Rankings Report: Mexico
Tax evasion reform improves accountancy opportunities
Mexico is experiencing flatlining foreign direct investment as the global economy faces up to the possibility of recession. Che Golden reports
The country is looking to exploit its relationship with the US, it nearest neighbour, to boost growth, while accidental conditions leading to nearshoring could plug the gaps in FDI. Locally, there are a lot of emerging opportunities - the digital economy is taking off, while the huge SME sector is not only proving to be more dynamic, it is also slowly becoming more tax compliant. But while the demand for accounting services is higher than ever, local firms are struggling with the global shortage of recruits and clients who put pressure on them to reduce fees. In Mexico, it could be easy to be busy and poor.
One of the local issues for Mexico has been bad governance amongst the SME sector, where incidents of tax avoidance have been high for many years. The SME sector in Mexico is huge – according to government estimates, it represents 93% of established companies and generally, they have had small profit margins, either due to financial limitations, planning or even knowledge of the market and business. But the changing make-up of these companies, as well as a combination of a carrot and a stick in terms of tax compliance, is going a long way to improve the situation.
“In the past SME were family companies that had a product that was either very in demand in the local market or they had a big multinational client,” said Francisco Bracamonte, legal tax partner, Kreston BSG México. “They used to lose a lot of money due to lack of controls, lack of financial information and one-man government administrative style. Now with more regulations and global competition, this model is not enough and some of them are focusing on good governance.”
Legal tax partner
Kreston BSG México
While constant tax reform has been a headache for the Mexican accountancy industry, reforms targeted at the SME sector to stamp out tax evasion have created an opportunity for local accountancy firms. There has been special treatment for small taxpayers in various sectors, such as those who obtain income from internet service platforms, or for foreign companies that do not have residence in Mexico. The introduction of digital tax vouchers for all transactions has produced better surveillance, while a long list of assumptions has been added where the penalties take a criminal nature, and others where the authority can block the individual so that they cannot issue invoices, freeze bank accounts or to publish that they are a tax fraudster. With these changes, it has become essential for SMEs to have expert advisors and accountants.
Not all changes have been punitive. “Mexico has shown its support for the SME sector through the implementation of various programmes,” says Jaime Rojas, partner director, Skatt Mexico. “According to the objectives and strategies outlined in the National Development Financing Programme 2020-2024 (PRONAFIDE 2020-2024), Mexico seeks to have greater financial inclusion of beneficiaries through the offer of credit products and guarantees to SME (exporting and importing companies); infrastructure projects, particularly those that incorporate sustainable criteria to contribute to environmental care; and to promote the offer of housing with sustainable criteria through bridge loans, guarantees and housing credit insurance.”
It seems that concentrating on getting more revenue from SMEs is becoming more pertinent as levels of Foreign Direct Investment (FDI) are dropping. The INEGI’s (National Institute of Statistics Geography and Information) most recent data showed that in the last quarter of 2020 total investment in the country fell 13% compared to the last quarter of 2019, but advanced 2.9% with respect to the third quarter of 2020. During 2020, total investment represented 18.8% of the national GDP); this is the lowest proportion since 1996, when it weighed 18.4% of GDP. Investment as a proportion of GDP has not been below 20% since 2004.
Bracamonte believes investors are being put off. “The government policies scared investors, by introducing reform that narrows investor opportunities,” he said. “Another important challenge is the rule of law, because the current government has not shown a big commitment to this issue.”
Nearshoring has been generating a lot of that investment and should be exploited further, according to Enrique Pastor Escobar, director partner at Kreston FLS Mexico. “There are almost accidental conditions that have generated interest in investing in Mexico from abroad,” he said. “Businesses in the northern region of Mexico have benefited from the nearshoring of companies as a result of the health crisis, and recent geopolitical events, mainly the war between Russia and Ukraine. According to a recent survey conducted by Banxico (Banco de Mexico), 16% of companies nationwide reported increases in demand for their products or foreign direct investment as a result of nearshoring in the last twelve months. The report also found that 49.3 percent of companies consider that trade tensions between China and the United States have benefited Mexico in terms of attracting foreign capital.”
Enrique Pastor Escobar
Kreston FLS Mexico
However, Manuel Rangel de la Garza, partner at CPC Rangel SC, a BKR member firm, feels that the monetary policies in the highly advanced economies limit investment scenarios and export possibilities of emerging economies like Mexico. “Our relationship with the US and Canada will continue to represent the biggest opportunity for Mexico and for the three countries’ economies,” he said.
Pre-Covid, Mexico was concentrating on growing the digital economy and this seems to be paying off. “For the third year, Mexico is in the top five countries with the highest growth in retail e-commerce, along with India, Brazil, Russia and Argentina,” said Escobar. “Six out of 10 SMEs sell through the Internet, but only one sells internationally. In this aspect there is a window of opportunity for Mexican businesses that have the United States as a neighbour, one of the most relevant e-commerce markets in the world. The American market has more than 59 million Hispanics and 62% of them are Mexican.”
While the global economy might be entering a period of recession, Escobar feels the local market is lively and offers plenty of opportunities for local accountancy firms. “The market is developing with new companies, young entrepreneurs, digital economy and foreign companies,” he said. “There are new regulations regarding anti-corruption practices and reporting on sustainability issues, which are areas of opportunity that still have much room for development.” However, demand does not necessarily bring in the revenues in Mexico. For instance, Mexican tax reform means that demand for tax specialists is booming but clients want to negotiate on fees, forcing firms to race each other to the bottom. Escobar pointed out that while more companies have sought accounting and tax advice from specialised firms, many seem to be using the impact Covid had on their own finances to get tax specialists to reduce their fees. According to Cuauhtemoc Contreras, partner at Zesati Contadores, an MGI Worldwide member firm, customers are focusing on price rather than quality. “People will always need our services but I find that a lot of firms are dropping fees in an effort to win clients,” he said. “In the long term, this is bad for our profession.”
Zesati Contadores, an MGI Worldwide member firm
“Economic conditions mean that clients are going to be demanding reduced fees for some time to come,” said Rafael Castellanos Perez, partner at MGI Bargalló, Cardoso y Asociados, S.C. “The challenge is to have sufficient and qualified human resources, as well as being up to date in terms of technology so we able to provide agile services for customers who seek both cost reduction and a service with greater benefits.”
Rafael Castellanos Perez
MGI Bargalló, Cardoso y Asociados, S.C.
In terms of attracting staff, Mexico is struggling. Escobar pointed out that young people are not attracted to the profession, and universities are actually reducing accounting places due to lack of demand. He feels that locally the industry has not grasped the way young people now want to live and work and so do not offer an attractive environment. Perez believes that accounting firms all over the world will have significant challenges recruiting and retaining people, as IAB has seen through various country reports, if they do not change their thinking.
As well as customers demanding lower fees, Mexican firms have also experienced rising costs as they change their businesses to adopt ISQM1 and ISQM2. “The Mexican Institute of Public Accountants (IMCP) is adopting the ISQM1 and ISQM2 and will be in force on December 15, 2022,” said de la Garza. “On that date the quality management systems of the firms must be designed, implemented and ready to operate. It undoubtedly represents a great opportunity to improve work processes and quality.” But of course, it comes at a cost. Perez claims his company has had to invest heavily in training staff, as well as updating company infrastructure and technology to carry out the implementation and monitoring of the quality control system, but in the long run it will increase confidence in in the Mexican accounting profession, which will be vital to attracting FDI.
Hopefully, adopting international standards might persuade the Mexican government to slow down on tax reforms and created a more relaxed environment for tax advisors where they do not feel as if they are under constant surveillance.
According to Escobar, tax legislation has incorporated several rules and penalties that include the identification of operations that the BEPS recommendations suggest being closely followed to avoid the erosion of tax bases and transfers of profits to other countries. Within these regulations, specific regulations have been incorporated about reporting such activities to the tax authority, and such reporting includes identifying who the tax advisors are and disclosing to them the full picture of the operations. These include corporate changes such as mergers, spin-offs, capital increases, decreases, and a long list of possible reportable activities.
“This of course exposes advisors to be reviewed and evaluated in their advice,” he said, “As well as being classified into categories of advice in which the authority grants its consent, and others in which it is classified as an advisor whose clients and advice will be observed with greater scrutiny. It can feel onerous - no one likes to feel observed and watched in terms of their professional services and in terms of what they advise their clients in general.”
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