Inside the Most Complex Places to Do Business in Latin America

The TMF Global Complexity Index 2014 placed five Latin American countries in the top 10 most complex places to do business rankings, with Argentina and Brazil placing first and second as the most complex in the world. Nearshore Americas examines the complexities of these places and the implications for nearshore offerings.

Photo by Brewbooks.

The TMF Global Complexity Index 2014 placed five Latin American countries in the top 10 most complex places to do business rankings, with Argentina and Brazil placing first and second as the most complex in the world. These were followed by Bolivia (3), Mexico (6) and Paraguay (8). Fully half of the top ten list of complex places to do business is in Latin America. Despite this, though, a robust and thriving ITO/ BPO landscape serving North America and other places in the world has evolved in the region, which begs the question: are these countries really so difficult to do business in?

As the TMF report notes the global business environment has become more complex in a number of ways, especially in terms of “an increase in the compliance requirements shouldered by organizations, including FATCA compliance, anti-bribery and corruption, BEPS and changes in international company law.” Within this context, North American firms looking to benefit from nearshore advantages have to tackle a nest of legal, compliance and business requirements that can make setting up shop elsewhere particularly daunting.

Sara Haq, Founder and Principal of SH International, who has worked across Latin America, explained that many of the factors assessed in studies such as the TMF one relate to the ability for foreigners to do business in the country.

Entrepreneurial companies are able to be creative and responsive in complex business environments – Stephen Wagner, Senior Attorney

“For instance, whether record keeping is not in English is considered, as is whether local residence is required for directors. Many other factors simply create higher barriers to entry, as well as higher barriers to exit, leading many international companies to prefer to do business elsewhere where they can be more agile in moving around resources between countries as needed,” she said, adding that these factors include the length of registration process as well as the process for the dissolution of a private company.

Haq noted that many countries in South America, including Argentina, Bolivia, and Peru have had less modernization of institutions by the government to open up towards foreign investment.

Tough Taxes

Carlos Amaral, a Director at Alsbridge, highlighted the complexity of tax systems in Latin America as a key contributor to the overall difficulty of doing business in the region. “In Brazil, for example, a service provider must become an expert in local taxes for invoicing purposes. While the federal tax system is common across all of the country, the tax system varies based upon city, county and state,” he said.

In a recent PriceWaterhouseCoopers (PwC) report, Carlos Iacia stated of Brazil: “complex data provision requirements and frequent changes to tax laws result in a high compliance burden.”

Moving across borders in the region is also a complex issue when it comes to tax. “The cross-country tax system is also very complicated. Argentina, Brazil, Paraguay, Uruguay, and Venezuela have all signed the Mercosur, which is roughly the equivalent of NAFTA,” Amaral said. “This is designed to be a free-trade agreement and while it allows some products to be traded free of taxes, it doesn’t cover all products and services. So understanding and navigating the rules and exceptions is a huge challenge.”

Brazil is not alone in its tax system complexity. The TMF report said of Mexico: “Paying taxes is a laborious process in Mexico, taking some 337 hours of business time per year, even though there are only six payments to be made.”

Tax is not the only area where complexity can be a hindrance. “HR regulations in Brazil are also crazily complex. For example, Brazilian employees receive a yearly bonus called the décimo terceiro or thirteenth month. The payment is made at different times and varies based on the number of months worked by the employee,” Amaral said.

Enforcing contracts in Mexico is also potentially issue, as it takes “415 days to do so, and there are 38 procedures involved”, according to the TMF.

Assessing the compliance of a company that a U.S entity wants to do business with in these countries is also often difficult, according to Mitchell Fuerst, co-founder of Miami law firm Fuerst Ittleman David & Joseph, which specializes in helping U.S. companies do business in Latin America. “The complexity of these systems means it is difficult even for local accounting firms to assess a company’s compliance with the country’s laws.”

Ricardo Aquino, Managing Director of TMF Group Brazil, said in a press release that “reforms of Brazil’s laws and regulations for opening and running a business have not adapted at the rate with which the economy has grown, presenting many hurdles to overseas corporations.”

Changing Attitudes

In Argentina, the issue seems to have been a move away from U.S investment, which has made it difficult for American companies to get a foothold in the country as they had in the past. Government restriction of U.S dollars in 2011 and the subsequent black market that resulted caused complications for U.S multinationals.

Understanding and navigating the rules and exceptions is a huge challenge – Carlos Amaral, Alsbridge

Fuerst said the situation is as a result of Argentina’s practical default on its international debt. This has created difficulties in being able to move money out of the country as foreign businesses often want or need to do.

As Stephen Wagner, Senior Attorney at Fuerst Ittleman David & Joseph, pointed out, when a US company is looking to expand, one of the things they are looking at is how am I going to get my capital out and extract my profits? “Some of the more traditional means that companies would use aren’t necessarily going to work in these markets,” he said.

Fuerst added that Argentina is characterised by antiquated capital systems that result in a calcified process of putting money into the country and “all sorts of roadblocks getting it out.” There are also regulatory and compliance issues once you are there.

Signs of change exist, however. Carlos Pirovano, sub-secretary for investment in the City of Buenos Aires, told Forbes magazine that Argentina is in a process of change following poor economic policy decisions and that they are hopeful of opening the country up to further foreign investment next year. Fuerst, however, has not yet seen evidence of this.

Bolivia, while having improved in international reputation and actively seeking foreign investment, has hurdles of its own, including a swathe of government departments to navigate through. The TMF listed the Registry of Commerce, National Tax Service, the Municipal Government, the Chamber of Commerce or Industry and the Ministry of Labor as some of those directly impacting foreign investment. Electricity cost is also exorbitant, registering property is time-consuming, and trading across borders difficult.

Across all of the identified countries the key words that signaled the complexity of doing business were “bureaucratic and burdensome”. Wagner explained that rule of law is quite often an issue, with onerous litigation processes in place. While the TMF study looked at business in a general sense and examined factors that can impact on all or most types of business, legislation and practices specific to outsourcing also exist in most of these geographies, posing their own sets of challenges.

Fuerst cautioned that the media in places like Brazil also tend to publish accusations about individuals and companies that would never be published in the U.S, and these statements can make their way to U.S. sources causing reputational issues for companies.

Routine money transfers are also often an issue because of increasing scrutiny and suspicion of such transactions as a result of trade-based money laundering scams, Wagner added.

Growth Potential

While these factors make it harder for foreigners and new entrants to compete, it only “helps those who are already doing business in these countries and sectors from flourishing even more as a result,” Haq said, pointing to the BPO/ ITO sector across the region.

Wagner noted that while there has been a movement away from foreign investment in manufacturing in Argentina and other countries like Brazil, there is greater investment in software development and call centers, often tapping into the growing local Hispanic markets in US. “Unlike with hard products, these kinds of services do not require you to move the product out of the country to extract the value out it,” he said.

Wagner emphasised also that the types of foreign companies expanding into the region tend to be entrepreneurial in nature. “Entrepreneurial companies are able to be creative and responsive in complex business environments,” he said. Brazil, for example, has tremendous growth potential. “The TMF report noted a slowdown in the growth of Brazil, but it is only slowing down in relation to itself,” Wagner said.

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In many instances, it is a case of the benefits of a nearshore location and the quality of talent available outweighing the disadvantages of a complex business environment. Once the initial familiarization process has been done, companies have a much firmer grasp on the nuances of the complexities in a particular locale and are then able to expand operations further into the county or even the region.

Services that simplify these complex processes on a country-by-country basis can also take the sting out of moving into an area with an onerous legal-regulatory framework for foreign business. It is clear that local help is crucial to the successful implementation of business in any of the countries identified.

The local vendor in a nearshore location can and must play a crucial role in making the process less complex and daunting. Both parties need to work together to mitigate the negatives of a complex system and identify the most effective ways to achieve the shared goals of an outsourced deal. There are so many examples of multinational, high-value deals in the BPO/ ITO sectors in Argentina, Brazil, and Mexico certainly that there is little doubt that clients and vendors are successfully navigating these complexities to gain the benefits.

Government and industry in these countries have all, to a certain extent, expressed an interest in stimulating foreign business investment, and simplifying processes. Whether these changes will come quickly and in such a way as to benefit the nearshore outsourcing sector remains to be seen, however.

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