Background
On November 12, 2020, an initiative to complement the applicable rules on labor subcontracting from the Federal Executive was published. This initiative reforms, adds, and repeals various provisions of the Federal Labor Law (LFT), Social Security Law (LSS), National Workers Housing Fund Institute Law (LINFONAVIT), Federal Tax Code (CFF), Income Tax Law (LISR), and Value Added Tax Law (LIVA).
Statement of Reasons
According to what was expressed by the Executive, the subcontracting regime has given rise to abusive or simulated practices to the detriment of workers’ rights, a situation that contravenes the social policy of the State, whose primary purpose is the well-being of the Mexican population.
Therefore, the prohibition of labor subcontracting structures is proposed, and precise rules are established for companies that contract only specialized services or the execution of specialized work.
Initiative’s Scope
I. Federal Labor Law
How this initiative proposes to regulate the following figures:
• Personnel subcontracting: the subcontracting of personnel, consisting of an individual or legal person providing or making their workers available to benefit another, is prohibited.
• Personalized services and specialized work: allows the provision of specialized services or the execution of specialized work, which are not part of the corporate purpose or the economic activity of the beneficiary, for which authorization will be required from the Ministry of Labor and Social Welfare (STPS), as well as the creation of a public registry of specialized service providers.
• Employment agencies: they may only intervene in the hiring process: recruitment, selection, or training, among others, but in no case will the intermediary be considered an employer since this character is held by those who benefit from the services.
• Employer substitution: the company or establishment’s assets must be transferred to the substitute employer for the employer substitution to take effect.
It is important to note that sanctions are foreseen for both the beneficiary and the provider of subcontracting services, specialized services, or the execution of specialized work without the STPS’ authorization, ranging from 2,000 to 50,000 UMA (173,760 to 4’344,000 MXN, or 8,400 to 212,000 USD approximately.)
II. Social Security Law and Institute of the National Housing Fund for Workers Law
The reform proposes the following:
o Recognizing that a specialized job or the execution of specialized work is not part of the corporate purpose or the beneficiary’s economic activity.
o That the individual or legal person who hires the provision of services with a company that fails to comply with its obligations in terms of social security will be jointly and severally liable concerning the workers involved.
o Eliminating the administrative facility granted to companies that provide personnel services to open an employer registry per class at the national level.
o In the event of an employer substitution, the substituted employer will be jointly and severally liable along with the new one for the obligations derived from the LINFONAVIT, from before the replacement date, up to a term of six months after the substitution.
o The individual or legal person who hires the provision of services or the execution of work with a company that fails to comply with social security obligations will be jointly and severally liable concerning the workers employed to carry out said services.
o The Mexican Institute of Social Security (IMSS), INFONAVIT, and the Ministry of Labor and Social Welfare (STPS) will celebrate collaboration agreements to exchange information.
o The incorporation of sanctions due to non-compliance with the obligations provided for in the LSS and INFONAVIT ranging from 500 to 2,000 UMAs (43,440 to 173,760 MXN or 2,100 to 8,400 USD approximately.)
III. Federal Tax Code
o A general definition of what is considered labor outsourcing is proposed.
o Tax receipts issued due to personnel subcontracting will not be valid for tax purposes.
o It is proposed to incorporate a case of recidivism for deducting or crediting illegal services.
o It is proposed to add an alleged violation and its sanction (ranging from 150,000 to 300,000 MXN or 7,300 to 14,600 USD, approximately) if the contractor does not provide the contracting party with the necessary information for expenses to be deductible or the transferred taxes, accreditable.
o The use of simulated or illegal labor subcontracting structures will qualify as a tax fraud crime and its equivalents.
IV. Income Tax Law
o It is proposed to condition the deduction of specialized service payments corresponding to the obtaining of:
- Current authorization issued by the STPS in terms of the FLL.
- Tax receipts for the payment of wages to the workers who provided the service or executed the work.
- Statement of the full return of tax withholdings made to said workers.
- Payment of worker-employer fees to the lMSS, as well as contribution payments to INFONAVIT.
V. Value Added Tax Law
o Repealing section IV of article 1-A of the VAT Law is proposed.
o The VAT accreditation for services in which personnel is provided or made available to the contracting party will not be permitted when:
i. The workers that the contractor provides or places at the disposal of the contracting party have been initially workers of the latter and have been transferred back to the contracting party, through any legal form, and
ii. The workers provided or made available by the contractor cover all the principal activities of the contracting party.
o The accreditation of VAT related to the provision of specialized services is conditioned to the fulfillment of the following requirements:
i. The contracting party must obtain from the contractor:
a. A copy of the current authorization referred to in the LFT,
b. The VAT return and the acknowledgment of receipt of the payment corresponding to the period in which the contracting party paid the consideration and the VAT transferred to him.
ii. The contractor will be obligated to provide the contracting party with a copy of the documentation above, which must be delivered during the month following the one in which the contractor made the payment of the consideration for the service received and the VAT that has been transferred.
o If the documentation is not obtained from the contractor within the indicated period, the contracting party must submit a supplementary return subtracting the amount that would have been credited for the said concept.
Recommendation:
If your company provides or hires outsourcing services or works under the insourcing structure, we recommend considering how this could affect your operations in Mexico if the initiative were approved in these terms.
J.A. Del Río, committed to helping you do business in Latin America, will keep you informed of this initiative in a timely manner. We are at your service if it becomes necessary to make any changes to the way your company carries out its operations.
