Flash: Update of the legislative process on outsourcing

Versión en español

What are the main aspects of the bill approved by the House of Representatives?

When will the labor, tax, and social security reform enter into force?

On April 13, 2021, the overall Draft Decree was approved by the House of Representatives to reform, add and derogate various provisions of the Federal Labor Act, the Social Security Act, the National Workers’ Housing Fund Institute Act, the Federal Tax Code, the Income Tax Act, and the Value Added Tax Act, in terms related to outsourcing of personnel.

The outsourcing of personnel, defined as the practice of when an individual or legal entity provides or makes available its own workers for the benefit of another, is still prohibited.

Outsourcing the performance of specialized services or the execution of specialized works is permitted. Thus, specialized services are defined as services that are not part of the contracting party’s corporate purpose or main economic activity.

The Draft Decree adds that supplementary services and works will be considered specialized and those provided among companies of the same business group, provided they are not part of the contracting party’s corporate purpose or main economic activity.

For this purpose, a “business group” is the group of legal entities that hold direct or indirect equity interest in the share capital, and one company controls those legal entities and financial groups.

The joint and several liabilities of individuals or legal entities that subcontract another to provide specialized services remain in effect when the subcontracting party fails to comply with the obligations arising from its employment relationships.

The Draft Decree adds that individuals or legal entities that provide outsourcing services must register before the Ministry of Labor and Social Welfare and publish the registration on a website created by the authority. Notwithstanding their compliance with the authority’s rules, they must provide evidence of their compliance with all of their tax and social security obligations within a term not to exceed 30 days from the date the reform is enacted.

The registration must be renewed every three years. It may be canceled if they fail to comply with their labor, tax, and social security obligations.

In like manner, the Ministry of Labor and Social Welfare must respond to the request for registration within 20 days. Failure to do so could lead to the Ministry being required to issue a resolution in three days, after which the registration will be considered authorized.

The transition period establishes that the Ministry of Labor and Social Welfare must issue the operating rules in a term of no more than 30 days after the Decree becomes effective.

The Draft Decree adds that employee profit-sharing is capped to an amount equal to 90 days of the employees’ salary or the average of the last three years, whichever represents the worker’s highest benefit. 

The Draft Decree incorporates a condition stating that, for the employer substitution to take effect, the substituted employer must transfer its assets.

For employer substitution purposes, companies that operate under the subcontracting regime are not required to transfer their assets from the substituted employer to the substitute employer, provided the employees are transferred to the beneficiary companies in a term of no more than 90 calendar days from the date on which the reform goes into effect, with full recognition of all employee seniority and labor rights.

The proposal to consider the contractor of specialized services or works jointly and severally liable remains in effect.

Every four months, individuals and legal entities providing specialized services must report their service agreements to the social security authorities, with information regarding the service provision, the personnel involved in providing the specialized services, and their registration with the Ministry of Labor and Social Welfare.

Providers of specialized services or specialized work must begin to submit information regarding their business relations to the Mexican Institute of Social Security (IMSS, acronym in Spanish) in a term of no more than 90 calendar days from the effective date of the reform. The information submitted to the National Workers’ Housing Fund Institute (Infonavit, acronym in Spanish) must be delivered as established in the rules issued in a term of no more than 60 calendar days from the effective date of the reform. The information required by the Ministry of Labor and Social Welfare must be submitted once this agency issues the mechanism to obtain the referenced record.

The Draft Decree eliminates the administrative option to obtain an employer registration by class to cover occupational hazard quotes. Therefore, employers with this type of employer registry must cancel them and apply for new employer registries for each work center and municipality in a term of no more than 90 calendar days after the effective date of the reform, as the IMSS will cancel them once this term has expired.

The increase in the fine for failing to comply with the obligation to submit reporting information on service agreements or specialized works is maintained at 500 to 2,000 units of measure and update (UMA, acronym in Spanish), even for late filing.

For social security purposes, the Draft Decree establishes a transition period whereby employers have 90 calendar days from the date on which the reform is enacted to migrate workers from companies operating under the subcontracting regime to another, in order to be considered employer substitution, provided the company receiving the workers recognizes their seniority, labor rights, and the risks of work completed.

The Draft Decree also approved the following assumptions regarding occupational hazard insurance premiums (percentage of payment):

i) Companies receiving the employees may pay their quotas according to the company’s risk grade premium registered for the workers with the Ministry of Social Security, as long as they were correctly classified under the occupational hazard category

ii) Companies receiving workers ranked in different occupational categories must adjust their classification with a weighted premium calculated by considering each employer registry’s premium and wages, provided it was classified correctly in the occupational hazard category

The reduction in the current two-year period of joint and several liabilities of the substituted employer is maintained; however, the six-month term originally proposed is reduced to three months.

Every four months, individuals and legal entities providing specialized services must report their service agreements to the social security authorities, with information regarding the service provision, the personnel involved in providing the specialized services, and their registration with the Ministry of Labor and Social Welfare.

With respect to the reforms proposed to the Federal Tax Code, the Value Added Tax Act, and the Income Tax Act, the Ministry of Labor and Social Welfare and the Ministry of Finance and Public Credit made no substantial modifications to the amendments proposed by the Federal Executive in its reform initiative and therefore, the following was approved:

The Draft Decree maintains that the proposal for payments made for the outsourcing of personnel will not have tax-deductible or creditable effects, in the understanding that the outsourcing of personnel is defined as the time when a contractor provides its workers to work on behalf of the contractor or makes them available to the latter.

The reform also maintains that no tax effects are granted to outsourcing of personnel services in the following cases:

a) when the workers that the contractor makes available to the contracting party originally worked for the contracting party and were transferred to the contractor

b) when the workers provided or made available by the contractor cover all of the contracting party’s main activities

The Draft Decree also clarifies that tax effects will be granted to payments or considerations for outsourced specialized services or for the execution of specialized works that are not part of the corporate purpose or the main economic activity of the contracting party, provided that the contractor is duly authorized by the Ministry of Labor and Social Welfare, and the authorization is granted to the contractor.

In terms of joint and several liabilities, the addition of the assumption in which the service contractor would be jointly and severally liable for the contributions payable to the workers providing the outsourced service is maintained.

The Draft Decree considers the use of frameworks that simulate the provision of specialized services or the execution of specialized works, or the hiring of outsourced personnel as tax fraud.

In the case of specialized services or the execution of specialized works, the proposal to modify the deduction requirements is maintained. This proposal states that the contracting party must obtain certain information from the contractor, including a copy of the valid authorization as a provider of specialized services; the Payroll Digital Tax Receipts (CFDI, acronym in Spanish) of the payments made to the employees who will provide the service or execute the works; proof of payment issued by the bank of the withholding for wages and salaries income tax return; and proof of payment of the social security quotas to the IMSS and Infonavit. The contractor is bound to submit this information to the beneficiary of the service.

The Draft Decree also reiterates that payments for the outsourcing of personnel are non-deductible expenses.

With respect to the Value Added Tax (VAT), the Draft Decree maintains the proposal that the tax paid for the outsourcing of personnel services cannot be credited. In the case of the payment of specialized services or the execution of specialized works, the credit for VAT paid will be subject to the beneficiary of the service obtaining certain documentation from the contractor, including a copy of the valid authorization as a provider of specialized services, a copy of the VAT return, and the acknowledgment of receipt for the period when the contractor paid the consideration and transferred the VAT.

In this sense, the contractor will be bound to submit this information no later than the month following the month when the contractor pays the consideration. The requirement to withhold 6% of VAT when personnel is provided is repealed.

The Draft Decree adds the prohibition to hire outsourced personnel for the benefit of public sector agencies and institutions, allowing only specialized services or specialized works that are not part of their essential activities and provided that the contractor has the registration required by the Federal Labor Act.

The Draft Decree establishes that the reform will become effective the day after its publication in the Official Gazette of the Federation, except for the provisions established by the Federal Tax Code, the Income Tax Act, and the Value Added Tax Act, which will become effective on August 1, 2021. However, the legislation regarding public officials will become effective in the fiscal year 2022.

It is important to highlight that the bill approved by the Plenary session of the House of Representatives will continue with the legislative process for its approval.

It is a recommendation that each organization should perform a specific analysis of the impacts that the bill will have to comply with the provisions during the transition period.

As always, personnel from the Labor, Social Security, and Compensation Tax Services Practices of KPMG in Mexico are at your service to provide a detailed analysis of how the application of the provisions described above could affect your company.