Investing in Mexico - Perceptions and Attitudes about Corruption and Democracy in Mexico - Case Study Example

Individual Report: Investing in Mexico

Mexico presents a lucrative place to conduct business for many multinational corporations. Many factors favour the growth of such businesses, such as low cost of labour and good potential for expansion. However, there are issues that one ought to take into account before investing in the region. West Elton Company’s ambition to invest in the Mexican economy should first consider the various accounting, ethical, and sustainability issues affecting the region. The accounting matters affecting the investment option in Mexico revolve around factors such as taxation and the monetary policies with which a multinational company has to abide. The evaluation of the ethical factors will help in projecting the company’s sustainability with regard to its relations with the local people and their cultural perspectives.

Accounting Issue

The main accounting issue that will affect the establishment of a new subsidiary in Mexico is taxation. The aspect of taxation presents a major challenge due to the policies put in place to deal with foreign investors in the nation (Breceda, Rigolini, & Saavedra, 2008). Failure to scrutinise and determine the most appropriate structure for the subsidiary to be set up in Mexico will result in double taxation, a factor that would lead the company to make losses (Chow & Wong-Boren, 1987). The tax system in Mexico, according to Clausing (2009), has three broad categories to which companies must comply. The first is the value-added tax, which taxes the sales made. The second tax is the corporate flat tax, charged on the sale of goods and the provision of services. The other tax is the corporation tax, charged at around 30%. The taxes are payable annually. However, the companies have the obligation to file the tax returns every month. The investment of West Elton in Mexico, however, needs to consider the type of structure it will adopt in Mexico. Such a consideration is important since the structure of the company has a direct implication on taxes it pays.

The Mexican government can provide a tax treaty advantage to a company depending on the choice of its structure. Tax treaties help in either the reduction or elimination of any prospects of double taxation (Fernandez & Carson, 2002). The structure and strategy-related taxation will determine the company’s liability to the taxes put on foreign dividends that are distributed from the subsidiary and whether it is liable for capital gains (Gordon & Li, 2009). The last aspect of consideration is whether the foreign subsidiary will have to pay taxes when it receives capital gains and dividends in its home country where the parent company is situated.

The first structure for West Elton’s consideration while investing in Mexico would be the basic subsidiary structure. The structure comprises a single unit of the parent company placed in the foreign country. Such can be a manufacturing plant that serves the customers within Mexico. The structure would allow the organisation to operate independently, to the extent of either importing or exporting goods or services (Mintz & Weichenrieder, 2010). Setting up a subsidiary of West Elton in Mexico would reduce the cost of exporting and distributing the products of the company to the nation. The cost would reduce since the company would not have to pay any percentage of its income to import and export brokers. Opting to use the structure would require that a company registers as a limited liability company.

The second structure for West Elton’s consideration in the choice of a company structure to set up in Mexico is the multilevel holding structure. The multilevel holding structure requires that an organisation sets up a holding company in the foreign country to control the several subsidiaries that it has in that country (Davies, Norbäck, & Tekin‐Koru, 2009). In this case, the West Elton company will have to establish several subsidiaries in Mexico that perform differentiated works and also establish a holding company to oversee their functioning. Such a structure supports companies that aim at operating various manufacturing plants (Muller &Kolk, 2009). In such a structure, Mexico exempts the dividends that the subsidiaries pay to the holding company from paying taxes. The holding company can be registered as either a corporation or a limited liability company. Registering as a limited liability company, however, will provide a degree of tax exemption through preventing double taxation (Prather-Kinsey, 2006). The structure is most appropriate for the companies that wish to keep most of the funds generated within the foreign country through other forms of investment as opposed to repatriating them back to the county where the mother company is located (Profeta & Scabrosetti, 2007). The repatriation to the home jurisdiction attracts taxation.

Ethical Concerns in Mexico

The main ethical concern in Mexico is the widespread bribery and corruption that cripples most activities within institutions that wish to operate on a clean slate. The concern over corruption bases on overhead costs that it puts on the operations and efficient service delivery (Bailey, John, & Pablo, 2006). However, the perception over the ethics on corruption is relative. In Mexico, the issuance of Mordidads is seen as normal (Haber et al., 2008). However, foreigners interpret it as bribery (Ionescu, 2011). The difference in the perspective of the things that constitute a corrupt dealing base on the difference of cultures between Mexicans and foreigners.

However, such normal practice of the issuance of Mordidads comes from the constant and widespread practice of corruption to the point of its normalisation. Avoiding corruption in the region further becomes hard due to the involvement of the law enforcement agencies in the act (Casanova & Dumas, 2009). Foreign companies have to incur extra charges at every step of their application for licensing and other official procedures. A crucial factor to note is that the issuance of a single bribe, in most cases, requires that one gives others for complementary and supplementary purposes (Sarsfield, 2012). Corruption is a major setback in the Mexican region when it comes to operating a business since it tends to reduce the profit margins of the business (Kaplan, Piedra, & Seira, 2007). The reduced profit margins make it hard for the company to either expand or improve the services it offers to its clients.

Another consideration that the West Elton company has to take is the time it takes to complete legal requirements for any documentations. Corruption makes it impossible for the responsible government authorities to attend to the licensing and author documentation matters promptly (Coronado, 2008). The companies that do not take part in any corrupt dealings such as the issuance of bribery, in most cases, have their documents processed slowly. The ethical dilemma in the region makes most companies participate in bribery as a means to hasten certain processes that are crucial to the organisation’s progress (Morris, 2009). The decision to issue a bribe to hasten things in such offices, however, is not forced on an individual. Choosing to pay bribes is a personal decision that either a company or an individual makes for themselves.

However, not all people in Mexico are corrupt. Some individuals and institutions uphold good moral values that abhor bribery and all other forms of corruption (Morris & Klesner, 2010). Such institutions prove the viability of the Mexican market to other institutions. The West Elton company, therefore, has the obligation to distinguish the genuine payments and bribery while investing in the country. Any form of bribery allegations is bound to destroy an institution’s reputation and will make it hard for it to conduct business with other institutions (Rose-Ackerman & Palifka, 2016). Creating a good image that is not tarnished by any form of corrupt dealings build customers’ trust and makes the company advance quickly in its endeavours.

Recommendations

The accounting issues that the company faces in its endeavours in Mexico mostly revolve around taxation. Therefore, it is empirical that the company has good knowledge of the taxation system in the country. It is in the interest of the company to conduct further assessment to determine the details of tax. Recommendation stands that the company should pay all the taxes that it is liable to pay. Doing so would build a good reputation of the company. Regarding the taxes that the institution should pay, it is advisable that the company adopts the basic subsidiary structure; the structure helps a company avoid double taxation. The accounting issue that revolves around taxation aims at ensuring a company pays the least amount of taxes without violating any tax policies. The proposed structure makes it possible for the company to repatriate the profits it makes back to the mother country. Therefore, adopting the structure will help the headquarters of the West Elton company situated in the UK enjoy the profits generated in its off-shore branches without incurring addition costs in taxes.

Ethical considerations in Mexico require that the West Elton company observe strict measures in reminting cash to other institutions. Such strict observation will ensure that the company only pays for the services that it receives from either the government or other financial institutions without incurring excess costs in corruption. Adopting a strict policy against corruption will also help in building the company’s reputation with other institutions and its customers as well. It is recommended that the company also learns the culture of the local region to understand the difference that exists between bribery and friendly tips. Doing so requires one’s personal judgement of a situation and the necessity to offer any tips.

Summary

Investing in Mexico requires that one understands the dynamics of the market in aspects such as accounting and ethics. The most important accounting concern for the West Elton company is the taxation that it will have to incur when setting up a subsidiary in Mexico. There are three main taxes that a company operating in Mexico has to pay. First, there is the value added tax, the second is the corporation and, the third is the corporate flat tax. Abiding by all these tax requirements makes it easy for the company to operate without incurring any additional expense in fines. The amount of the tax that a company pays also relies on the type of license that a company uses to operate. In this regard, a company can either be a limited liability company or a corporation. The taxation also depends on the structure of company that a company adopts. It is advisable that West Elton adopt the basic subsidiary structure. The recommendation bases on the structure’s ability to prevent double taxation when the subsidiary repatriates profit back to the mother country.

The ethical issue that West Elton will have to deal with while investing in Mexico is the widespread corruption and bribery. Many bribes are issued in Mexico in the form of Mordidads. These are tips that one issues to the people who provide various services. Overcoming the challenge that corruption and bribery presents in the nation makes it important that the company adopts a strict measure against corrupt dealings. Doing so requires that the institution abide by all the laws provided. It further requires good personal judgement and understanding of the company staff regarding the culture of the people and the kind of payments that constitute corruption.