By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico
The Mexican authorities published a number of changes and new rules in the federal gazette on April 23, banning the outsourcing and insourcing of local agreements. Practices related to outsourcing and insourcing activities may only be permitted in certain cases if the relevant conditions and requirements are met.
These rules introduce a new tax system that will take effect on August 1st.
Federal Tax Code
The new rules deny any tax advantages (ie deductions or credits) for payments in connection with outsourcing or insourcing services, if these activities are related to the business purpose and the main economic activity of the service recipient.
In addition, tax benefits are denied in cases in which the service provider’s employees were previously classified as employees of the service recipient and these employees were transferred to the service provider by a legal agreement and the activities of the service provider’s employees correspond to the main activities of the service recipient’s economic activity.
Under the new rules, however, tax advantages (deductions or credits) would be allowed for payments in connection with the outsourcing of specialized services or the execution of specialized work that is neither related to the business purpose nor to the main economic activity of the service recipient. Certain requirements must be met for these purposes.
Insourcing, i.e. complementary or shared services or work by and between companies in the same group of companies, would have a similar tax treatment if the services were classified as specialized. It is necessary that these services are not related to the business purpose and main economic activity of the service recipient.
Joint and several liability has now been extended to those companies or individuals who may be classified as beneficiaries of outsourcing or insourcing services or work. This liability focuses on taxes and duties that apply to employees who are involved in the execution of work or the provision of services.
The changes in the law also introduce a new class of violations that will be fined. The fines range from USD 7,000 to USD 14,000 and can be imposed individually for each failure.
In addition, certain simulated agreements, e.g. B. the simulation of specialized services or the execution of specialized work, prosecuted, which in turn can lead to criminal offenses. The use of prohibited outsourcing has similar effects.
Income tax law
Tax deductions for payments related to specialized services or the execution of specialized work would be allowed under certain conditions.
In particular, the beneficiary must check whether the service provider is actually registered with the responsible labor authorities. In addition, the beneficiary must receive from the service provider copies of tax receipts / receipts corresponding to employees’ salaries and wages, including any withholding taxes, and evidence of payment of social security contributions and the National Employee Housing Fund Institute.
According to the new regulations, the service provider must make this information and these documents available and hand them over to the beneficiary.
The new rules specifically deny a tax deduction for payments related to prohibited outsourcing and insourcing activities as described in federal tax legislation.
Value Added Tax (VAT)
The obligation to withhold VAT (6% on the amount actually paid) for outsourcing and insourcing activities is now lifted.
Additionally, any VAT credit related to prohibited outsourcing and insourcing services will be denied under the provisions of federal tax law. Therefore, under these conditions, it is not possible to apply for or claim a VAT credit.
However, it might be possible to credit VAT for specialized services or for performing specialized work. In these circumstances certain requirements must be met. Under these requirements, the service recipient must verify that the service provider is properly registered with the labor authorities and receive from the service provider copies of the relevant VAT returns corresponding to the period in which the payments are made by the service recipient. In addition, the service provider must provide this information and make it available to the beneficiary.
Failure to comply with the VAT information and documentation obligations (either by the provider or the beneficiary) leads to the cancellation of credits that have already been claimed.
These tax changes to the domestic regime for outsourcing and insourcing services are part of a broader reform that includes other laws such as labor, social security, national workers’ housing funds, and even provisions regulating federal government agencies and agencies.
The new rules will inevitably affect providers and beneficiaries of these types of services that have become very popular in Mexico, such as: B. by including and maintaining the so-called operational companies and services / personnel units. The impact of the regulations will be far-reaching and will cover the current structures or arrangements of both related and unrelated parties.
Although the new tax rules will come into effect on August 1, certain rules already apply to taxpayers for labor, social security and the purposes of the Institute for Employee Housing Funds.
If they have not already done so, companies should conduct individual assessments to determine whether a change in the business / operating model of a relevant company may be necessary. Of course, internal departments like tax, human resources, legal, information technology, finance, finance, etc. should work closely with management to manage the impact of the new regulations as needed.
Arturo is a tax partner at Fratelli Consultores and is based in Monterrey, Mexico.
He has more than 15 years of professional experience in Mexico and abroad in domestic tax law, international tax law, EU tax law, transfer pricing, corporate law, general accounting and tax compliance. Arturo has worked for Big 4 law firms as well as in industry (internal role).
He is involved in a number of domestic and cross-border projects for individuals and corporate groups including tax planning, restructuring, mergers and acquisitions, due diligence, compliance, etc.
Arturo received his law degree from the Universidad Autonoma de Nuevo Leon and an LLM from the Queen Mary of the University of London and an LLM from the Universidad Antonio de Nebrija.