Mexican Senate approves the Labor Reform on subcontracting
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Mexican Senate approves the Labor Reform on subcontracting
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On April 20, 2021, the Senate approved the initiative to reform various articles of the Federal Labor Law, Social Security Law, the Worker’s National Housing Fund Institute Law, Federal Tax Code, Income Tax Law, and Value Added Tax Law on labor subcontracting. The Executive presented this initiative on November 12, 2020.

The President will sign it, for its publication in the Official Federal Gazette, in the following days.

Below, we highlight this reform’s relevant issues:

Overview:

1) Personnel subcontracting via outsourcing/insourcing is prohibited, understanding subcontracting as when a natural or legal person provides or makes available their own workers to benefit another.

2) Shared services’ provisions (Shared Service Center) and service providers within groups of companies will be allowed as long as they have a different corporate purpose and preponderant activity from the companies receiving them (accounting, finance, human resources, and treasury, among others.)

3) Employment agencies may continue to provide specialized services such as recruitment, selection, and personnel training (a different business line than hiring).

Specialized services

4) The provision or execution of specialized services is allowed when registered with the Ministry of Labor’s Single Registry (art.15 Federal Labor Law (LFT)

5) Guidelines on tax, labor, and social security matters are expected from the Ministry of Labor (“STPS”) within a period of 30 calendar days following the Labor Reform’s publication date and entry into force for the enrollment in the Public Registry.

6) Specialized service providers must obtain their registration within 90 calendar days after the STPS publication of the specific rules (Transitory Articles) and renew it every three years. 

7) The STPS has 20 business days to respond to the registration request, counting from the filing date. After those 20 days, if the STPS has not issued a resolution yet, the applicant has three days to request a reply. If after those three days the STPS' resolution is still pending, the registration will be considered as accepted.

8) Contracts for the provision or execution of specialized services or works must be made. The specialized services provider must supply the information related to said contracts as follows:

  •  To the Mexican Institute of Social Security (“IMSS”) and the Institute of the National Housing Fund for Workers (“INFONAVIT”), no later than the 17th day of the months of January, May, and September, for specialized contracts held in the corresponding four-month period.

9) Joint and several liability is contemplated for the specialized services contracting party for the non-compliance of the service provider’s social security obligations.

10) In cases of employer substitution, the assets’ transfer must be carried out, as long as there are assets to transfer (art. 41 LFT) and the worker’s labor rights, work risks, and seniority must be respected.

11) In the event of an employer substitution, the substituted employer will be jointly and severally liable with the new employer for the obligations regarding INFONAVIT before the substitution date, up to a period of three months.

Tax treatment

12) The 6% VAT withholding to outsourcing services is eliminated 1.

13) Payments related to personnel subcontracting will not be deductible for Income Tax (ISR) nor creditable for Value Added Tax (VAT.)

14) Payments for specialized services meeting the following requirements will be Income Tax deductible and VAT:

a. Those that are not part of the corporate purpose or the predominant economic activity of the contracting party.

b. The specialized service provider must be registered in the STPS database.

c. The contracting party must:

    •  Verify that the service provider is registered in the STPS database.
    •  Obtain a copy of:

i. The tax receipts of workers’ wages.

ii. The complete return of tax withholdings made to the workers.

iii. Payments of worker-employer fees made to the IMSS.

iv. Payments of the INFONAVIT contributions.

v. The VAT return.

vi. Acknowledgment of the payment corresponding to the period in which the contracting party paid the consideration and the VAT transferred to them.

  •  The specialized services or works provider will be required to give the contracting party a copy of the above documentation, and in the VAT’s case, no later than the last day of the following month (if it is not provided within this period, the contracting party must present a supplementary return in which the amounts credited for the said concept must be subtracted.)

Employee Profit Sharing

15) For the Employee Profit Sharing (PTU) distribution, there are two options. The one that favors the worker the most must be used:

  •  a maximum limit of three months of the worker’s salary, or
  •  the average PTU received by the worker in the last three years.

Sanctions

16) It is a tax fraud crime to use structures simulating permitted subcontracting or carrying out prohibited subcontracting.

17) Deducting for ISR or crediting the corresponding VAT without complying with the corresponding requirements constitutes an aggravation in the commission of an offense (increase from 60% to 90% of the amount of the undue benefit or omitted contribution).

18) Applicable fines:

  •  Not allowing inspection and surveillance by the STPS: from 250 to 5000 times the amount of the unit of measurement and updating (UMA) (MXN 250 to MXN 5,000)
  •  Whoever performs subcontracting without registration, or hires, or benefits from it without verifying the subcontractor’s registration: from 2,000 to 5,000 UMA (MXN 179,000 to MXN 4,481,000)
  •  Employer’s acts and omissions of the employer in social security matters: from 20 to 350 UMA (MXN 1,792 to MXN 31,367)
  •  Submitting quarterly information to the IMSS after the deadline: from 500 to 2000 UMA (MXN 44,810 to MXN 179,240)
  •  For each unfulfilled obligation to deliver information corresponding to ISR and VAT: from MXN 150,000 to MXN 300,000

Entry into force

19) The initiative will enter into force the day after its publication in the Official Federal Gazette (DOF), except for the provisions modifying the Income Tax Law, the Value Added Tax Law, and the Federal Tax Code entering into force on August 1, 2021.

It is vital for companies in a personnel subcontracting scheme, via insourcing or outsourcing, to migrate their current personnel provision structures within their operating companies or to hire a specialized service provider before the Labor Reform enters into force.

At JA Del Río, always committed to our clients, we will be pleased to advise you in the analysis and implementation of the best structure for your business, the proper compliance with the new provisions on Social Security, and the corresponding tax provisions.

 

 

 

 

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