On April 23, 2021, the Federal Government published in the Official Gazette the amendment of several provisions of the Federal Labor Act, the Social Insurance Act, the Law of the National Employee Housing Fund (Infonavit), the Federal Tax Legislation and the Income Tax Law, the Value Added Tax Law (VAT), the Federal Law for State Employees and the Federal Act on Article 123 Paragraph (b) of the Federal Constitution (collectively the “Amendments”) to completely change the current staffing regime. Outsourcing.
In general, the purpose of the changes is to prevent “outsourcing,” which is understood as a mechanism by which a beneficiary hires its required staff through a third party in order to avoid or reduce the employer’s liabilities and obligations under Mexican law. The aim of the changes is to provide incentives for companies that benefit from staff to hire them directly within the framework of working agreements that reflect market conditions and trigger the appropriate tax and social security contributions under applicable law.
In Mexico, work-related and social security contributions have traditionally been viewed as high1. In this context, companies operating in Mexico have for decades developed “outsourcing” mechanisms with which they can reduce these costs. These mechanisms have also been used to reduce the tax and sometimes mandatory impact of profit sharing on total cost of ownership.
A first attempt to regulate the above mechanisms was carried out in 2012. An amendment to the Labor Code introduced what is known as “mediation”, which enabled a company to provide services with its own employees for a third party, known as the “beneficiary”. “The company that hired the staff was directly responsible for social security and related costs, and the beneficiary would only be responsible if certain conditions were not met. The attempt was unsuccessful, however, and the federal government continued to complain about the impact of these mechanisms on public finances, particularly social security institutions, as well as the legal and constitutional rights of workers.
Representatives of the federal government and the private sector have discussed a new proposal to address these concerns. This new attempt is based on the prohibition of “outsourcing” defined above, which is supported by certain fines, the non-recognition of the tax deductibility of the beneficiary’s expenses and even the possibility of criminal charges of tax evasion.
The changes can be grouped into four key groups: (i) the Labor Code, (ii) the Social Security Institute Law, (iii) the Infonavit Law, and (iv) other tax laws (Income, VAT and Tax Code).
Federal law now prohibits “outsourcing” – defined as the situation in which a company or individual supplies or makes available personnel for the benefit of another company. That figure, which includes the use of companies known as “pagadoras” in Mexico, is now banned.
Companies may only outsource services that fit into the description of specialized work or services if (i) these work or services are not included in the business purpose or in the core activities of the beneficiary and therefore cannot be carried out directly, and (ii) the service provider is registered in a new database that is being developed by the Ministry of Labor according to rules yet to be published.
A company could outsource specialized services to a subsidiary or an affiliate if the same conditions are met.
Any outsourcing services provided by individuals or companies that fail to meet these conditions will be fined2, collectively liable for all labor obligations and, as noted below, social security contributions, and are not allowed to deduct related expenses for income tax purposes. or to credit the cost for VAT purposes.
The Law of the Institute for Social Security now provides in its new Article 15-A that companies that provide specialized services or carry out specialized work must now provide the Institute with quarterly information on their contracts and staff. Otherwise, certain fines will be imposed. On the other hand, companies that enter into contracts with companies that violate these obligations are jointly and severally liable to the Social Security Institute for all relevant obligations.
The Infonavit Act has been amended to closely track changes to the Social Security Institute Act. The changes include obligations for companies providing specialized services and for the beneficiaries. The former have a reporting obligation with regard to contracts and personnel providing specialized services, and the beneficiaries are jointly and severally liable to Infonavit if their service provider breaches its obligations.
On the tax side, the Tax Code, the Income Tax Act and the Value Added Tax Act were amended to deny the tax deductibility of payments made by a beneficiary of “outsourced” services that are related to either the beneficiary’s business purpose or part of its core activities. Payments for “outsourced” services can only be deducted if the aforementioned conditions are met. Indeed, they relate to specialized services or work that are not part of the beneficiary’s corporate purpose or core activities and when the supplier is registered with the Ministry of Labor. The tax code provides for new fines for companies trying to deduct payments for “outsourced” services and for service providers who are not properly registered. In addition, the tax code goes so far as to regard all structures that simulate the provision of specialized services as tax evasion.
Changes went into effect in the April 23 evening edition so that they will take effect on April 26, with the exception of changes to federal tax legislation, the Income Tax Act, and the Value Added Tax Act, which will come into effect on August 1, 2021.
* This GT Alert is limited to matters and laws outside of the United States.
1 This perception may not be entirely correct. (see: https://data.oecd.org/tax/social-security-contributions.htm)
2 Fines can be up to 50,000 units, which is $ 225,000 at an exchange rate of 20 pesos.
© 2021 Greenberg Sad, LLP. All rights reserved. National Law Review, Volume XI, Number 120