Challenges of Doing Business in Mexico
Challenges of Doing Business in Mexico
Mexico's Competitiveness and Rankings
July 2020
Let’s be honest, there are challenges of doing business in Mexico. In other words, Mexico’s competitiveness is not its greatest feature. As a lawyer, I constantly face the stressful bureaucratic hurdles.
Despite not being one of the most competitive countries in the world, Mexico’s competitiveness is above most Latin American economies according to the World Economic Forum (WEF) and the World Bank (WB). So, it is easier doing business in Mexico than in Brazil, for instance, according to said organizations.
WEF’s Global Competitiveness Index 2019, a yardstick for policymakers, analyzes 12 “broad” pillars, made up of components, that shape an economy of a country. By the way, 141 countries are ranked.
Meanwhile, the WB’s Doing Business gathers information regarding the regulatory environment and how it impacts local firms or companies, reporting 10 key indicators. I must disclose that this report was discontinued as a result of some
World Economic Forum's 12 Pillars
- Institutions
- Infrastructure
- ICT adoption
- Macroeconomic stability
- Health
- Skills
- Product market
- Labor market
- Financial system
- Market size
- Business dynamism
- Innovation capability.
World Bank's 10 Indicators
- Starting a Business
- Dealing with Construction Permits
- Getting Electricity
- Registering Property
- Getting Credit
- Protecting Minority Investors
- Paying Taxes
- Trading Across Borders
- Enforcement Contracts
- Resolving Insolvency
Negative Indicators of Mexico’s Competitiveness in 2019
Challenges of Doing Business in Mexico
Corruption
Crime and Theft
Inefficient Government
Tax Rates
Tax
WEF’s Global Competitiveness Index 2019
Unsurprisingly, Mexico underperforms in the Institution and Labor Market pillars of the WEF’s Global Competitiveness Index 2019.
Although serious legislative steps have been made on security, corruption, and “regulatory improvement”, Mexico continues to rank particularly low in a handful of matters that fall under the Institution pillar such as security (138th), burden of government regulation (116th), judicial efficiency (116th), judicial independence (103rd), as well as incidence to corruption (116th).
Insecurity is a concern not only for foreign investors. We note that the new administration has pushed for constitutional and legal reforms that have overhauled security bodies, the attorney general’s office, and powers to the Tax Authority (SAT, acronym in Spanish) against tax evasion schemes. Moreover, the Financial Intelligence Unit (UIF, acronym in Spanish) has been tackling high profile individuals and companies that are allegedly involved in laundering money or in corrupt practices.
As for the Labor Market pillar, Mexico underperforms in redundancy costs (e.g. severance of labor contracts) (103rd), as well as labor tax rates (116). Needless to say, Mexican Labor Law has undergone a significant overhaul as a result of USMCA’s Labor Chapter, which seeks to protect collective labor rights. However, such reform neither addressed the redundancy costs nor labor tax rates (i.e. a state tax on payroll).
For more information on the recent labor reforms, visit our labor in Mexico guide.
World Bank’s: Doing Business 2020
Known to have a complicated tax environment, Mexico is ranked in the 120th position out of 190 economies in the paying taxes topic of WB’s Doing Business 2020. This is Mexico’s lowest rank. Under normal circumstances, a company would have to pay six taxes throughout the year, namely (1) corporate income tax, (2) value added tax, (3) security social contributions, (4) payroll tax, (5) property tax*, and (6) vehicle tax*. Despite a low number of tax payments as compared to other jurisdictions, Mexico’s tax environment is poorly ranked specially due to (1) total tax and contribution rate and (2) the postfiling index. For instance, Mexico’s statutory tax rates for the corporate income and VAT, which are the most time consuming and prone to tax audits, are set at 30% and 16%, respectively. Furthermore, VAT refunds or income tax corrections take a considerable amount of time.
In addition, Mexico also underperforms in starting a business (107th), getting electricity (106th), and registering property (105th) in the WB’s Doing Business 2020. The process to incorporate a company appears, in its face, straightforward in Mexico. An entrepreneur has to complete about eight procedures to incorporate a company and have all its registrations in order; however, a significant hurdle is that concerning to the company’s registration before the Mexican Tax Authority, i.e. SAT.
Likewise, other challenges of doing business in Mexico are the number of procedures and time that negatively affect Mexico’s score in getting electricity, meanwhile the number of procedures, cost, among other matters, influence Mexico’s negative performance in registering property.
Employment
Judicial Efficiency
Inefficient Government
Electricity
Registering Property
Positive Indicators of Mexico’s Competitiveness in 2019
Benefits of Doing Business in Mexico
Macroeconomy
Market Size
Electricity Access
Financial Stabilility
Airport Connectivity
WEF’s Global Competitiveness Index 2019
Mexico ranks in as the 48th most competitive economy out of 141. The Mexican economy stands out in macroeconomic stability (41st) and market size (11th) pillars. This is no surprise as Mexico’s inflation has been controlled, around 3% to 4% per year; its GDP has had a stable growth, about 3%, in the last decades; and, its public debt has been properly managed.
Needless to say, inflation has had few spikes, notably in 2017, as a result of the liberalization of energy goods; and, despite having the second largest market of Latin America (124 million people), Mexico has a low GDP per capita or purchasing power.
Furthermore, Mexico also stands out in the following specific components or indicators: budget transparency (6th), energy efficiency regulation (30th), renewable energy regulation (30th), road connectivity (22nd), airport connectivity (15th), liner shipping connectivity (34th), electricity access (% of population) (2nd), debt dynamics (36th), trade openness (27th), ease of hiring foreign labour (48th), financial stability (30th), cluster development (36th), among others.
World Bank’s: Doing Business 2020
Mexico is ranked in 60th place overall, out of 190 economies, and is one of the top business-friendly environments in Latin America, only behind Chile that ranks in the 59th position. Mexico’s top three topics or indicators are getting credit (11th), resolving insolvency (33), and contract enforcement (43rd).
As a result of strong legal rights in relation to collateral laws (securities) as well as a robust credit reporting system, Mexico outperforms most economies in getting credit.
In a similar vein, Mexico also has a decent performance in the resolving insolvency and contract enforcement indicators, particularly, due to time to carry out a dispute in a court (under certain assumptions) and the strength of the insolvency framework index.
Insolvency
Contract
Getting Credit
Road Connectivity
Trade Openness
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