40 procedures involved in doing so, making it a complex task. Resolving insolvency, on the other hand, is more streamlined, taking only 1.8 years compared to 2.9 in the rest of Latin America and the Caribbean.
Investor protection remains a contentious issue in Mexico. The North American Free Trade Agreement (NAFTA) helped to rectify some of the past issues that existed (and has been replaced by The United States-Mexico-Canada Agreement), but recent cases such as cancelling Mexico City’s Texcoco Airport project and the reversal of energy reforms, continue to create an uncertain environment.
Paying taxes is a laborious process in Mexico, taking more than 240 hours of a business’ time per year, even though there are only six types of payments to be made. In TMF Group’s Global Business Complexity Index 2021 – which ranks 77 countries based on the complexity of their business environment – Mexico has moved up 10 places in our rankings to number three. Major drivers of this increase in complexity are the need for in-person interactions with the state, and a reliance on hard copy documents in order to incorporate. These factors have been compounded by the Covid-19 pandemic. However, it is worth noting that the need for in-person interactions is more limited when it comes to accounting and tax, hiring or dismissing employees and payroll. Furthermore, with the effects of the pandemic beginning to ease in the jurisdiction, these processes should become simpler over the next year.
For all those who establish a business in Mexico, one of the first impressions of the complexity of the market comes from the electronic accounting system required by the Mexican tax authority, or Secretaría de Hacienda y Crédito Público (SHCP), through the Servicio de Administración Tributaria (SAT). From creation to dissolution, the SAT requires that all transactions, internal or with interested parties, be recorded in the electronic accounting system. While it seems convoluted and overwhelming given the workload it can entail, it must be observed from the perspective of its ultimate purpose: the traceability of transactions, money and beneficiaries.
Tax legislation in Mexico is unique in the sense that the basic accepted documentation supporting transactions is the invoice issued by the supplier. Although the country is in the process of adopting IFRS (it has adopted IFRS for all listed companies other than financial institutions and insurance companies), it is important that every foreign company coming into the country analyses the regulatory and reporting differences, particularly for different industries.
Another fundamental principle behind the perception of complexity in Mexico is the protective nature of Mexican labour law towards employees, which in turn is based on constitutionally granted rights, such as the right to access socially useful work, limited working hours and a decent wage.
To be able to employ, you must register your company with the relevant authorities, in this case the Mexican Institute of Social Security (IMSS), Institute of the National Housing Fund for Workers (INFONAVIT), Institute for the National Fund for Employee Consumption (INFONACOT), and the State Treasury. All procedures must be carried out by a legal representative with the respective powers of attorney.
One of the most controversial benefits that Mexican law gives workers is the PTU, or Participation of Workers in Profits, from the second year of operation onwards. The worker is entitled to participate in 10% of the profits reported by your company on the annual tax return, calculating individual participation based on wages received and days worked. Given the burden this benefit places on employers, companies resorted to operating models where the perception of profit is separated from the creation of it, using outsourcing or insourcing schemes. With the latest anti-outsourcing reform approved in April 2021, such models are not longer allowed and companies using them had to undergo important changes.
As in many other jurisdictions, payroll is subject to withholding tax. The difference in Mexico is that employers are required to reflect payroll payment and corresponding withholding through the authority’s electronic system with the digital fiscal receipt (CFDI). For new employers in Mexico, whose payroll volumes are high, it is highly recommended to integrate their payroll systems with certified suppliers in order to issue CFDIs. Although a critical requirement, it is not an insurmountable obstacle. There are suppliers and systems that are already prepared to make this process transparent and fluid. There is also the option to outsource the calculation and processing of your payroll.
In addition to federal tax, a percentage of payroll taxes must be paid depending on the federal state in which the employment relationship occurs, which will be entirely borne by your company.
There are certain contributions shared by the employer and employee, such as social security, pension insurance for termination and retirement and the contribution to INFONAVIT. These contributions have minimums and maximums determined by reference measures that you must be aware of, like the minimum wage, the Unit of Measurement and Update (UMA) and the INFONAVIT Mixed Unit.
As employer, you are also obliged to report payroll details to different institutions oriented to the welfare of the worker. From registration IDs, payroll values, deductions, contributions made by your company and the worker to deposit bank accounts and tax receipts issued, all these elements are primary data that will be required to meet the reporting requirements of different institutions. Non-compliance with these requirements could lead to penalties for you.
The key is to have local knowledge at hand, to guide you through this complex web of rules and customs, giving you the time you need to think about how to achieve success with your business in Mexico.
Talk to TMF Group
Our team of experts on the ground in Mexico have the local knowledge to help you navigate these areas of complexity. Our professionals provide accounting, tax compliance, corporate secretarial, and HR and payroll services to local and multinational companies.
Whether you want to establish new operations in the jurisdiction or just want to streamline your Mexican operations, talk to us.