In todays material we’re exploring the top ten most complex for business jurisdictions worldwide. They are ranked by the experts of TMF Group in their latest report.
Have you heard about the Global Business Complexity Index?
Each year the TMF Group presents a thorough analysis and evaluation in terms of ease or complexity of doing business in jurisdictions worldwide that represent over 90% of the world’s GDP.
In particular, the 2022 GBCI measures 77 jurisdictions worldwide, forming 32% of the total country count. It capturies the world’s largest economies and investment hubs, representing 71% of world’s population, 92% of world GDP & 95% of the net FDI inflow.
The report provides an authoritative overview of the complexity of establishing and operating businesses around the world. While exploring factors as significant drivers for the success or failure of international business, the GBCI report focuses on operating in foreign markets, and outlines key themes and intricacies emerging both globally and locally across the evaluated 77 jurisdictions.
The 2022 Global Business Complexity Index is based on 292 different indicators regarding the business complexity. It provides in-depth analysis of the global and local challenges that impact on the ease of doing business across the world. The global ranking of the 77 jurisdictions formed within the report cover legislation, compliance, accounting procedures, tax regimes, human resources (HR) rules and payroll processes.
Now let’s explore each of the top 10 most complex jurisdictions according to the 2022 Global Business Complexity Index.
TOP 10 World’s most complex jurisdictions for business 2022
Most complex jurisdiction for business worldwide: Brazil
As the report says Brazil holds the first place in the ranking as the most complex jurisdiction both in 2022 and 2021. The volume of regulatory changes each year, combined with the three layers of tax regimes to comply with – federal, state and municipality are pointed out as key drivers of complexity in Brazil.
As a response to the Covid-19 pandemic in 2021 Brazil executed short-term changes including temporary government incentives. This aimed to help businesses reduce their payroll costs, and tax reductions to help companies retain their workforce. As GBCI estimates the adaptive changes added to the business complexity in Brazil, since they came with a heavy administrative burden. In 2022’s GBCI, the cessation of these incentives comes again with a similar administrative workload as businesses revert to normality.
The positive impact regarding the measures around Covid-19 was that they accelerated Brazil’s already high levels of digitalization. For instance, before the pandemic, all notarial services required a physical presence, as well as a face-to-face signing of documents. This necessity has been replaced by solutions like digital formatting and video calls. As it seems these changes will remain permanently.
In Brazil one of the most complex processes remains the incorporation of new companies.
It takes about 45 days to the businesses to deal with three layers of regulation. At the federal level, businesses are required to set up a tax ID, and select their tax code based on the specific company sector. Companies pay VAT and service tax at the state level, and revenue tax at the municipal level. Also revenue taxes vary from city to city. Despite the fact that this lengthy process is mostly digital now, companies must have an appointed locally residing representative. Foreign shareholders are obliged to appoint a resident legal representative and the local entity must have a locally residing officer.
The regulations in Brazil are definitely complex. However the jurisdiction presents opportunity, with a large consumer market of 213 million inhabitants. “Assets under administration in Brazil are at an all-time high, with particular growth in the energy, infrastructure, and services sectors”- points out the GBCI 2022.
France is second in the ranking of business complexity two subsequent years
In both rankings for 2021 and 2022 year France holds its second place as business complexity jurisdiction. French government’s policy ishistorically known to be employee centric. During Covid-19 the government’s strategy emphasized that approach with economic schemes to help absorb some of the impact of the pandemic. Its measures supported companies and, in turn, their staff. Although attractive to businesses benefitting from the schemes, this support also added administrative complexity.
In France accounting and tax can be particularly complex. This is due to local language requirements and the number of taxes and tax reports that need to be filed. These factors are challenging for foreign businesses that must adapt to local ways of working.
France is considered a leading jurisdiction for ESG (Environmental Social Governance), especially environmental and social legislation. This jurisdiction was an early adopter of EU rules, developing ESG regulations before the EU. Examples include gender equality legislation and rules for the employment of people with disabilities. They apply for companies with as few as 20 employees.
Third most complex jurisdiction for business worldwide according to GBCI: Peru
Since 2021 complexity increased significantly in Peru. As a result this jurisdiction moved up from 24th in 2021 to 3rd position in the 2022 ranking. The political situation is in a state of unrest over the past six years, with corruption leading to caretaker governments. The inauguration of new president Pedro Castillo is contributing to uncertainty due to a perceived lack of political experience.
In addition to the political uncertainty is the complexity of the process of incorporation for both foreign and local business. It takes around 20 days to incorporate a company. In-person signatures and meetings with notaries are required, which contributes to the extended period.
Another complexity factor is the monthly tax reporting requirements that was introduced in 2021. According to them any business with monthly accounts of 10,000 soles (€2,540) or more is required to submit tax reports, with a view to reducing tax evasion. While this can be burdensome for businesses, it does appear to support the drive for transparency.
On the plus side Peru is a highly attractive jurisdiction thanks to its rich natural resources of zinc, copper, iron, and lead. The country has laws and legislation related to the treatment of land in order to protect these resources and drive sustainability. For instance, Peru mandates public consultations that can take up to a year to explore the environmental impact of businesses seeking to profit from natural resources. These measures do increase complexity, but they also boost the jurisdiction’s environmental credentials. This in turn makes it more attractive to organizations and individuals driven by sustainability.
Fourth most complex jurisdiction for business worldwide: Mexico
Mexico, unlike many other jurisdictions, didn’t’ implement any incentives during the pandemic to ease the financial pressure on businesses. As the GBCI analysis points out this was in part due to the slow-moving nature of parliament, but also the impending 2022 political elections.
To incorporate a company in Mexico remains one of the most complex aspects of doing business. All companies must have a tax ID in order to legally exist, but this can only be obtained through a physical appointment, in order to collect biometric data. Throughout the pandemic, the tax authorities reduced their operating capacity to around 40%, which added significant delays to incorporation times. Opening a bank account is also a lengthy process that typically takes two to three months.
Operating in Mexico is complex but also generally relatively predictable. Yet a recent law was passed requiring all companies to pay permanent employees 10% of profits generated each financial year. New businesses can be set up with this in mind, but this change created complexity for existing companies that had to manage and accommodate it. It also led to many businesses that hired subcontractors moving towards hiring permanent staff. The GBCI 2022 notes that some companies that provide outsourcing services are subject to heightened reporting requirements.
New unclear laws & burdensome reforms
From January 1st 2022, a new law requires businesses to provide information on UBOs (Ultimate Beneficial Owner) to tax authorities. The exact requirements of the new law are not clear and the new obligations lengthen the incorporation process by around three weeks.
Regarding the payroll reporting there’s another recent reform adding up to the business complexity. Tax authorities must timestamp all documents, and new legislation is coming into law which requires the postal code of employees to be on the timestamp. This is expected to create a large and idiosyncratic administrative burden. The GBCI 2022 express their hope Mexico may become simpler as it moves beyond the pandemic.
Colombia ranks as the fifth jurisdiction in terms of business complexity
Over the last ten years Colombia has experienced many legislative changes. Taxes are very complex, as they must be filed at national, regional and local level. The presence of more than 1,200 municipalities is one of the key drivers of complexity for businesses in the jurisdiction. During election years the country is at a standstill, apprehensive until the outcome of the election is clear. This has become more severe over the last two elections in which a viable Center-left candidate emerged.
Colombia has become a recent adopter of ESG legislation. A new law in December 2021 aims to create and preserve forests and other natural areas throughout Colombia. The government has set out an agenda in line with the Paris Agreement to be carbon neutral by 2050. The government also introduced a new kind of employment law, whereby companies can receive incentives for hiring young people and/or women.
Sixth most complex jurisdiction in terms of doing business: Greece
Greece remains to be a complex place to do business in the past few years. Key driver of complexity continues to be the constant change to legislation. Every year around 150-200 new laws and 1,500-2,000 new decisions are made. Although a changeable legislative climate is not new, the jurisdiction has become more complex in the last year. Respectively Greece has moved up the rankings from 13th in 2021 to 6th position in 2022 GBCI.
This has been driven by a new digital system introduced during Covid-19. Without this system, there would have been no other way for businesses to incorporate and operate due to a previous requirement for a face-to-face contact between organizations and government bodies. Typically the introduction of digital processes simplifies incorporation and operations in the long term. However, it can also create an initial period of increased complexity.
The 2022 GBCI prognosis is that doing business in Greece will become simpler in the coming years thanks to the digitalization. Unfortunately for the time being it has produced many pain points for the business. For example, the government has created a template for online business incorporation. This template is not very practical since, it is only relevant for around 10% of businesses. Businesses that cannot benefit from the template, are still required to visit a notary.
Accounting and tax digitalization has also been problematic.
The government’s “MyData” portal allows entities to upload tax records (sales) in real time, including the reporting of expenses and assets. This aims to reduce complexity by giving the authorities a more complete and current view in the long run. However, revenues and expenses for 2021 need to be backdated. The Greek government has postponed the deadline for the submission of documents related to backdated revenues, due to the complexity of this process. MyData also requires a minimum of €20,000 investment for medium to large businesses. GBCI concludes that “despite the increase in complexity in the jurisdiction, Greece does remain attractive. There are hopes that in future years it will reap the benefits of its focus on digitalization.”
Seventh most complex jurisdiction in terms of doing business: Turkey
Turkey regularly changes regulations and continues its efforts to digitalize public services. However challenges appear due to the short time period given to adapt to the changes. Another negative factor is lack of a collaborative cross-government effort. All this makes compliance difficult. Authorities introduced regulatory changes with minimum of information and guidance. Although it is difficult to adapt to these changes within the required timeframes, they are intended to make Turkey a major player in the global economy.
The economic difficulties have also caused problems for Turkey in the past year. The Turkish lira has depreciated against foreign currencies significantly and the country has experienced hyperinflation. The annual CPI for Turkey in 2021 was 40%, with the production index around 86%. In the first quarter of 2022, production index rates reached 100%. In other words there will be a significant impact on the price of consumer goods in the months following. “Such uncertainty and flux can drive complexity for foreign businesses”- states the GBCI 2022 report.
Despite the challenges, Turkey is an affordable market for foreign investors and therefore considered attractive. However, as the GBCI concludes, the propensity for consumers to decrease may deter foreign investment.
Number 8 in GBCI 2022’s ranking as most complex business jurisdiction is Italy
Over recent years Italy has become increasingly complex, climbing from 15th position in 2021 to 8th position in 2022’s GBCI.
According to the complexity index, this hike is partly due to Italy being one of the first countries in Europe to introduce e-invoicing in 2020. Cross-border invoices were to be added to the existing digital business-to-business transaction requirements from July 2022. The steps required to transition to e-invoicing are challenging and time-intensive. However in the long term this change should make operations far simpler by reducing manual input of accounting documentation. In the future, e-invoices could become the basis of VAT returns.
In spite of the shift to digital invoices, the entity activation process in Italy remains highly manual, and takes usually between 30 – 90 days. During the incorporation phase of new Italian companies, a notary needs to be involved, requiring in person company proxy holders. Also, incorporation documents must be notarized abroad, in person, and electronic signatures are not accepted. Covid-19 caused a large backlog, increasing the timeframes due to access restrictions at the Revenue Agency and Trade Register public offices.
After incorporation of a new company in Italy, additional complications arise from the rules around resolutions that need to be passed by boards of directors and shareholders. Usually these boards only take place twice a year.
The process of opening a bank account in Italy is also complex.
Italy has aligned with the EU directive’s anti-money laundering (AML) laws, but Italian regulators are applying additional restrictions to identify UBOs. This leads to additional documentation requirements, some of which must occur in person.
“Alongside EU AML and UBO register alignment, Italy follows common accounting standards. Like Luxembourg, Italy’s accounting standard is Local GAAP, but this has gradually become more aligned with IFRS principles” – states the GBCI report. Last but not least, Italy has a highly regulated labor market which can cause complications for businesses due to inflexibility. Employers must carry out any settlement or termination agreements with employees in front of the labor office or trade unions. Additionally, labor law regulations frequently change along with governments. However the Prime Minister is determined to lead a (rare) stable period of government ahead.
Ninth most complex jurisdiction in terms of doing business: Bolivia
Local requirements are a key reason for Bolivia’s top 9th position. Some of them are the need for a Bolivian national or locally resident legal representative, and the requirement for a number of foreign workers not exceeding 15% of a company’s total employees. Furthermore, the accounting system needs to be in Spanish and the local currency, managed by a certified accountant within Bolivian territory. These factors drive complexity for foreign businesses that are used to a more globalized approach.
Things are more complicated also due to the onus on paper filings. Companies have a legal obligation to keep paper records of activity for three to eight years, depending on the government entity that supervises it. This information ranges from company constitution and meeting minutes to accounting records. Despite the ”old-fashioned “approach the jurisdiction is gradually becoming more digitalized with declarations of management taxes, pension funds and salary now being conducted via web portals.
When it comes to sustainability legislation, Bolivia is a progressive country. For example, at the beginning of commercial activity every company must obtain an environmental license to be able to operate and stay valid. The new company must also make some commitments depending on their line of activity. This is attractive to businesses and investors seeking to operate in a more sustainable manner. However, failure to comply with this license can be subject to fines.
Although a complex jurisdiction, Bolivia, it is still attractive for business thanks to its wealth of natural resources. With a commitment to sustainable practices, there is hope that this attractiveness will continue and complexity reduce.
Number ten in GBCI 2022’s ranking as most complex business jurisdiction is Poland
The GBCI 2022 notes that over the past year the Polish government introduced multiple pieces of legislation. They were passed in a short timeframe and accompanied with little public guidance. As the report says the main change was the introduction of the ‘Polish Deal’. This was significant as it overhauled taxation system. It did not just change tax laws impacting corporations, entrepreneurs and employees, but also the way that salaries are calculated. With a lack of guidance from the authorities, this has caused salary calculation problems for companies.
In Poland the Labor laws were already complex. The Polish Deal implementation in January 2022 led to the resignation of several government officials and two amendments to this new law with more to come later this year.
Before the Russian invasion of Ukraine, Poland was witnessing a hesitancy of foreign business activity. For instance, the Polish government and judicial system challenged some principles of EU legislation. This resulted in some funding being put on hold. Although Poland wants and needs foreign investment, the Polish government has prioritized state investment.
As the GBCI 2022 states each of the top 10 jurisdictions (in terms of business complexity) offer both beneficial and challenging conditions. Local and foreign businesses need to adapt to them in order to function properly within the mentioned countries. The most often complexity driver seems to be the shift towards digital processing and exchange of data between business entities and governmental bodies. The optimistic prognosis is that in the long run digitalization will simplify, clear and speed up numerous procedures. Last but not least digitalizaton is expected to provide more transparency. Of course after all administrative obstacles, procedural and legal burdens are being reworked to accommodate the digital processing.
Wonder where Bulgaria is among the 77 jurisdictions explored in the GBCI 2022?
In 2022’s ranking Bulgaria stands on 50th position. Our nation ranks at only 17 positions before the top 10 world’s least complex jurisdictions. The 2022 GBCI indicators valued Bulgaria as country with much less business complexity. In this regard Bulgaria is positioned ahead of countries like France, Poland, Germany, Russia, Spain, Portugal, Hungary, Croatia, Romania, Greece, Turkey, China, India, Philippines, Brazil, etc.
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