The following discussion reviews measures approved during a plenary session of the lower chamber, as the legislative process continues.

Concerning Mexico’s labor law, the pending proposals would:

• Prohibit the outsourcing of personnel (defined as the practice of hiring a party outside the company to perform services and produce goods that traditionally are performed in-house by the company’s own employees and staff)
• Permit certain outsourcing services including specialized services (defined as services that are not part of the contracting party’s corporate purpose or main economic activity)
• Clarify that supplementary services and work would be considered specialized services and would include those provided among companies of the same business group, provided they are not part of the contracting party’s corporate purpose or main activity (a “business group” defined as the group of legal entities that holds direct or indirect equity interest in the share capital, and one company controls those legal entities and financial groups)
• Continue joint and several liability for individuals or legal entities that subcontract to provide specialized services when the subcontracting party fails to comply with the obligations arising from its employment relationships
• Impose registration requirements on individuals or legal entities providing outsourcing services (with registrations to be listed on a website); registration treated as verifying compliance with all tax and social security obligations within a term not to exceed 30 days from the date the measures are enacted; registration required to be renewed every three years, and subject to cancellation for a failure to comply with labor, tax, and social security obligations
• Cap employee profit-sharing to an amount equal to 90 days of the employees’ salary or the average of the last three years, whichever represents the workers’ highest benefit
• Add a condition regarding “employer substitution” (substituted employer must transfer its assets); under the outsourcing regime, qualifying companies would not be 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 when the measures are effective, with full recognition of all employee seniority and labor rights

Concerning Mexico’s social security law, the pending proposals would:

• Continue joint and several liability for the contractor of specialized services or works
• Require reporting of services agreements, service provision, personnel involved in providing specialized services to the social security authorities every four months by individuals and legal entities providing such specialized services (90 days after the effective date to IMSS and 60 days to Infonavit)
• Eliminate the ability to obtain an employer registration by class to cover occupational hazard fees (qualifying employers required to apply for new employer registries for each work center and municipality no more than 90 days after the effective date of the reform)
• Increase penalties for noncompliance with the requirements to submit reporting information on service agreements or specialized works
• Provide a 90-day transition period for employers to migrate workers from companies operating under the outsourcing regime to another “employer substitution,” provided the company receiving the workers recognizes their seniority, labor rights, and the risks of work completed
• Provide rules regarding occupational hazard insurance premiums

Under the workers’ housing fund law in Mexico, the pending proposals would:

• Reflect the current two-year period of joint and several liabilities of the substituted employer but reduce the six-month term as originally proposed to three months
• Require individuals and legal entities providing specialized services every four months to 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 labor and social welfare registrations

With respect to the proposed amendments to Mexico’s income tax law and value added tax (VAT) law, no substantial modifications to the government’s proposals were adopted during the legislative process. Thus, the following amendments were approved:

• Payments made for the outsourcing of personnel would not have tax-deductible or creditable effects, with 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.
• There would be no tax effects granted with regard to outsourcing of personnel services in the following situations:
  • When the workers that the contractor makes available to the contracting party originally worked for the contracting party and were transferred to the contractor
  • When the workers provided or made available by the contractor cover all of the contracting party’s main activities
• There would be no tax effects regarding 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 Secretariat of Labor and Social Welfare, and the authorization is granted to the contractor.
• The service contractor would be jointly and severally liable for the contributions payable to the workers providing the outsourced service.
• The use of structures or frameworks that simulate the provision of specialized services or the execution of specialized works, or the hiring of outsourced personnel would be treated as tax fraud.
• Regarding the income tax treatment of specialized services or the execution of specialized works, the proposal provides that the contracting party would have to obtain certain information from the contractor—including a copy of the valid authorization as a provider of specialized services; a digital tax certification or CFDI regarding payments made to the employees who provide the service or execute the works; proof of payment issued by a bank of the withholding income tax return; and proof of payment of the social security quotas to the IMSS and Infonavit (the contractor would be required to submit this information to the authorities).
• Clarification that payments for the outsourcing of personnel would be non-deductible expenses.
• With regard to VAT, the tax paid for the outsourcing of personnel services would not be creditable. In the case of the payment of specialized services or the execution of specialized works, a valid credit for VAT paid would require the contractor to obtain 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. The contractor would be required 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 would be repealed.

Under the draft decree, the proposed measures generally would be effective as of the day after their publication in the official gazette (except the tax provisions would have an effective date of 1 August 2021).

Accordingly, organizations need to consider the possible implications and how to comply with the provisions during the transition period.
 

Read an April 2021 report prepared by the KPMG member firm in Mexico

For more information, contact a KPMG tax professional in Mexico:

Armando Lara | +52 555 246 8300 | armandolara@kpmg.com.mx

Manuel Rico | +52 555 246 8558 | rico.manuel@kpmg.com.mx