On November 12, 2020, the Executive presented a major initiative to reform several legislations including the Federal Labor Law, Social Security Law, Law of the Institute of the National Housing Fund for Workers, as well as the Federal Tax Code, Income Tax Law and the Value Added Tax Law, to modify the labor and tax consequences of the use of outsourcing services in Mexico. Among the most relevant aspects are:
The main reasons that give rise to this initiative consist of safeguarding worker’s labor and social security rights, as well as avoiding practices that would be considered as tax evasion.
The key aspects of the initiative presented are:
- Eliminate the outsourcing of personnel regime
- Regulate the outsourcing of specialized labor and services
- Clarify the activities performed by employment agencies
- Establish stricter sanctions, such as: prosecuting as a tax fraud crime, deductibility of contributions and ascertain fines
The initiative proposes to prohibit the subcontracting of personnel, considered it as the type of contracting in which an individual or legal entity provides or makes available their own personnel for the benefit of another, which would even affect intra group services.
Specialized services, understood as the execution of specialized labor, which are not part of the corporate purpose or the economic activity of the beneficiary of such services, would be considered allowed. However, specialized services will require authorization from the Ministry of Labor and Social Welfare (STPS), as well as employment agencies, understood as those that intervene in the hiring, recruitment, selection, training, training process, among other services.
Federal Tax Code
It is proposed to add an article that establishes that the payments for subcontracting personnel will not trigger a deduction or credit. Personnel subcontracting is defined when a contracting party provides its own workers for the benefit of the contractor or makes them available to the latter.
Such tax effects will also be given to services in which personnel are provided in the following cases:
- When the workers that the contractor makes available to the contracting party and that originally were the contracting’s party workers and had been transferred to the contractor
- When the workers provided or made available to the contractor, cover all the principal activities of the contracting party
However, it is clarified that subcontracting is not considered to be the provision of specialized services or the execution of specialized works that are not part of the corporate purpose or the economic activity of the contracting party, provided that the contractor has authorization from the Ministry of Labor and Social Security and is provided to the contractor.
Joint liability and tax fraud
It is proposed to add an assumption in which the contracting party would be jointly and severally liable for the contributions that would have been made by the workers with whom the subcontracting service is provided.
Also, the proposal considers tax fraud any schemes that simulates the provision of specialized services, specialized labor or the subcontracting of personnel.
It is proposed to modify the requirements for deductions for the provision of specialized services or specialized labor. The contracting party should obtain from the contractor:
- A copy of the valid authorization as a provider of specialized services;
- The electronic invoicing (CFDIs) of the payments to the workers that provided the service and the proof of payment issued by the bank of the withholding income tax return;
- Proof of social security payment of the employer and the contributions to the national housing fund.
The contractor will be obliged to provide this information. In addition, it is reiterated as non-deductible expenses any subcontracting payment.
Value Added Tax
VAT on subcontracting services will not be creditable. However, in case of payment of specialized services or specialized labor, the VAT could be credited to the extent the contracting party obtains from the contractor:
- A copy of the valid authorization as a provider of specialized services
- Copy of the VAT monthly return and the proof payment of the VAT
The contractor shall be obliged to provide this information no later than the following month in which the contracting party made the payment of the service.
The current obligation to withhold 6% VAT on the provision of personnel, will be repeal.
It is important to note that this reform, due to its scope will significantly affect the structure of many companies in Mexico, and it is to be expected that it will undergo modifications during its discussion at Congress in the following weeks.
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