Outsourcing regime Reform in Mexico

Last April 23, 2021, a Decree was published in the Mexican Federal Official Gazette (Diario Oficial de la Federación - DOF) which amended, extended and repealed different laws, including changes to the Federal Labor Law (Ley Federal del Trabajo - LFT); the Social Security Law (Ley del Seguro Social - LSS); the National Workers’ Housing Fund Institute Law (Ley del Instituto del Fondo Nacional de la Vivienda para los Trabajadores - LINFONAVIT); the Federal Tax Code (Código Fiscal de la Federación - CFF); the Income Tax Law (Ley del Impuesto sobre la Renta - LISR); and the Value Added Tax Law (Ley del Impuesto al Valor Agregado - LIVA).

As a result of this Decree, below we have provided an explanation of the most relevant and important tax-related changes and aspects:

Outsourcing is now prohibited, which is understood to mean when an individual or legal entity provides or makes its own workers available to another.

For outsourcing to be valid, the assets of the company or establishment must be transferred to the substitute employer.

Deduction for Income Tax purposes is prohibited, as well as the crediting of the Value Added Tax on the payment of considerations for outsourcing services.

The outsourcing of specialized services or the execution of specialized works that do not form part of the corporate purpose or represent the main line of business of the beneficiary company is permitted, as long as the contracting party is entered in the public registry.

The deduction for Income Tax purposes and the crediting of Value Added Tax on the rendering of specialized services and the execution of specialized works is permitted, as long as the service providers supply certain information related to their obligations as employers.

The obligation to withhold 6% of the Value Added Tax for outsourcing services is eliminated.

Individuals or legal entities who provide outsourcing services must be registered with the Ministry of Labor and Social Welfare (Secretaría del Trabajo y Previsión Social – STPS). To obtain the registration, they must prove that they are current with their tax and social security obligations. Additionally, the aforementioned registration must be renewed every three years.

The amount of profit sharing will be limited to a maximum of three months of the worker’s salary or the average profit sharing received over the last three years, whichever most favors the worker.

With regards to social security aspects, the migration of the workers of the company that operated under the outsourcing regime will be considered as employer substitution, as long as the company receiving the workers recognizes their employment rights, including their seniority and the terminated work risks, before the corresponding legal bodies.

This reform also stipulates the following times for compliance with these new outsourcing rules:

This Decree will be effective on the day following its publication in the Federal Official Gazette, i.e., April 24, 2021.

As of April 24, the Ministry of Labor will have 30 calendar days in which to issue the general rules for entry in the specialized outsourcing service providers registry.

Those individuals or legal entities who provide specialized outsourcing services will have 90 calendar days as of the publication of the aforementioned rules by the Ministry of Labor.

Regarding employer substitution, the Decree states that if such substitution is performed within a term of 90 calendar days following its publication, the transfer of the company’s assets will not be required, as long as employment rights are recognized, including the seniority of the transferred workers.

The aspects of Income Tax deduction and Value Added Tax crediting, as well as the 6% VAT withholding, will be effective as of August 1, 2021.

With regards to Social Security, the aforementioned worker migration will be considered as employer substitution if it occurs during the 90 calendar days following the publication of the Decree.

Finally, the penalties for noncompliance with the aforementioned points are as follows:

The fine for providing or receiving outsourcing services will be 2,000 to 50,000 times the value of the Measuring and Updating Unit (UMA). The same fine will apply to providers of specialized services or whoever executes specialized works, without the authorization of the STPS.

The Decree also establishes a penalty corresponding to a fine for the failure to submit information by the contractor, ranging from $150,000 to $300,000 pesos per noncompliance related to the submittal of information regarding Income Tax deductions and Value Added Tax crediting.

As you can see, the deadline for compliance with these new tax and labor obligations related to outsourcing has already started to run. At Mazars, we are at your disposal if you have any doubts or concerns to this regard.