TMF Group’s Massimo Canovi Explains Why Colombia Is World’s Fourth Most Complicated Country For International Business
Global payroll and tax firm TMF Group just released their 2021 Global Business Complexity Index (GBCI) that analyzes business administration and compliance across 77 jurisdictions, from the time it takes to incorporate a company, to changes in tax legislation, policies around wages and benefits, through to the challenges of opening a bank account. In all, more than 290 different criteria are factored into this year’s rankings.
Though Brazil remains champion as a notoriously complicated jurisdiction for foreign companies to enter and operate, Colombia came in as the fourth worst country out of 77 jurisdictions. In fact, while El Salvador stood out as one of the best countries for multinationals despite its crime and corruption issues, six of the ten worst countries for business complexity are in Latin America.
Mexico, Colombia, Argentina, Bolivia and Costa Rica ranked 3rd, 4th, 7th, 8th and 9th, respectively. Ever changing legislation and multiple layers of government bodies to deal with contribute to the region’s placement.
Other reasons for this positioning are the number of bodies that need to be notified when incorporating a company. South America, for instance, requires four to five bodies to be notified on average, whereas the average in other regions, such as North America and EMEA, is two or three.
Another factor is the region’s preference for in person appointments with tax and other authorities, while the global trend is towards digitalization. Consequently, businesses investing in the region have to deal with longer than usual timeframes while incorporating local entities, opening bank accounts or validating relevant documentation. The delays in more manual jurisdictions have been exacerbated by Covid-19.
When it comes to HR, South America also leads the world in mandatory pay increases, with 70% of its jurisdictions requiring those, as opposed to 27% globally (decreasing from 32% across all 77 jurisdictions in 2020).
The region is the lowest in adhering to Common Reporting Standards (CRS), with only 50% of the countries requiring it. Globally, 83% of the jurisdictions researched commit to the standards. On a positive note, Latin America has shown some signs of moving more towards the digital future. Electronic invoices, for example, are mandatory in 40% of South American countries, with the global average standing at 17%.
Finance Colombia’s Loren Moss was able to reach TMF Group’s head of North LATAM Massimo Canovi while he was battling mosquitoes on Colombia’s Caribbean coast for a frank and fascinating dive into Colombia’s challenges, what the country can do to improve, and if it is headed in the right direction.
Finance Colombia: I know that TMF Group is one of the leading global outsourcers that handles payroll and accounting for multinational companies. As a company expands and goes into different markets and jurisdictions, TMF partners with them so that so that they can stay compliant legally, handling payroll and handling all the legal issues with not just employment, but taxation and accounting. I saw that the company recently conducted global research on the easiest and the most complicated jurisdictions for doing business. I think you are well placed to do this kind of study, and I saw that you found that Colombia is one of the most complex places on Earth to do business.
You ranked Colombia number 4 in the world. Could you explain what problems you encountered, the challenges that you found in Colombia, why Colombia ranked so poorly and how the government might use this as guidance to understand where they might be able to improve?
Massimo: Yes. All right, so first of all, let me give you an idea of how we build the global GBCI, because I think this is the most important element, one of the most important elements. We are as TMF present in about 80 territories and countries.
So we have people all around the country, all around the world, and these are people who work for TMF. These are not consultants, these are like me, employees of TMF and what we do every year, we launch a three month survey with, I don’t know how many hundreds of questions that we have to answer in detail regarding the local situation in terms of the tax commitments, HRP commitments, general entity management duties, all of that in a very detailed manner, and what we do then, through the help of a market research company, we analyze all this data and we compare them across countries and with previous years, and that gives us a an objective way of measuring, the complexity of a country.
So it’s not me who says, “this is a very complex country”. It’s through the answers that I give, which are very objective questions like, ‘how many papers do you have to fill out to incorporate a company’ to how many authorities do you have to send them to? In which language can you send them? Can you use digital means to send them? Or you have to go in person in front of a notary to present them? Do you have to sign them manually or you can sign them digitally? So this is what we try to do, is to do something as objective as possible because otherwise it’s Massimo who is being Italian and not speaking a proper Spanish comes along and says “this is a mess”.
That’s not what we want, you know, which, by the way, this is exactly what happened to me, by the way, you know, and that’s how it works. So, and that the only way it’s not me who decides the ranking, it’s this external market research company that really puts gives a weight and the value to each and every question and makes the ranking. So for us as well, every year is a kind of surprise. We wait for this GBCI to come out because we know what we know. We give the answers, but we do not know the result or our answers and the most striking to me, news of this year is that 6 out of the 10 most complex countries in the world are in Latin America, which is surprising to me.
I went through the reports and what boils down to it, I’m giving you a generic answer that we go to Colombia. What are the key features that make a country more complex than the others? Imagine what one of the most basic one is language in most of the Latin American countries, you have to speak Spanish and you have to write in Spanish, so there’s no way of communicating to authorities in another language. In the simple countries such as Denmark, everything is in English. Secondly is the number of layers you have to deal with. Again, let’s look at Denmark, when you incorporate a company, you send everything to a single point of contact and it’s done. They take care of spreading it through all the other authorities.
Think about Colombia, you have the DIAN (Colombia’s tax authority), you’ve got all the local authorities, you’ve got the 1,100 municipalities. If you are doing business in Colombia, you’ve got difficulties when you have 16 interchange treaties, and in many cases, if you send goods to one country, it’s different than if you send it to another country. Think about the European Union, where, apart from England, now you send everywhere everything with no customs. Here, it’s not like that, so that is the other point, and last, but not the least, is the continuous change. Colombia in the last 10 years, 8 fiscal reforms, being the last one last week. Happy birthday for the eighth time!
Finance Colombia: I know!
Massimo: Right? Yes, so can you imagine for a corporation doing five years planning, what that means? They have no idea of how…Think about it, they just increased the tax rate by 3%, which for a company is a fortune, and then you don’t know what is going to happen next year because if this is the trend, how can you trust a country that every year or so changes its fiscal environment? So these are the keys.
At the end of the day, the key element that make Colombia such a difficult business place, and then again, as you say, you know, the country’s trying to change. Look at what they’re doing now with the e-invoicing. Now they have implemented electronic invoicing. As of October, it is compulsory as well to send everything digitally, that’s a big investment to make for a company. On the other hand, you incorporate a company—I had to do it and I had to go to a notary with my beautiful fingertip!
Finance Colombia: I’ve done business in Colombia since 2013, so I understand. Yes.
Massimo: And again, you know, and then the UBO (Ultimate Beneficial Owner), you incorporate the company and most countries in order to—it’s good to have legislation on anti-money laundering. It’s good to have legislation in transparency—In most countries UBO is set to 25%, 20%, here in Colombia 5%, that means that a lot of minority stakeholders have to give everything about them, like documents, and then it has to be a notarized document, that has to be notarized here. So can you imagine a large corporation having to deal with that immediately with a UBO in Sweden having to come over to put a “huella (fingerprint)?”. These are the kinds of things, you know, it’s a bit of a bipolar country for me. It’s a fun country. I love it, but it’s still in the process of becoming a modern country.
Finance Colombia: Lots of friction.
Massimo: Enormous friction. You know, it’s something that’s prehistoric and something that’s science fiction and that puts a lot of burden into the large corporation. Again, I mean, from my personal experience, it was hilarious. I still do not have a credit card. Because after 40 years of having a credit card in every country in the world, I don’t have any credit history in Colombia, and I have to wait for six months to create my credit history. I couldn’t have a telephone line because I don’t have a credit history. So imagine a company that starts with small entities, you know, you send the person to person, this person doesn’t have a phone, doesn’t have Wi-Fi, doesn’t have a credit card because he doesn’t have a credit history in the country. So it’s still a bit, you know, that’s the thing. You want to be open to the world, but in so many things you are still a local thing that doesn’t accept the global rules.
Finance Colombia: Right.
Massimo: I think these are the big challenges that we have today in Colombia. Last but not least is the political situation, which of course, especially in this period causes a lot of question marks, many people wonder what is going to happen in one year, you know, and it doesn’t have to do only with Colombia, it has to do with Latin America, where there are incredible swings from extreme left to extreme right, and you do not know what to expect, and that’s the the dark side.
The bright side is that it’s a huge country, thanks to all its memberships in the like Pacific Alliance, OECD, it has access to a market of potentially 1.5 billion consumers, because it’s open to Europe, it’s open to the United States to Mercosur, to everything, and it’s growing. I mean, in 2020, the country, you know it better than I do, grew up about 5%, and in 2022 is expected to grow again between, I think it’s 4.3% the latest estimate. 2021, because of COVID we know, but I mean, I was stunned by the reaction the country had with the vaccination. It started very slowly and now it’s ramping up. It’s incredible.
TMF Group’s Top and Bottom Ten Most Complicated Countries For Business
|1 Brazil||68 Mauritius|
|2 France||69 El Salvador|
|3 Mexico||70 The Netherlands|
|4 Colombia||71 United States|
|5 Turkey||72 British Virgin Islands|
|6 Indonesia||73 Curaçao|
|7 Argentina||74 Ireland|
|8 Bolivia||75 Cayman Islands|
|9 Costa Rica||76 Hong Kong|
|10 Poland||77 Denmark|
As TMF, we took parts of this initiative made by the Chamber of Commerce of buying vaccines privately, and yet we didn’t use it because the public process was faster than the private one! So it’s a country full of contradiction, enormous potential, you know it’s got incredible mineral wealth, nature, tourism. It’s got a historical heritage. I mean it’s right there at the…It’s a gateway to America. People, even though the level of English is still poor, the universities are very good. The level of know-how and a cultural level is very high, and so again, it’s, I mean, I feel like, I’m in Italy 50 years ago.
Finance Colombia: Okay.
Massimo: I really think this is a country of opportunities, and again, as in any country opportunity, it’s really difficult to grasp them and having somebody who’s a local expert who can help you drive through all the nonsense. Let me put it this way. You know, all this contradiction or this challenge that you have can help you a lot, because there’s this again, it’s like opening a mind, you now start digging and there’s a lot to dig. That’s why I’m here. I mean, I wouldn’t be here otherwise.
Finance Colombia: It’s a fun place to live. It’s convenient for me being American, it’s three hours from the States, you know, my teenage daughter gets on a plane and flies down here to visit without any kind of hassles or problems. It’s not like she’s going to cross the world or anything like that.
But I remember when I first started a business down here and I had my first employee and she came to me and she said, “are you going to pay my prima?” And I said, Prima, okay, that’s a cousin. I said, your cousin, why am I going to pay your cousin? And she said, no, you have to pay me an extra salary!
I never heard of that, so I learned a whole lot of things the hard way, but eventually I learned how to navigate things myself and go down to the DIAN and all that stuff like that, but especially for big companies, you’ve got to have people and I already knew Spanish when I came down here too and I’d already known the country for 10 years before I moved down here, but it is very complex, and even though I did it myself as a small business person, still I made a lot of mistakes and these mistakes were for me, kind of inconvenient, but for a big company can get somebody fired or in really big trouble, and they’ve got to use a partner, especially when they’re multinational, because national tax strategies, Colombia, of course, as a country, that one of the few countries that, that taxes on worldwide income, and that creates problems for individuals, for…
Massimo: Yes, and especially directors here are personally liable and that makes an enormous burden. I mean, this is a country where you want to have a zero-risk based approach, you’re not going to do business. It’s as simple as that, you need to have a very strong compliance office. You need to have very strong, local support, and you need to get, you know, a bit of an appetite for risk, because here, you know, now that the laws are changing and first it’s like in Italy, it’s called Solve et Repete, first you pay the fine, and then we discuss,
Finance Colombia: (Laughs). I mean, the former governor got arrested–. Well, they’d have charges against one of the governors has got removed here, and he got a corruption that he’s stolen the money or anything like that, but he said that the terms on the loan, you know, the currency fluctuated in and they blamed him for that, and so now one of the presidential candidates is under–. And I think that it might be politically motivated because he’s going to be a strong candidate, but he’s being held personally liable for the cost of a contract that was adjudicated in foreign currency, and when the foreign currency fluctuates it, after he’s out of office, they came back to holding him liable. The Hidroituango project here, the hydroelectric dam, they found 26 entities and people…
Finance Colombia: Personally liable say that they own something like 4 billion Pesos. So something like $300 million or something like that. One of the guys is a former mayor, another guy, and they weren’t involved in…So not corruption, not like, hey, I stole somebody’s money—No, they’re saying this dam has a problem in the construction, and then technically how they built the tunnel, right? and because you were mayor, when they built the tunnel, you’re liable, like you’d have to pay, they found 26 different people liable…
Finance Colombia: I think that, you know, it’s one thing if you’re kind of at a smaller level, but it can be nightmarish when you look at it now, there are situations. If you don’t have complex solutions and they need to bring in professionals like you guys to handle these things, but it’s really could be scary when you start to get into the big bucks.
Massimo: Yes and think about it as well. You know, the judicial system: We figured out it can take up to 1,300 days to have a contract enforced through a court. I mean, 1,200 days it’s a life! That reminds me of Italy because it’s more or less the same. So I think, you know, here you can see the Latin inheritance. I think, you know, like Argentina, Colombia, they took the European inheritance and they brought it to excellence. I mean like bureaucracy difficulty of doing business. It was just beautiful for me because I feel like I’m at home, and again, you know, can you imagine you’re a small company, you’re a small entity, you’ve got to implement a contract and it goes into the front of a court and you have to wait for three years? You’re bankrupt!
Finance Colombia: Exactly, and that’s why it becomes harder to do business here, because what happens is that there’s a lower level of trust because I mean to rent a place it’s very difficult for an individual to rent a place in Colombia because it’s so hard to evict somebody. In the US is, it depends. It goes differently from state to state. But in the states where it’s hard to evict people, it’s hard to rent. Where it’s easy to evict people and there’s little risk So it’s easier to rent and down here, I mean, I’ve seen foreigners come down here and have to pay somebody the entire lease term in advance or things like that, or their company has to sponsor them. When I first came down and I’ve got a credit history now, and I’ve been down here and I’ve got my residency. But, when I first came down here, my first two apartments, I had to use personal connections and people had to go and say, look, I know this guy, and I literally had letters from government agencies call the landlord on my behalf and said, look, we know this guy and it’s important that you help out.
Massimo: Loren, that’s exactly what happened to me.
I came here. I had to look for apartments. I have a contract with a global company in Euros. So I’m not exactly poor and they didn’t want to rent me an apartment! “You know, you don’t have credit history.”
Finance Colombia: Right, and a lot of that is because once you rent to somebody here, the court system is so slow. It’s so difficult to evict somebody that I mean, if you’re in a poor neighborhood, they just go get some thugs and they just come and throw you out and don’t worry about it. But in a nice place, they can’t do that and they have to do everything legally, and this is really difficult and that makes it harder for the lessor. As you know, in the US renter’s insurance pays like if you’re couch catches on fire or something like that, but down here, rental insurance pays the rent to the landlord and it goes after the people because it’s so complex, and it’s complicated.
One of the things that I wanted to ask you is what, what are the kinds of companies that should reach out to TMF and when should they reach out to TMF?
Massimo: I would say our core business is global corporations, which are large enough to expand into new countries and small enough not to need, local people, experts to be hired. Because what happens is we are very strong at the initial stage of the company where, you know, you’re here, you’re lost, but you need to set up an entity and you need to start growing at that point. You want to have somebody who manages your risk and who makes your cost variable and has the local expertise to support you in everything like setting up a company, having your own payroll.
As I say, here the HRP systems, having your own accounting system, tax system and how to grow into the business. Now with COVID, we saw many companies keep working with us, even if they reached big levels, because we give them something that other companies do not give, which is consistency. That is, you get the same reports, the same treatment. You got one single point of contact throughout the region because we’ve got offices in any single country.
So that is why we have enormous corporations as well, who keep working with us, even though you will say, no, this is impossible. Why shouldn’t we do it in house? Because even if it may be, it may look more expensive, realize that we are always up-to-date in any country. We give you one single platform. For instance, in Costa Rica, we have a service center to serve all the countries in the Caribbean. So we use one single solution. Can you imagine the company, as it always happens, you open up a branch in a country, in another branch in the country, general managers open, buy its own solution, and other country buys its own solution with us. It’s impossible. We use one single solution, and that would give me one single report in the same language throughout the country. So, the typical client of ours is a multinational growing with expansion plans into a region and with the appetite to grow fast without having a fixed cost burden in house.