Expanding into Central and South America – Part 2

Bloomberg recently reported that a ‘nearshoring’ push is fueling tech job demand in Latin America. The reasoning behind this push, according to CSIS (Center for Strategic & International Studies), is that the United States is seeking to align with countries in the Americas on key supply chain issues. The intent is to establish special economic zones (SEZs) throughout Latin America and the Caribbean.

Throughout the rest of the month, HSP Group will be releasing blogs that will further highlight why companies are choosing to expand to Latin America and the complexities to look out for. In today’s blog, we delve into the regional specifics that muddle tax calculations.

Part 2: Understanding the Tax Complexities within Latin America

Considering that Latin America is comprised of 33 separate territories when it comes to tax compliance, there is not a ‘one-stop-shop’ solution. Each country will hold its own regulations, and, in some cases, the taxes vary within the country itself.

Using the examples of Brazil and Mexico, let us take a look at just how varied tax regulations can be.

Country Example: Brazil

Brazil calculates federal, state, and municipal taxes. Brazilian companies make an assessment at the end of each fiscal year based on their operating state and city.

The tax calculation process involves assessing VAT at both federal and state levels. International trade dictates federal tax. State tax, however, is determined by the movement of goods within Brazilian borders, including transport use, electricity, and communication services.

Municipality taxes offer another layer of complexity. There are 5,570 municipalities within Brazilian borders. Each one will have its own set of tax regulations and calculations that you will need to understand. If you’re operating in multiple cities within Brazil, this would obviously require extremely close attention to detail.

Additionally, you’ll need to understand the amount of annual revenue that is taxable. Tax amounts will differ depending on whether the company is headquartered in Brazil and operates globally vs. operating in Brazil with headquarters located elsewhere.

Taxes are calculated based on global gross revenue for a Brazilian-headquartered company. A foreign-based company will pay their taxes based on their gross income within Brazil.

Country Example: Mexico

Mexico’s tax law is the second most complicated tax law in the world. Companies must file both monthly and annual tax declarations. This process demands a considerable amount of time as well as knowledge of how to navigate the Tax Administration Service’s digital platform.

Mexico’s federal corporate income tax (CIT) is set at 30% of an entity’s annual gross income at the end of a fiscal year (though corporate taxpayers involved in agriculture, livestock, fishing, or forestry are subject to a 30% decrease on their total tax liability).

Once CIT is paid, money goes into a post-tax account known as a Cuenta de Utilidad Fiscal Neta (CUFIN). The CUFIN earnings can then be distributed to shareholders with no further corporate-level tax liabilities. (Though a withholding tax (WHT) at the rate of 10% will apply to any dividend payments to individuals or foreign residents – including foreign corporations, from income made post-2014.)

Unlike Brazil, this total taxable amount no longer varies depending on whether you operate from Mexico or as a non-resident. This is due to Tax reforms passed in 2020 that dictate foreign-sourced revenue generated by both Mexican residents and permanent entities (PEs) established by non-residents through transparent legal entities or juridical figures will be taxable in Mexico.

On an advantageous side, Mexico does not hold any additional corporate tax regulations at a state or municipal level. So, despite all the numerous accounting difficulties, the 30% CIT rate is the only applicable corporate income tax liability.

HSP Group can Manage your Tax Obligations, so You have Time to Manage Big-Picture Progress

In-country tax regulations are complex and require local expertise to get it right. While there is a plethora of expansion opportunities within Latin America, the sheer level of intricacies revolving around tax compliance can be off-putting when evaluating Latin America as your next growth region.

Working with HSP Group can help you get started in a compliant manner with full confidence, knowing you’re on the right track.

HSP Group provides top-tier expertise, extensive service platforms, and a comprehensive software suite that leaves no stone unturned in making your Latin American expansion a resounding success.