According to the World Bank, in 2014 Mexico’s economy was the 15th largest in the world measured in current dollars and the 11th in PPP dollars. Gross domestic product (GDP) amounted to USD 1,294.7 billion (current dollars) and USD 2,145.1 billion in terms ofpurchasing power parity (PPP). Per capita income was USD 18,500 per annum in PPP dollars.
In 2015, the country’s GDP structure was:
Broadly speaking, in regional terms northern states concentrate on manufacturing, the central region on manufacturing and services, and the southern region on agricultural activities.
Mining 6.8% (incl. oil)
Electricity & Water 2.3%
Manufacturing Services 60.9% 17.0%
The oil industry is mainly concentrated in the southern region and along the Gulf of Mexico coast. It should be noted that, contrary to widespread belief, the oil industry only accounts for around 6% of Mexico’s GDP. Its main importance is for the government’s finances.
When doing business in Mexico, it is important to remember that it can be critical to make friends with Mexicans. In general, Mexicans make friends first and then do business, rather than the opposite way round. Not taking the time to develop a relationship of trust will hinder the possibility for a long-term business relationship, so business people should initially focus on building relationships.
A meeting should begin with a brief casual talk. Family is very important in Mexico, so a brief enquiry about the wellbeing of a host’s family is common practice. Other conversation topics to break the ice may be previous visits to the country (if any), the country’s natural beauty (whether known about or not experienced) or the weather. Business deals are rarely concluded over the telephone, since eye-contact and personal acquaintance are essential for doing business in Mexico.
SETTING UP A BUSINESS
As a very open economy to trade and investment, Mexico has a vast experience with foreign companies operating in its territory and offers a reliable institutional and legal framework for their operations.The following section aims to provide basic guidelines for companies starting business in Mexico. These are general guidelines and their particular application depends on several factors, special laws and business activities. Mexican laws are mostly federal in nature; therefore this guide is applicable to virtually any state of Mexico and represents what can be done without any special permission or authorisation in the different states.
ESTABLISHING A BUSINESS IN MEXICO
As mentioned, Mexico has more than 16 free trade agreements with 48 countries including NAFTA (North American Free Trade North America) and the European Union, and consequently companies incorporated in Mexico enjoy the benefits of such treaties, which provide foreign companies the same treatment as a domestic investor.
TYPES OF ORGANISATION
LIMITED LIABILITY COMPANY (LLC)
This is a form of company often preferred by foreign companies in Mexico because of its similarity to institutions in their countries of origin. The minimum risk to guarantee the payment to various creditors is the amount the parties consider. The LLC can be administered by a sole administrator or a board of directors. With this type of company, the social capital is not represented by shares with free movement, but by parts which are not entitlements.
This type of company is becoming less popular, mainly because taxes are applied to the individuals and because the individual assets of partners are at risk. It does not require a minimum social capital and can be administered by a sole administrator or a board of directors.
The opening of a foreign branch is advisable when a company wishes to do business with no income or income from Mexico. However, it is applicable only where the structure of ‘corporate governance’ and shareholders retain the same designation and distribution as abroad. In this case, registration with the National Commission on Foreign Investment is needed to obtain the necessary permission.
Representative offices are largely similar to branches, but have a different tax treatment, especially in the case of foreign banks where this is a legal imperative. With this type of organisation, companies must apply for a Tax Identification registration.
When investors have no prior knowledge of the country and its market, the risks of investing are often a major concern for foreign companies. In some cases, foreign investors therefore choose to use alternatives which reduce the risk, such as buying a Mexican society which has been duly constituted and has some experience and a track record in the local market. Or investors can enter into a joint venture with a local company. There are two ways of establishing a joint enterprise –strategic alliances and joint ventures. The strategic alliance does not require that the parties invest liquid resources in the business.
However, companies are able to take advantage of benefits such as the use of infrastructure, establishment of branches without investment, the reduction of costs, and agreements to provide contracts and/or exclusive distribution etc. In the case of a joint venture, both companies invest a sum of money which is agreed upon to start the new business. A contract then sets out the way this business will be administered, the profit and dividend distribution, rights and obligations.
DOING BUSINESS IN MEXICO
This form of entering the Mexican market does not involve direct investment of foreign companies and in some cases simplifies the sale of products. However, it involves a broker who keeps a significant portion of the profits. An advantage of distribution contracts is that, in many cases, dealers already have a network of customers. This allows distributors to facilitate contact with customers/consumers, which for a foreign company with no previous experience in the country would be difficult and may take some considerable time to achieve.
There are three levels of taxation in Mexico – federal, state and municipal (or local), with Federal taxes comprising both direct and indirect taxes.
- Income tax –on individuals and companies
- INDIRECT TAXES
- Value added tax
- Real estate transfer tax
- Import tax or duty
- Excise taxes – ad valorem taxes on specific products and services
- Withholding Income
STATE AND LOCAL TAXES
- Payroll tax, real estate transfer tax and land tax are the main state taxes.