Ciudad de México, noviembre, 2020
On November 12, 2020, Mexico’s Executive Power proposed a draft decree amending, supplementing and repealing various provisions relating to personnel outsourcing under the Federal Labor Law, Social Security Law, National Workers Housing Fund Institute Law, the Federal Tax Code, the Income Tax Law and the Value Added Tax Law.
Below you will find a summary with the main issues regarding labor law:
- This initiative mainly proposes to regulate the following: (a) Personnel outsourcing, (b) Specialized services and performance of specialized work, and (c) Personnel placement agencies.
- Personnel outsourcing, that is, when a person or legal entity provides or makes available its own workers for another party’s benefit, is generally prohibited.
- Providing specialized services or performing specialized work that are not part of the corporate purpose or economic activity of the beneficiary thereof is not considered outsourcing, provided that the contractor has the required authorization from the Labor and Social Security Ministry. Any person or legal entity that retains specialized services or the performance of specialized work with a contractor who fails to comply with the obligations arising from relations with its workers shall be jointly and severally liable for the workers used in connection with such retainers.
- Intermediaries, which are the persons or legal entities involved in the recruitment of staff to provide services for an employer, may only include recruitment, selection, orientation and training services, among others. Under no circumstances will the intermediary be considered as an employer, since the party that benefits from the services will be regarded as the employer.
- In order for an employer substitution to be effective, the property of the company or establishment must be transferred to the substitute employee.
- Any party that outsources personnel generally, as well as any person or legal entity that provide specialized services or perform specialized work without the required authorization will be subject to a fine ranging from 2,000 to 50,000 times the Unit of Measurement and Update, i.e. between $173,760.00 and $4,344,000.00 pesos. The same fine will be applied to persons or legal entities that benefit from personnel outsourcing.
Regarding tax laws:
- Amendments to the Federal Tax Code: Personnel outsourcing will not be afforded the tax deduction or tax credit benefit. It is also important to note that the use of schemes simulating the performance of specialized services or specialized work, as well as personnel outsourcing will be included within the definition of the tax fraud felony, with penalties punishable by imprisonment. Similarly, fines are contemplated.
- Income Tax Act Amendments: For the purpose of authorized deductions, the party that retains specialized services or the performance of specialized work must obtain from the contractor a copy of the authorization granted by the Labor and Social Security Ministry, as well as the tax receipts for wages paid to workers employed to perform the service or work, tax returns evidencing remittance of the tax withholdings made to such workers, and payment of fees to the Mexican Social Security Institute and National Workers’ Housing Fund Institute. The contractor will be obligated to provide such information. In this regard, payments made for personnel outsourcing will not be deductible.
- Amendments to the Value Added Tax Law: Value added tax transferred for outsourcing services will not be creditable. In addition, the provision that requires withholding the tax transferred when they make available to the contractor or a related party personnel that performs their duties in the contractor’s or a related party’s facilities, is repealed, and in which case the withholding tax is 6% of the value of the consideration actually paid.
- As an initiative to amend different laws, it has to be discussed and approved by Congress, for which it may vary.
- The labor law reforms would enter into force as soon as such are approved by Congress and tax reforms as of January 2021.
- By limiting intermediation services, it is possible to conclude that services provided by outsourcing companies such as Manpower or Adecco would be limited.
- This amendment could eliminate corporate structures with “insourcing” or internal services companies.
- Notwithstanding the terms of this initiative, we recommend waiting until the reform is approved by Congress.
Please contact us if you have any questions or comments.
*This article is authored by Fernando Martínez and Oscar Paz and it may reflect their personal opinions independently from the law firm they work for. Shall you intend to apply any of the debated interpretations within the article, we highly recommend to formally consult Jáuregui y Del Valle, S.C. or any other qualified tax and labor advisor.