Labor Outsourcing Reform in Mexico

The Labor Outsourcing Reform in Mexico was finally published in the Official Gazette Friday, April 23, 2021, with huge implications on Labor and Tax matters. 

The Mexican laws that were amended are:

  • Federal Labor Law
  • Mexican Social Security Institute Law
  • Infonavit Law
  • Federal Tax Code
  • Income Tax Law
  • Value Added Tax Law
  • Federal Law of Workers in the Service of the State

What are the main labor changes in Federal Labor Law?

The main changes to the Federal Labor Law are the following:

1. Labor Outsourcing or Subcontracting Prohibited

Labor subcontracting (outsourcing and insourcing) is prohibited.

2. Employment Agencies and Intermediaries

Employment agencies or intermediaries involved in the personnel hiring process may participate in the recruitment, selection, training and qualification, since they are not considered employers.

3. Specialized Services Agreement

The provision of specialized services and execution of specialized works is allowed, but certain conditions have to met. For instance, the specialized services must not be part of the corporate purpose or the main economic activity of the beneficiary. However, the company providing such service (the “contractor”) must registered in the public registry maintained by the Ministry of Labor. In order to obtain the registration, the company must prove that it is up to date with its tax and social security obligations. The company has to renewed  its registration every 3 years.

Jorge Montes, Taxation in Mexico, Taxes, Income Tax, VAT, IMMEX, Doing Business in Mexico

Jorge Montes

DBM Contributor

Public Accountant based in Guadalajara with ample experience in tax matters. 

Rafael Alday, VTZ, Lawyer, Labor

Rafael Alday

DBM Contributor

Mexican attorney based in Monterrey with ample experience in labor law.

4. Companies Within the Same Group

Complementary or shared services or works rendered between companies of the same business group will also be considered as specialized as long as they are not part of the corporate purpose or the main economic activity of the company that receives them.

5. Joint Responsibility

A company that benefits from the specialized services or the execution of specialized works is jointly liable with the contractor that fails to comply with the tax and social security obligations (IMSS, INFONAVIT, SAT, etc.) regarding the involved workers . 

6. Profit Sharing with Workers

With respect to Profit Sharing payments (PTU, acronym in Spanish), the reform established a maximum limit of three months of the employee’s salary or the average PTU payment in the last three years, whichever is the most favorable for the employee. The Profit Sharing formula did not change.

7. Fines

The reform established administrative fines equivalent to 50,000 UMAS (as of today, approximately 450,000 pesos) to those companies that fail to comply with the labor obligations, regardless of other social security, tax or criminal penalties.

What are the Main Tax Implications in the Labor Outsourcing Reform?

The tax implications did not undergo significant changes in relation to the Presidential draft-initative, except for the complementary or shared services between companies of the same business group.

November 11, the President announced a Law Initiative to modify the Federal Labor Law, the Social Security Law, the Law of the Institute of the National Housing Fund for Workers, the Tax Code of the Federation, the Income Tax Law …

Federal Tax Code

1. Prohibition to Deduct Outsourcing or Subcontracting Expenses

Companies that execute illegal “outsourcing” or “subcontracting” agreements and make payments shall not make deductible said expenses. As noted, the specialized services shall not relate to the corporate purpose and the principal economic activity of the beneficiary.

2. Companies within the Same Business Group

Complementary or shared services or works rendered between companies of the same business group will be considered as specialized as long as the service does not form part of the beneficiary’s corporate purpose or main economic activity.

3. Withholding Taxes from Employees

The legal entities or individuals that benefit from specialized services or works will be jointly liable for the withholding taxes applicable to the involved workers.   

4. Recurrence or Repetition of Unlawful Conduct

When a company has deducted or credited amounts related to illegal outsourcing or subcontracting services two times or more, the Federal Tax Codes provides the recurrence or repetition of unlawful conduct. The Law now considers such conduct as an aggravating circumstance for purposes of imposing fines. 

5. Tax Fraud: Simulation of Rendering Services or Specialized Works.

The Federal Tax Code establishes that using simulated schemes for the rendering of specialized services constitutes an aggravating element in the commission of tax fraud crime.

6. New Tax Infringement and Fine

In the event that the contractor does not provide the necessary information to the beneficiary for the expense to be deductible and VAT creditable, the reform includes a sanction.

Income Tax Law

1. Requirements to Deduct Payments for Specialized Services.

The Law conditions the deduction of payments for the rendering of specialized services or the execution of specialized works. For this purpose, the beneficiary must obtain certain information from the contractor and, in turn, the contractor will be obliged to deliver a copy of the following documents:

  • The current registration issued by the Ministry of Labor.
  • The invoices relating to the worker’s salaries of the employees that performed the service or work.
  • Bank notices and receipts relating to the withholding tax payment applicable to the employees that performed the service or work.
  • Social-security tax payments made to the Mexican Social Security Institute (IMSS) and National Workers’ Housing Fund Institute (INFONAVIT).

 2. Non-deductibility of payments for subcontracting of personnel.

In accordance with the changes to the Federal Tax Code, the Income Tax Law specifies that payments corresponding to the outsourcing or subcontracting of personnel are not deductible.

Value Added Tax Law

1. The Obligation to Withhold VAT on Certain Services is Eliminated.

Given that outsourcing and subcontracting of personnel is prohibited, the withholding requirement for subcontracting of personnel services was eliminated.

2. Subcontracting: Non-creditable for VAT purposes.

As noted above, subcontracting of personnel and labor outsourcing payments have no tax effect. Therefore, VAT Law provides that the VAT transferred to a taxpayer for the “subcontracting of personnel” is not creditable.

3. Requirements for Creditable VAT 

The law provides that VAT transferred to the beneficiary of specialized services is creditable when the following requirements are met:

  • The Beneficiary shall obtain from the contractor the following:  (1) the contractor’s registration as a specialized service provider before the Ministry of Labor, (2) the contractor’s value-added tax returns or notices, (3) and proof of VAT payment during the period the service was provided.
  • The contractor shall provide a copy of the aforementioned documentation to the beneficiary, which has to be delivered within the following month after payment was made.

Regardless of the remarks above, we suggest that a company has to review the Labor Outsourcing Reform in its entirety to identify other potentially relevant issues.

Entry into Force

The amendments to the various tax regulations will enter into force on August 1, 2021.