Contributors from Mexico were asked three questions: What were the highlights/trends in your market last year? (i.e. important mergers, regulatory changes, economic situation etc.); What are the opportunities and challenges for accounting firms in the market?; What are the expectations for the future short/medium/long term?
By Jorge Jiménez, president, Russell Bedford Mexico
The key issues – from a macroeconomic point of view, affect advisers as much as their clients – for the second half of 2016 and first of 2017, are linked to some important events:
– The US presidential elections
– The oil price
– Domestic politic scandals and increasing insecurity.
The main consequences were devaluation by around 25% in this period and inflation of over 6% (annual rate) instead of the expected 3%, as well as a downward adjustment in budgeted GNP growth from 3.5% to 1.8%.
This situation has had several effects on advisers. Many small accounting firms have disappeared or have reduced their volume of clients dramatically, medium-sized firms have grown just a little over inflation, and second-tier and big firms are not doing so well. Additionally, this last group are undergoing internal reorganisations, with the consequence that many partners have left these firms, and are trying to start their own individual or small practices.
Our expectations for the end of 2017 and 2018 include that some sectors, like technology, telecommunications, energy, construction, automotive, and financial services, will grow.
In addition, some local regulatory requirements – such as reports and control for money laundering, financial sector regulations, and incorporation of electronic controls for tax purposes – are widening the range of services for accounting firms in general.
Taking the above into account, the main opportunities for accounting firms are primarily in tax services, because most companies, in this period of crisis, are looking for greater efficiency and a reduction in the tax burden.
Second, they are looking for advisory services for the design and implementation of more efficient processes, with the aim of reducing administrative costs.
And, finally, they require assurance services for the purposes of accountability, transparency, fraud prevention and anti-corruption work.
Another important issue is the substantial increase in the demand for business process outsourcing (BPO) and back office services for start-ups, medium-sized to large and foreign capital companies.
The main challenges are, internally, staff retention and talent development, training and adoption of systems and technology, as well as digital marketing investment. Externally, the challenge is to find ways to create services with additional benefits for clients.
The pricing of services will continue to be under pressure because of intense competition. There will be a high demand for integrated packages of services, which include accounting, payroll, legal/corporate services, taxes compliance (not tax consulting) and back office, as well as BPO for medium and large companies.
With regard to accounting practices in Mexico, in the medium and long terms, we will see several mergers and acquisitions of firms, mainly in the mid tier.
By Alexander Mahoney, Biz Latin Hub country Manager for Mexico & Central America (member of 3e Accounting)
Mexico continues to be an emerging economy, despite the minor temporary slowdown it has experienced since 2014. The fact that it has managed to rehabilitate itself so quickly from the 2008 financial crisis shows us that it has great potential as it picks itself back up. The International Monetary Fund (IMF) forecasts an acceleration of growth of approximately 2.7% a year between 2018 and 2020. There is a slow but constant inflation of the Mexican peso, which is usually expected in the case of emerging economies.
As for recent regulatory changes, in 2016, the Corporation Law was amended, allowing the formation of Simplified Stock Corporations in Mexico. These changes allow Mexicans to form companies more efficiently by allowing the process to be done electronically and without the need of a notarization.
Mexico’s main industries are tourism, energy, and oil. Therefore, there is great sightseeing to be done as Mexico holds 27 UNESCO World Heritage sites. Also, medical tourism has also become very profitable in the country. The oil industry is doing very well since the opening up of the state monopoly to private investors in 2013, attracting a large influx of foreign direct investment.
Companies and individual investors from around the globe are operating successfully in Mexico and taking advantage of what the country has to offer. The high rates of foreign participation in Mexico have unlocked a wealth of opportunities for multilingual market entry and back office services companies. Multilingual accounting services are highly sought after in Mexico by international investors and companies operating in the region.
Much of the success of Biz Latin Hub in Mexico has been due to the provision of professional services in English as well as in Spanish. The need for professional and multilingual accounting services will continue to grow as international investment in the region increases across all sectors.
The switch to the IFRS accounting method has been another factor in attracting foreign investment into the country. Foreign accounting firms can have greater confidence when entering Mexico knowing that they will use the universal accounting system. This was aimed to reduce corruption and fraud in the accounting industry.
The two main challenges are tax regulations and the uncertainty of how Mexico will continue with business regulations depending on changes in the political agenda. The Mexican tax authorities (SAT) are renowned for making frequent changes to tax regulations. For this reason, firms in the accounting market should be well aware of their tax/accounting obligations and requirements. Without a thorough understanding of the legal accounting obligations, companies put themselves at risk of facing the consequences imposed by SAT like fines, penalties etc.
Regarding politics, the coming general election in 2018 has the potential to play a role in changing tax regulations in Mexico. It is a factor that all accounting firms operating in the market should be aware of in regards to how it may affect their operations.
Trade and investment between the US and Mexico has seen huge growth since the implementation of NAFTA in 1994. If the US pursues their protectionist reform, the Mexican economy will take a blow.
However, Mexico can weather the storm -despite an over reliance upon the NAFTA since the 1990’s, Mexico has a huge number for FTA’s, a range of strong national industries (automotive, mining, tourism etc.) and a great strategic location in the middle of the Americas. These factors will allow Mexico to survive the short-term effects that significant economic, legal, and political changes would have on the country.
Over the years, Mexico has been seeking new FTAs around the globe, ensuring that they preserve their role as a major player in the global scene. In the medium to long term, Mexicans will have to turn towards these countries for trade and foreign investment to boost their economy.
With enormous supplies of oil and gas in the Mexican market, it seems that FDI in the country is here for the long term – generating jobs and contributing to the economy.
By Gabriel Llamas Monjardín, managing partner, BDO Mexico
Economic growth in Mexico has slowed down in recent years and there has been higher inflation over the first two quarters of 2017, but it is expected to drop at the end of this year. The industrial sector in Mexico has been expanding in the recent years, mainly in the automobile industry. The proximity with the USA plays a main factor in the Mexican economy, as it is its main commercial partner and the remittance of Mexican workers is one of the most important factors currently. The new petroleum regulation is expected to have a positive impact in the economic growth as well as the prices of gasoline. However, there is uncertainty with the renegotiation of the North American Free Trade Agreement and its effect in the balance of trade, although foreign investment has not decreased in the last months.
In the Mexican tax field there are at least three important issues:
- The evolution of electronic filing of the accounting records as well as the electronic invoicing on line with the tax authorities.
- The introduction into Mexican tax laws of the main issue of the BEPS project of the OECD (transfer pricing) as of this year (2017) Mexican entities, in certain cases, will have to inform to the tax authorities about the transactions between related parties in a more detail basis, as the country by country reporting is enforced in Mexico.
- The renegotiation of NAFTA and the potential tax reform in the United States is a challenge for the Mexican tax system for this and the next year (2017-2018).
The opportunities are that the demanding and dynamic world will enable a closer relationship with clients, as their business evolves to global operation, even if they have experience in international transactions or not. Also, help clients to smooth their business processes putting technology and knowledge at clients’ availability and with that help them increase their profits.
Technology is good, but on the other hand it is challenging because there are processes that are undertaken more and more often by so called “robots”. This is a challenge for services based in recurrent processes like audit procedures and tax compliance, therefore, accountancy firms are going to be facing a big challenge in the near future in these kinds of services. Consequently, these firms must evolve to more value added services as consulting in business matters rather than being a compliance observer or provider. With this, another challenge will be the demand of people (headcount) and the profile of the people the firms have to hire and develop or train.
My expectations for the short term in this case are to finalize my adaptation to BDO in Mexico as well as in BDO´s network. In the medium term, be an active partner in Mexico that can contribute to value added and high quality services to the Firm´s clients. In long term, become a leader to our Firm that helps in the consolidation of this view of the services to our clients.
By members of Allinial Global:
Adrian Romero, managing partner, Grupo Consultor EFE
Juan Manuel Hernandez, partner, Hernandez & Hernandez Asociados
Raul Estrada Zepeda, managing partner, Estrada Zepeda & Asociados
This year has regained some stability for the country after a rocky 2016 influenced by the US election. This led to a currency depreciation of more than 20% against the US dollar, and the freeing of fuel prices.
One of the main challenges was the US election because our country was attacked by the Republican candidate, now president, Donald Trump. The United States is our most important trade partner, and during more than 20 years of NAFTA, our economies have become more and more dependent on each other. During his campaign, Trump spoke about immigration, withdrawal from the NAFTA treaty, and building a wall on our common border. As the campaign advanced and he maintained chances to win, the markets started to feel nervous, and this was reflected into the deceleration of foreign investments and the fall of the Mexican peso against other currencies.
At an internal level, losing 20% against the dollar has had a negative impact on consumer confidence and government acceptance. The rhetoric also provoked important transnational companies, like Ford, to decide to withhold new investments from our country due to the menace of a new border tax.
In general terms, we can consider that the actions carried out by our government were the correct ones, trying to cut expenses under a zero base budget, using oil hedging, and improving tax collection. Even the polemic invitation made by the Mexican president Peña Nieto to the US candidates, which was accepted only by Donald Trump, had positive results as it opened negotiation channels for a review of NAFTA and it reduced the uncertainty.
The first rounds of participation for the energy sector, and also important changes in the communications sector have allowed the incorporation of new and important competitors. In terms of tax reforms, we have not seen major changes. As mentioned before, the authorities in Mexico have been working very effectively in improving tax collections.
In addition to e-invoicing, which continued to evolve, electronic accounting was also introduced, forcing taxpayers to present their accounting information in a standardized format every month. This allows the Mexican Tax Authority (SAT) to process and analyze the information to the degree where they can present pre-filled tax forms. We also saw the introduction of the electronic audits that will be used by the authorities to review the details of the electronic information presented by taxpayers. This gives them the ability to review any accounting period at any moment, looking for omissions on payments, revenue miscalculation, and tax evasion. It is important to mention that the SAT does not need to inform the taxpayers when it performs an electronic audit. Lastly, on an international level, Mexico introduced BEPS related obligations into our domestic tax law, such as new tax returns and transfer pricing documentation like the Master File, Local File, and the CbC Report.
The mandatory implementation of electronic accounting and e-invoicing presents some of the most important challenges and opportunities for public accounting and business advisors in Mexico. It represents a paradigm shift because taxpayers are forced to generate and deliver standardized data to the Tax Administration Service for every transaction, in real time.
Under the present requirements, bookkeeping and tax calculation have become more automatized processes for the authorities, pushing accounting professionals to embrace the use of new technologies in order to take advantage of the same information and assist their clients in the decision-making process for shorter periods of time.
Data analysis is a term that needs to be incorporated into the common vocabulary and activities of accountants, meaning that accounting services need to improve by adopting new tools and knowledge in order to not lose opportunities to offer services that are relevant for their clients.
President Peña Nieto promised there will not be changes in tax regulations until the end of his period, but due to the financial difficulties faced by the government, tax collection could become even more aggressive. This is another opportunity for accounting firms, considering that the taxpayers will require proper advice in order to be able to answer the inquiries made by the authorities in a timely manner.
Lastly, a large group of the leading accounting firms are expanding and evolving into advisory firms, focusing their practice on specialized services that differentiate them from the rest. Therefore, services like management consulting, IT, and others are more common and requested by the business community.
For medium and long term, future expectations are favorable, considering a positive outcome on the renegotiation of NAFTA and continued investment as a result of the implementation of structural reforms (energy, telecom, etc.).
Two of the most important credit rating agencies have recently changed the country’s score from negative to stable, and the GDP growth is above expectations. Inflation has been over 6%, the highest in nine years, but the Bank of Mexico expects a recovery in the second half of the year.
Next year, there will be the presidential elections in Mexico, but – even with data showing a robust and resilient economy – the lack of confidence in the current government and external influences will likely present a volatile scenario.
As only the left-wing MORENA party announced their candidate – the party’s founder, Andres Manuel Lopez Obrador – and the other parties have not yet officially announced theirs, he is the only sure contender and is leading the polls.
The structural reforms promoted by the three major parties are starting to show results, but the continuity of these reforms is essential for the future growth of the economy in the years to come. MORENA represents a threat to continuity, but it is still to early too estimate what the result of the elections could be.
By Mario Camposllera, International Liaison Partner of PKF Mexico
I have no doubt: the great constitutional reforms that have taken place in recent years in Mexico have changed the way of doing business in our country. Accounting is not exempt from such structural transformations. Every day new regulations, rules, laws, policies and certifications arise as a challenge for our profession.
The current business dynamics force us to act, rather as business strategists than as technicians. True advisers can accompany the clients in their complex making decisions. They rely on us, for example, on issues of money laundering prevention, tax reforms, capital transfers, risk analysis, and forensic auditing.
Nowadays, the situation is difficult and complicated. We are going through times that incubate several challenges, in very different areas (political, economic, social, and technological). It is true, as an ordinary citizen that we have challenges. In all Latin America countries, such as in Mexico, there are aspects to improve, but also to take advantage of. We have problems, different challenges, but we also share culture, values ??and idiosyncrasy, and these are great opportunities for us.
Latin America is a natural market that we must boost and grow, especially in the field of collaboration between nations. Regardless of the course of the relationship between Mexico and USA (both countries sitting together with Canada to renegotiate NAFTA). Additionally, it will be very important to strengthen trade with Spain, a historic door of trade between Europe and Latin America. We must work to generate wealth and heritage between both regions of the world.
Currently Mexico has a lot of business with Latin America, although it is likely to increase, because the commercial and cultural relationship between our country and the region is not new. In fact, it is historical; hence one of the challenges is to strengthen the communication to be proactive in generating value. Making customer and business references will be the key to materialize the opportunities of the environment in terms of wealth for all.
Corruption is also an obstacle to overcome. However, at least for PKF Mexico, every day we work to prevent it. Moreover, several partners at the firm are part of different professional colleges where they obtain first hand valuable information to combat the corruption and to give better advice to our clients. These are actions that reinforce our Ethics Committee (composed of three partners) to ensure that, in every moment, we act according to ethical standards.
These are the challenges and the opportunities in front of us, and as a country, as citizens, we are prepared to grow up in the next years. Macroeconomic numbers reflect it, but there are things to improve in microeconomics, and I am optimistic. Everyone needs to be informed and be prepared for this great challenge.