By Globalization Partners
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Mexico’s numerous trade pacts and strong economy make it a viable prospect for international expansion, but complex taxes and lengthy dispute and permit processes could hold you back if you’re not prepared. Strategic international planning means understanding each facet of your new market. To fully enjoy and profit from Mexico’s duty-free cross-border trading and overall ease of doing business, you first have to maneuver your way through challenges with legal compliance, hiring, and IP protection.
This guide covers why you should expand your company to Mexico and the obstacles you could encounter along the way.
Benefits of doing business in Mexico
Successful international expansion lets your company enter new, diverse markets and grow your customer reach while increasing your revenue. It also helps you hire local talent with specialized experience in your industry. Mexico, in particular, can be very beneficial if you need a strategic trade location that’s easy to do business in.
These are the top reasons to expand to Mexico.
1. Numerous free trade agreements
Mexico’s optimal location along the United States’ southern border gives it convenient access to both the U.S. and Canadian markets, while its southern neighbors — Guatemala and Belize — grant strong connections with Latin America. Mexico exported goods that were worth approximately 491.6 billion U.S. dollars in 2019, thanks to numerous duty-free, free trade agreements (FTAs) and simplified cross-border trading processes, ideal for companies seeking cost-efficient exports. Mexico currently has 12 trade agreements with 46 different countries.
One of the most profitable trade agreements is the United States-Mexico-Canada Agreement (USMCA), an update to the North American Free Trade Agreement (NAFTA) that established strong trade ties between the three countries. The USMCA bolstered those ties; added more resolutions for labor, digital trade, and intellectual property (IP); and adjusted automotive requirements. In 2019, approximately 80 percent of Mexican exports were sent to the U.S.
Mexico’s connections open your expansion to over 1 billion consumers, totaling more than half of the world’s gross domestic product (GDP). These figures have earned Mexico global attention from brands like Nestle, Ford, and the BMW Group.
2. The ease of doing business
A country’s “ease of doing business” score, or DB score, looks at factors like getting credit, starting a business, taxes, cross-border trading, and resolving insolvency to gauge how easy it is to run a company there. Mexico’s cumulative score is 72.4, with its highest category being the ease of getting business credit. This is largely due to Mexico’s new law, which allows the general description of assets to be granted as collateral in Mexico City and Monterrey. The second highest factor in its score is starting a business.
Mexico’s newly simplified minimum wage program also supports its overall ease of doing business score. Former labor laws established two separate minimum wages in Mexico, depending on company location. The process is now simplified, with the same minimum of 141.70 pesos per day required across the entire country.
3. A strong, stable economy
One of the most significant political issues in Mexico affecting business is its newfound stability. After his 2018 election, President Andrés Manuel López Obrador — also known as AMLO — vowed to spend his six-year term ending corruption and addressing Mexican poverty by increasing the government’s efficiency and expanding social programs. He announced plans to invest more than US$4 billion into the oil industry. Mexico’s leading political party, the Institutional Revolutionary Party (PRI), continues to adapt to global business trends that support a stable market that welcomes international expansion.
AMLO’s election and subsequent political stability have led to increased consumer spending, scoring a 105 on the consumer confidence scale. Many local governments offer incentives for doing business — including tax reductions and reduced costs for some purchases and services — depending on your industry and location.
4. A renewed focus on research and development
In the past, Mexico offered little for research and development (R&D), spending less than 1 percent of its gross domestic output on R&D initiatives. Urging from the Inter-American Development Bank (IDC) and a renewed interest in technological advancement have enticed Mexico to invest more into the R&D economy through incentives. Over the past decade, changes to the Mexican Income Tax Law now give a 30 percent tax credit for R&D expenses, where applicable, and a 42 percent increase in the national R&D budget. The efforts are paying off — new startups have tripled since 2010.
5. A strong manufacturing industry
In terms of Mexico’s economic growth rate, there has been a recent 3.9 percent increase in industrial activity, primarily in the manufacturing industry. Mexico has a diverse and skilled labor force — much of which is bilingual — that has built a strong manufacturing industry. As a top auto parts supplier to the U.S., Mexico’s leading manufacturing sector is the automotive industry, which had an estimated export value of US$95.7 billion.
Other profitable manufacturing sectors include:
- Medical devices
- Appliances and furniture
- Clothing and textiles
- Consumer goods
Part of the manufacturing industry’s strength comes from the government-sponsored IMMEX program, which gives tax benefits to international companies that choose to manufacture and export their goods in Mexico. IMMEX lets companies do so without paying the value-added tax (VAT) on some materials and equipment.
Disadvantages of doing business in Mexico
Part of establishing your company in an international market successfully is understanding the long-term benefits and ramifications of doing business there. While Mexico has profitable trade pacts and economic incentives, there are a few hurdles you must prepare for.
These are the top challenges of expanding to Mexico.
1. Lengthy employment disputes
Scoring at 67, the DB score found enforcing contracts is one of Mexico’s weakest areas of conducting a business. If any employee or contract disputes arise, you must go through the Mexico City First Instance Oral Civil Court to resolve them. The process takes 350 days on average, which may consume company time and resources. Working with an Employer of Record (EOR) like Globalization Partners is one way to eliminate this concern because the EOR acts as the official employer and has the expertise to navigate all Mexican labor contracts and laws.
2. Low insolvency score
Part of expanding your company is having a strong backup plan in place if your situation changes. Companies pursue insolvency for a variety of reasons, including:
- Loss of a critical client, partner, employee, or consumer base
- An unexpected downturn in the economy
- Global crises and widespread shutdowns
- A loss in business financing
- An interruption in your expected cash flow
- A gap in understanding your market
Another one of Mexico’s lowest-scoring portions on their DB scorecard is managing insolvency. On average, it takes 1.8 years to process bankruptcy. Your company can take steps to avoid insolvency, including working with an EOR that can help you avoid potential lawsuits or fees that may occur if you fail to meet labor requirements when hiring employees. EORs manage your international hiring and human resources tasks — you focus on running your company efficiently while the EOR handles employment contracts, benefits packages, and payroll.
3. Lack of IP protection
IP protection is crucial across industries, including films, books, artwork, software, pharmaceuticals, food and beverage, and consumer goods. IP infringement and trademark fraud can cost your company lost revenue, court costs, and legal fees when you pursue action. It can also harm your company’s reputation, stall your operations, and postpone further expansion efforts.
While Mexico has several agencies responsible for IP management and protection — including the Attorney General’s Office (FGR) and the Mexican Institute of Industrial Property — the country is not as efficient at removing and preventing IP infringement as other markets are.
Common concerns with Mexico’s lack of adequate IP protection include:
- Industrial use only: Mexico does not permit patented ideas, only trade secrets and processes with final results that benefit society or fulfill a need. IP for industrial use includes designs, slogans, and inventions.
- Lack of anti-piracy efforts: The International Property Rights Index (IPRI), which measures a country’s ability to protect IP rights, ranked Mexico 71 out of 129 countries in 2020. Mexico leaves much to be desired in terms of anti-piracy, with little defense against counterfeiting and patent infringements.
- Slow-moving processes: Mexico’s law enforcement and court systems lack the necessary resources and planning to process IP infringement claims in a timely manner.
Should you succeed in proving your company has been the victim of IP infringement or other patent violations, the fine typically amounts to 20,000 pesos. Your company may also pursue compensatory civil action against the thief and claim further damages, in addition to the initial fine.
4. Complex business taxes
Managing, calculating, and paying company taxes can be complex and time consuming. The International Tax Competitiveness Index (ITCI), which considers dozens of variables within corporate tax, individual tax, consumption tax, property tax, and international tax laws, ranks Mexico as 31 out of 36 scored countries.
The federal corporate income tax (CIT) — currently 30 percent — is comparable to other economic leaders, including China’s 25 percent CIT. Corporate taxes in Mexico vs. the U.S. are higher since the U.S. reduced the CIT from 35 percent to 21 percent in 2017.
Mexican companies pay six tax payments each year, which can take more than 240 hours and significant resources to complete. Taxes include the CIT, the VAT for purchases, excise taxes, and withholding taxes. For profit-sharing, companies have to pay 10 percent of adjusted taxable income to their employees each year. The current social security rate for companies is 7.58 percent, while sales tax sits at 16 percent.
Mexico has separate taxation laws for resident companies and non-resident companies, with non-residents only responsible for paying taxes on income made in the country. One exception is legal corporations with headquarters in Mexico, which are considered legal residents and subject to tax on worldwide income.
Some legal entities may be eligible for tax reductions if doing business in select industries, like forestry, livestock, and agriculture. Local incentives may also reduce overall tax costs.
5. Trouble getting electricity
You may face additional challenges if you plan to establish a physical presence with permanent electricity. If your global expansion plans involve a physical location or manufacturing facility in Mexico, be sure to include plenty of time and resources in your opening timeline and budget appropriately for startup costs. Connecting to the power grid in Mexico can take as long as 112 days and involves seven different procedures, like submitting applications and scheduling formal inspections from the Comisión Federal de Electricidad.
The World Bank and International Finance Corporation list Mexico as 130th globally for the complex processes involved with getting electricity. Mexico’s DB score — which factors in all procedures, time, and costs required for a permanent electric connection, including supply quality and ongoing expenses — for getting electricity ranks at 71.1.
Electricity rates vary across cities and towns. CFE Distribución, Mexico City’s leading electricity provider, charges nearly 2.14 pesos per kWh used. Even micro businesses can use up to 15,000 kWh of electricity annually.
How working with an EOR can help you avoid common pitfalls
An experienced EOR can help your company achieve global expansion while avoiding some of the most common pitfalls of doing business internationally. Globalization Partners is a global EOR that helps companies like yours manage:
- Employee onboarding: Whether you’re hiring remote employees to fill global positions or need help securing the top talent in Mexico’s diverse labor force, an EOR lets you do so without establishing a legal entity first. Globalization Partners will create competitive compensation and benefits packages based on local standards and expectations and offer around-the-clock support for all your candidates.
- Legal compliance: Labor laws vary across countries, states, and local governments. Failure to comply may result in legal action or costly fines. Globalization Partners has regional HR experts on staff to help your company understand its obligations and remain compliant as you hire new employees.
- In-house resources: Preserve your valuable in-house resources and let Globalization Partners handle the details of your international expansion. Your company will work one-on-one with a vetted partner while retaining access to leading legal, HR, and tax professionals.
- IP security: Our legal team will help you preserve legal ownership of your IP and manage sensitive assets, complete with legal monitoring and platform-wide data protection.
Get help expanding your company with Globalization Partners
If your goal is to achieve international expansion in a promising market built on a robust manufacturing industry and profitable cross-border trade, Mexico could be the ideal country for your next venture. Globalization Partners offers a comprehensive, data-compliant solution, with features like automated employment contracts and 24/7 HR support backed by a simple-to-use platform with secure log-in.
Request a proposal today to learn more about expanding your company internationally.