On November 12, 2020, during a recurring morning press conference, President Andrés Manuel López Obrador issued an amendment proposal to reform various laws with the aim of establishing a new regulation to the outsourcing scheme currently in effect in Mexico.
The reform proposal, if passed, would amend the Federal Labor Law (this week, the Bureaucratic Law eliminated outsourcing), the Social Security Law, the Workers National Housing Fund Institute Law and the correlative articles of the Federal Tax Code, the Income Tax Law, and the Value Added Tax Law. The proposal would expressly prohibit, under the subcontracting (or outsourcing) regime, companies from providing their own workers to benefit directly a third party (or client), by the work rendered by those workers.
Permitted Subcontracting
Companies may continue subcontracting or outsourcing, as a “specialized service” in the following situations:
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Specialized services and specialized works may operate as long as they are not part of the core business (per the stated corporate purpose) or the core of the economic activity (per the enrollment before the Servicio de Administración Tributaria (SAT) of the company that is the beneficiary of the service.
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A company may outsource its workers, as a specialized service provider, only if it obtains authorization from the Ministry of Labor and Social Security (MLSS). In addition, the outsourcing company’s records, must evidence specialization and compliance with labor, tax, and social security provisions. Companies must renew their MLSS authorization every three years.
Outsourcing will be permitted if the relevant companies use intermediation. The intermediation process involves (i) recruiting; (ii) selecting; and (iii) training candidates so that the third-party employer may hire them directly. This option assumes that the hiring company is in compliance with its legal, labor, and tax (i.e., social security) obligations.
Tax Deductions and Other Consequences of the Proposal
The major effect of this amendment is that companies may no longer take a tax deduction for outsourcing services. Mexico’s tax authority will be the inspector of the structure. If the new regulation is not accepted by the tax authorities, payments may not be deducted as a subcontracting concept/chapter, so they must be paid again under the appropriate section. The tax authority will determine the recharacterization of the operation and will assign the corresponding tax consequences.
In that context, if a company does not obtain authorization from the MLSS, the payments that have been made to the subcontracted personnel will not have tax effects.
Note that the specialized services or the execution of a specialized project will have tax effects and be credited towards the payments of the above, as long as the authorization of the MLSS is obtained and the services and or the projects are not directly related to the core business of the company or client.
Companies that do not follow the proposed regulations and attempt to deduct for outsourced services, simulation schemes for the provision of specialized services, or specialized works will be at risk of criminal liability under the relevant tax fraud laws. Companies found to have committed such tax fraud may face fines and even incarceration, from three months to up to nine years.
The client and the contractor will be considered jointly responsible for all labor obligations, in addition to social security and tax obligations, in the event of non-compliance with the proposed new amendment.
Next Steps and Timing
As of December 3, 2020, the proposal for the amendment of the laws related to outsourcing have not been approved. It is important to remember that the amendment process requires publication in the Official Journal of the Federation (Diario Oficial de la Federación) after the proposal is approved by the Chamber of Representatives (deputies) and later the Chamber of Senators.
It is also important to remember that outsourcing was created in order to manage (i) headcount in Mexico and, most importantly, (ii) profits among employees. As for timing, the negotiation of the proposal contains pending issues to be discussed and approved, such as the following:
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Individuals and entities are expected to have at least six months to obtain the authorization/certification of “expertise” from the MLSS.
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It is expected that the MLSS will have four months to publish the necessary requirements to obtain the “expertise” certification.
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It is not clear when the new outsourcing structure would be fully enforceable in Mexico after it is published.
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The rules for profit sharing (PTU) distribution that will be in place are currently still under discussion. (There is a possibility that productivity criteria for the distribution of PTU will be created as opposed to distribution being entirely on an assistance basis).
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