Mexico is one of the most competitive countries for international investment, thanks to its political and macroeconomic stability, the size and strength of its internal market, and predictable inflation. However, doing business locally can be a time-consuming task if you do not have the relevant local knowledge to support your business.
Although the Mexican government's adjustment to earlier reforms in the transport, energy and telecommunications sectors may divert investors' focus, it has been an attractive investment destination. The country is currently the 15th largest economy in the world and the 11th largest in terms of purchasing power.
One of the biggest changes in Mexico is its trade policy. Mexico has signed free trade agreements with 46 countries. The country has strong ties to the consumer economies of North and South America, making it a global manufacturing base. Mexico's strategic location and proximity to major consumer hubs allows businesses to respond quickly to shifts in demand.
However, there are still many hurdles to overcome when doing business in Mexico. For overseas companies, it is an asset to master the local investment environment, as well as legal, accounting and tax frameworks.
Start a business
Starting a business in Mexico used to be a potentially risky business, but now the process has become more manageable thanks to draconian measures by the local government. According to the Doing Business 2020 report released by the World Bank, Mexico ranks 60th, and the ease of doing business ranks 107th. Nonetheless, for businesses unfamiliar with the environment, especially with the Mexican Social Insurance Institute (IMSS) or the Tax Service (SAT), some of the processes can be tricky.
Apply for a building permit
It takes about 76 days to apply for a building permit in Mexico, which is far more efficient than in Latin America and the Caribbean. It takes the longest time to apply for water and drainage connections. Additionally, obtaining a single zoning permit that describes specific land use and viability is a complex task.
get electricity
According to the World Bank report, Mexican companies ranked 106th in the world in terms of ease of access to electricity, showing the complexity of their processes. It's a red-tape task that requires companies to submit applications, obtain permits and inspections to Mexico's Federal Electricity Commission (CFE) before contractors can officially start work.
Register real estate
Registering real estate in Mexico is a lengthy and arduous process, taking almost twice as long as the OECD country standard (24 days on average). Dealing with the public registry of real estate in the Federal District can be particularly time-consuming, as can obtaining a certificate of existence from the water department and a zoning permit for the property.
get a loan
Mexico's well-developed financial sector puts it in a good position to obtain loans, although it is still relatively difficult compared to most developed countries.
Enforcement of contracts and insolvency
Enforcing a contract in Mexico takes 350 days and involves about 40 procedures, complicating enforcement. On the other hand, the process for dealing with bankruptcy is more streamlined. It took Mexico 1.8 years to resolve its bankruptcy, compared to 2.9 years for other Latin American and Caribbean regions.
protect investors
Investor protection has been a contentious issue in Mexico. While the new North American Free Trade Agreement (NAFTA) addresses some of the problems of the past (which has been superseded by the US-Mexico-Canada agreement), the recent cancellation of Mexico City's Texcoco Airport and energy reforms have case, continues to create an unstable environment for Mexico.
pay tax
Even though there are only six types of taxes, paying taxes in Mexico is a time-consuming and laborious process, with businesses spending more than 240 hours a year paying taxes. According to the Global Business Complexity Index 2021 published by TMF Group, out of 77 jurisdictions, Mexico has risen 10 places to third in the complexity of doing business. The main reasons for the increased complexity in Mexico are the country's need for face-to-face communication and its reliance on paper documents when incorporating entities. These factors have also been compounded by the COVID-19 pandemic. But it’s worth noting that when it comes to accounting and tax, hiring and firing employees, and compensation management, the need for face-to-face communication is more limited. Those processes are expected to become easier next year as the impact of the outbreak in Mexico begins to ease.
For all those who want to set up a business in Mexico, their first impression of the complexity of the market comes from the electronic accounting systems required by the Mexican tax authorities or the Secretariat of Finance and Public Affairs (SHCP). The Tax Office requires businesses from creation to dissolution to record all transactions, whether internally or with stakeholders, in an electronic accounting system. While this may seem complex and labor-intensive, the ultimate goal is to ensure the traceability of transactions, funds and beneficiaries.
Tax laws in Mexico are special because the country accepts invoices from suppliers as documents to prove transactions. Although Mexico is adopting International Financial Reporting Standards (IFRS) (all listed companies in the country except financial institutions and insurance companies have adopted IFRS), foreign companies entering the Mexican market still need to analyze regulatory and reporting differences, in particular Differences between different industries.
Labor Law
Another root cause of the complexity of doing business in Mexico is the protective nature of Mexican labor laws for employees. According to the country's constitution, everyone has the right to a socially beneficial job with limited working hours and decent wages.
To hire an employee, you must be registered with the relevant agencies, including the Social Insurance Agency, the Labour Housing Fund Agency (INFONAVIT), the National Employee Consumption Fund Agency (INFONACOT) and the State Treasury. All procedures must be performed by a legal representative holding a power of attorney.
One of the most controversial employee benefits under Mexican law is that businesses must provide profit-sharing (PTU) to employees from the second year of business. Employees are entitled to 10% of the company's profits when filing annual income tax returns, and individual dividends will be calculated based on wages received and days worked. Because this benefit can be a burden on employers, they tend to outsource or insource to separate profit recognition and creation, and operate in this operating model. However, Mexico passed a bill banning outsourcing in April 2021, so the above model is no longer allowed, and companies adopting it will need to make significant changes.
Like many other jurisdictions, wages in Mexico are subject to withholding tax, but the difference in Mexico is that employers are required to update the wage amount and corresponding tax withholding through the relevant authorities' electronic system and provide electronic invoices (CFDI) . For new employers with high payroll volumes, we strongly recommend that they integrate their payroll systems with certified vendors for electronic invoicing. This critical requirement is not an insurmountable obstacle. Some service providers and systems are ready to make this process transparent and smooth. Another option for companies is to outsource payroll calculations and related processes.
In addition to federal taxes, businesses must pay payroll taxes at specific rates depending on the federal state in which the employment relationship is established.
Certain contributions are shared by employers and employees, such as social security, pension insurance for termination of employment and retirement, and contributions to the Workers' Housing Fund. Depending on the reference measure, these contributions have minimum and maximum contributions, so you must pay attention to measures such as minimum wage, Unit of Measurement and Renewal (UMA), and Mixed Units of the Labour Housing Fund.
As an employer, you are also obliged to declare salary details to the various employee benefit agencies. From registration numbers, salary amounts, deductions, corporate and employee contributions, to deposit bank accounts and tax invoices, these are the basic information that needs to be prepared to meet the reporting requirements of different agencies. Violators will face penalties. Experts with local knowledge can guide you through Mexico's complex laws and customs, giving you time to think about how to successfully do business in Mexico.
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