GBCI 2022: Business complexity in North America
TMF Group’s Global Business Complexity Index 2022 (GBCI) explores 292 different indicators relating to business complexity, to provide in-depth analysis of the global and local challenges that impact on the ease of doing business across the world.
Insights from the GBCI can help investors pick and manage their target markets with greater confidence. Those jurisdictions that are perceived to be the most complex are often among the most attractive for talent and customer opportunities. Local knowledge will help when it comes to navigating this complexity, allowing you to managing exposure to compliance risk and find your path to growth.
In this article, we take a deep dive into the North America region, to examine the drivers of business complexity in each jurisdiction, or conversely, what makes them simpler environments for investment or setting up operations.
Unlike many other jurisdictions, Mexico did not implement any incentives during the pandemic to ease the financial pressure on businesses. This was in part due to the slow-moving nature of parliament, but also the impending 2022 political elections.
Incorporating a company remains one of the most complex aspects of doing business in Mexico. All companies must have a tax ID in order to legally exist, but this can only be obtained through a physical appointment, in order to collect biometric data. Throughout the pandemic, the tax authorities reduced their operating capacity to around 40%, adding significant delays to incorporation times. Opening a bank account is also a lengthy process, typically taking two to three months.
Operating in Mexico is complex but generally relatively predictable. Yet a recent law was passed requiring all companies to pay permanent employees 10% of profits generated each financial year. New businesses can be set up with this in mind, but this change created complexity for existing companies that had to manage and accommodate it. It also led to many businesses that hired subcontractors moving towards hiring permanent staff. Some companies that provide outsourcing services are subject to heightened reporting requirements.
From 1 January 2022, a new law came into action requiring businesses to provide information on UBOs to tax authorities. The exact requirements of the new law are not clear, with new obligations lengthening the incorporation process by around three weeks.
Another recent reform concerns payroll reporting. Tax authorities must timestamp all documents, and new legislation is coming into law which requires the postal code of employees to be on the timestamp. This will create a large and idiosyncratic administrative burden. However, there is hope that Mexico will move to become simpler as it moves beyond the pandemic.
I think the one thing that is going to ease complexity is the pandemic winding down. We expect the tax authority bottleneck to ease. With that aspect improving, all processes of establishing a business in Mexico may become simpler, a little bit less painful.
Nicaragua is once again one of the more complex jurisdictions in this year’s GBCI. A key driver of this is the socio-political crisis in 2018 that saw protests against social security reforms which led to the death of nearly thirty people. The protests resulted in the cancellation of reforms which aimed to reduce benefits and raise taxes.
Since then, there has been widespread political uncertainty in the jurisdiction, leading to a contraction of the economy by around 4% across 2018 and 2019. Furthermore, the Nicaraguan government has been criticised by the international community, who have requested free democratic elections in the jurisdiction. Currently the Office of Foreign Assets Control (OFAC) has sanctions in place against current government officials and institutions.
This can lead to increased complexity for businesses looking to incorporate and operate within the jurisdiction as the relationship between government authorities and private business associations has become divided. For example, the time required to deal with public institutions for permits and compliance is taking longer. Also, additional requirements have been brought in for such procedures.
However, despite the uncertainty and complexity the jurisdiction has faced in recent years, Nicaragua remains attractive thanks to its location in the heart of South America, a cost-effective and high-quality workforce and rich resources.
The socio-political crisis of April 2018 and the Covid-19 pandemic in 2020 led to instability in gross domestic product. Nicaragua's economy contracted by 4% and 3.9% in 2018 and 2019. However, Nicaragua is strategically located in the heart of the Americas. The workforce is cost-effective and of good quality, and macroeconomic indicators have also been stable.
Complexity in the Dominican Republic comes mainly from accounting and tax. The laws concerning sales tax (ITBIS) and income tax (ISR) can be difficult for foreign businesses to navigate, and extremely time-consuming. As such, the assistance of a tax adviser is highly recommended.
Yet the Dominican Republic presents a vast investment opportunity, mainly due to its highly advantageous location. Positioned in the heart of the Caribbean and connected to vast consumer markets, it attracts a multitude of companies with a particularly strong presence from the telecommunications industry.
Looking forward, there aren’t any major legislative changes expected for the coming year, meaning that foreign businesses are unlikely to have to contend with shifting rules and regulations. Yet local experts predict a tough economic time ahead for the Dominican Republic. This is due to the rising prices of food, fuel, and tools, which comes as the country attempts to return to normal after the Covid-19 pandemic destroyed its tourism industry.
The Dominican Republic presents a good investment opportunity, but businesses should seek the advice of a tax advisor before deciding to invest.
Panama is politically stable and a relatively straightforward jurisdiction to operate within. In fact, it has emerged in the last decade as a leading place to do business, providing an attractive investment opportunity situated between North and South America.
Panama is a hub for trade by sea and air, and also acts as an international trading, banking, and services centre. As a result, more than 80 banks operate in Panama, making it a leading offshore global centre for finance.
In terms of setting up business, the process of incorporation is very quick, typically taking between three and seven days. Yet opening a bank account is far lengthier and can take more than three months. In addition, managing the tax closing due to the dissolution of an entity can take over a year.
The pandemic has led to higher dependence on technology for business incorporation and tax compliance in Panama. For example, a technology platform has been introduced to ensure compliance in tax filings. This is likely to increase further over coming years, helping to simplify processes and increase the appeal to foreign businesses.
Panama has implemented new technology processes and tools and has communicated further plans to do so.
Guatemala is not a complex place to operate in for established businesses. However, there are some challenges around company registration, which is a lengthy process. The registration process of each company is done independently in each authority or public entity, with no communication between the different entities.
Tax compliance can be complex and changes depending on the economic activity or regime of the business. The employer's contribution can be considered high since almost all payments to employees are subject to social security contributions.
Over the past year, Guatemala has switched to mandating the use of electronic invoices. Previously, employers could use pre-printed stubs, but from 30 June 2021, all employees now have to be registered under the electronic invoicing regime. This greater reliance on technology has brought about many benefits, making it possible to perform more online submissions that could not have been done previously, and there are plans to start implementing electronic accounting. The pandemic has accelerated the inevitable in terms of technology, and our experts expect to see continue in the coming years.
Every country has its differences and Guatemala is no exception. There are very particular things such as tax regimes, new things such as electronic invoicing, and a possible advance in electronic accounting for all taxpayers. It is a market with great potential, but it is necessary to know it.
El Salvador is in an economically difficult and unstable situation. With the entry into force of Bitcoin as legal tender, the government risks not having enough cash to cover short-term debts, and not being able to access international loans. El Salvador also has unpredictable socio-political and economic relations with other countries which can significantly alter the investment landscape.
To adjust to the introduction of Bitcoin, accounting teams must now be trained for transactions occurring in both physical and cryptocurrencies. It is highly complex to differentiate and manage these transactions, and how they are each treated as assets. Bitcoin and other alternative payments have created a spike in fraud and scams. As a result, greater security control systems are coming into force to minimise this.
In addition to the above, El Salvador has passed the Money and Asset Laundering Act in the last year. This act places greater demands and compliance controls on companies, and further increases complexity.
Currently, El Salvador and its political relationship with the United States has deteriorated and there is no clear picture of the line that the Salvadoran president will take regarding international relations.
Costa Rica has become simpler in recent years because the jurisdiction has been actively working towards making it easier to do business following the 2018 fiscal reform. This introduced a series of changes including a VAT law that brought extensive changes and aimed to align Costa Rica with international standards and OECD recommendations.
Another aspect that has been driving simplicity is the development of digital tools and an active focus on reducing the bureaucracy of incorporation processes. There has been a specific commitment from the government to make it more attractive for businesses to set up in Costa Rica, which has in turn attracted major corporations, including Microsoft and Amazon.
One aspect that can still drive complexity in the jurisdiction is transparency requirements. For instance, when setting up a bank account, UBO disclosure and tax returns from the past 3 years are required. This also involves a lot of interaction with banks, which can create complexity. Furthermore, in order to hire employees within an organisation, there are certain requirements that create complexity, for example, the regulator can ask for interviews with employees to confirm that what corporations have disclosed matches with employee experience.
Costa Rica is addressing specific issues to reduce complexity, especially for foreign businesses starting operations in the country. However, several bodies and organisations need to be contacted in order for legal entities to become operational which continues to be a great challenge for foreign business.
Honduras is one of the simpler Central American jurisdictions included in the GBCI. It is a stable jurisdiction in which legislation and regulations rarely change. While this is a strength and makes the legislative frameworks clearer for foreign companies to navigate, some processes and rules would benefit from being updated and digitalised.
At the incorporation stage, physical processes must be undertaken in several different institutions in order to complete the process. This is one area in which Honduras could learn from other jurisdictions and simplify processes for foreign businesses. Some fiscal processes must also be completed in a physical way, such as submitting a tax form.
Currently the government institutions do not notify or contact each other during these processes, meaning that local representatives of companies need to make multiple physical appointments. This also means that the same information must be submitted separately to multiple separate government bodies: social security reports must be submitted to four different institutions.
Honduras is, however, making efforts to be more internationally aligned. It has adopted the IFRS for accounting works and the government institutions are developing a plan to digitalise the country. Regulations relating to UBO, anti-corruption, information exchange and transfer pricing regulations will also increasingly impact the country and create compliance regulations that entities must comply with.
Honduras is a stable and attractive jurisdiction. However, foreign businesses must have local expert support, because the majority of the local processes are physical, rather than digital.
Canada remains a simple place for foreign entities doing business. To operate, entities do not need to be physically present in Canada, and a number of provinces do not require a locally resident director. Furthermore, bookkeeping does not have to be done in the jurisdiction, and companies are not required to submit transactional documents to any regulatory body.
Although it’s a relatively easy place to do business, the variation of laws and guidance in the multiple provinces can cause complexity for foreign companies. Operating in multiple provinces, particularly Quebec, can be more difficult to understand as multi-jurisdictional entities have reporting requirements that vary by province. In addition, local residency directorships vary by jurisdiction of incorporation.
Having employees based in multiple provinces can also add to complexity, as pay rules and frequencies vary slightly from province to province. Due to the prevalence of working from home introduced during the pandemic, and the subsequent increase in remote employees, requirements for extra-provincial registrations for non-resident entities are likely to become more common in future.
Canada is a fairly straightforward place to do business. There are some challenges, particularly with operating in Quebec, but otherwise, it's a pretty coordinated country.
Simplicity for doing business in Jamaica comes from a focus on digital and online processes that ease business incorporation and operation. For example, incorporation is simpler thanks to the ability to register online than at the companies and tax office.
This focus on online processes was further driven by Covid-19, so despite the complexity created by the pandemic, there were some changes it brought about that have driven simplicity in Jamaica. In the coming years, the jurisdiction will continue to invest in digital processes, so we should see it become even simpler.
Another aspect that drives simplicity in Jamaica is a commitment to international standards such as KYC and UBO legislation. This allows international businesses who already adhere to such legislation to quickly adapt to ways of working in the jurisdiction.
However, some aspects of business incorporation and operation can create complexity. For example, Jamaica’s National Insurance Scheme changes relatively frequently.
In Jamaica it is relatively simple to do business and check on compliance from anywhere in the world. Online processes such as the ability to register online at the companies office and at the tax office makes things more straightforward.
Given its progressive approach to business and focus on driving simplicity, it’s unsurprising to see the US maintaining its ranking among the simplest jurisdictions. A key driver of simplicity is that the government actively looks to make it corporate friendly. For instance, in recent years corporate tax rates were reduced in an effort to increase investment into the jurisdiction.
The state of Delaware serves as a key example of the US’s progressive business stance. Revenue generated outside the state is tax-free, making it particularly popular and attractive for foreign business incorporation. During Covid-19, like the rest of the world, the US did witness some delays in the time it takes to incorporate a business and also in the processing of certain documentation, leading to a backlog in Delaware that is having an impact even now. Despite delays, the US boasts a quick online incorporation process that did help to ease complexity during the pandemic.
Operating across states in the US can add an administrative burden, with states having different tax rates, as we see in Delaware, so ensuring that such tax rates are honoured across state borders is a necessary aspect of business operation. This can also create additional administration when setting up as there can be a need to incorporate in multiple states when nexus is established. However, this is not typically complex so, when properly administered, foreign businesses can avoid issues.
Thanks to its skilled workforce and clear global reach, the US is set to remain one of the most attractive jurisdictions for foreign businesses. However, with recent developments in the jurisdiction related to the Russia-Ukraine crisis and inflation issues following the pandemic it will be interesting to see how the business landscape changes.
I think that when you have investors looking to expand abroad, consistency and predictable from policymakers is one of the main factors under consideration. History has shown that the US has a business-friendly culture that embraces entrepreneurship. This is one of the pillars of this country and contributed to is becoming one of the wealthier countries.
BVI is consistently one of the simplest jurisdictions in our index, steered by an ambition from government and legislative bodies to be attractive to foreign investors and businesses.
Two key aspects are the simplicity of incorporating a business and the lack of taxation. There is also an emphasis on transparency that means businesses and investors know that their money and assets will be safe and protected. Over the past ten years, the jurisdiction has focused on international alignment with bodies such as the OECD. This has, in some cases, created slightly more complexity as there are certain regulations and legislation that businesses and investors need to adhere to. However, the transparency and security has been perceived as worthwhile. Also, adherence to such standards is not hugely disruptive as these are commonplace in other jurisdictions globally.
With such transparency standards, issues can arise. Failure to meet economic substance requirements can result in hefty fines, so it’s important to ensure that these requirements are taken seriously and acted upon.
Thanks to its lack of taxation and focus on transparency, while preserving privacy, BVI attracts private wealth, family office and fund investors as well as capital markets deals. It acts as a neutral domicile for a large number of businesses and individuals from most regions in the world that need an efficient set up for their companies in a well-structured legal framework. The jurisdiction rebounded strongly from the pandemic at the end of 2021, proving to be resilient and offering efficiency and flexibility in cross-border transactions and management of assets, while complying with global regulations.
BVI private wealth and family office clients from South America and elsewhere in the world now frequently look for ESG credentials, especially when it comes to operating in an environmentally and socially responsible manner. Although the BVI does not have specific ESG legislation there is the expectation that this may change.
In the BVI we have very solid legislation, which is updated regularly. We also have the Commercial High Court for the Caribbean. We have a very well-functioning international tax agency, and some people might think, 'Okay, but isn't that scary?'. It's not because it makes the country a very well-regulated jurisdiction to do business in.
Curaçao has improved its ranking to be the second simplest jurisdiction in 2022. This is unsurprising considering the focus on simplicity that has been embedded into Curaçao’s laws and legislation in recent years.
Accounting and tax are particularly straightforward. For example, bookkeeping is less complex thanks to minimal government interaction. All wage tax returns and filings are to be submitted by the 15th of each month, and if businesses can stick to this deadline there is little complexity.
Payroll and human resources can be slightly more complex here as there are increased ‘proof’ requirements to ensure businesses and individuals remain transparent. However, this has become simpler thanks to the development of electronic filing and online processes. Also, it doesn’t necessarily impact the attractiveness of the jurisdiction because it’s seen as a positive to be transparent and open. For instance, businesses and individuals from South America are attracted to Curaçao as it offers protection of their assets and their own safety.
An additional attraction for organisations from South America and elsewhere are language capabilities, with much of the workforce speaking Papiamento, Dutch, English, Spanish and Portuguese. It is also part of the Kingdom of the Netherlands, and a focus on international alignment drives attractiveness and simplicity.
During Covid-19 there were some delays in business operation and incorporation. However, solutions were found and delays resolved within months. This included an increase in the ability to sign documents electronically. However, during and emerging from the pandemic, the jurisdiction has observed staff shortages, particularly within hospitality and leisure.
There is an expectation that UBO requirements may increase in coming years, which could impact doing business in Curaçao. However, there is little doubt that it will remain a highly attractive jurisdiction.
At the beginning of the pandemic business slowed down a bit, because nobody was used to working from home and notary offices were not open. Some business could not be done but, after a couple of months, everybody found a way to work around those issues. Governments, tax authorities are getting more flexible in accepting electronic signatures and electronic filings.
The Cayman Islands is ranked as the simplest jurisdiction in the GBCI, driven by the jurisdiction’s very simple accounting and tax regulations. Incorporating a foreign entity is an extremely straightforward and streamlined process. However, while the Cayman Islands was removed from the FATF ‘grey list’, which flags jurisdictions in which money laundering is not sufficiently legislated against, it was added to the EU’s own grey list.
During 2022, the government is expected to pass legislation which will require limited partnerships (LPs), not just companies, to report their UBOs. Although it is not expected to impact on complexity, there will be a remediation project for financial services providers to obtain and report on their LPs.
The impacts of Covid-19 on how foreign businesses operate in the Cayman Islands have largely been positive. Pre-pandemic, wet signatures were expected, if not required, whereas now, e-signatures are expected going forward. Reporting processes have been digitally streamlined.
The Cayman Islands government was quick to respond and adapt its operations to increase efficiency, better supporting the financial services industry during the height of Covid-19. These changes have now become standard operating procedures for the most part. In stark contrast to just a few years ago, all transactions with the General Registry, such as entity formation and submissions, such as regulatory submissions to the Cayman Islands Monetary Authority and the Department of International Tax Cooperation are now solely conducted via online platforms.
The Global Business Complexity Index
The GBCI 2022 provides an authoritative overview of the complexity of establishing and operating businesses around the world. It explores factors driving the success or failure of international business, with a focus on operating in foreign markets, and outlines key themes emerging globally as well as local intricacies across 77 jurisdictions.
Explore the GBCI rankings, analysis and global trends to help you find your path to growth, amid the complexity of corporate compliance.
To download and read the report in full, visit the Global Business Complexity Hub today.
To find out more about the drivers of business complexity in the jurisdictions that matter to you, why not explore our Complexity Insights Dashboard?