The anticipated amendment to the rules regarding outsourcing in Mexico was published on April 23, 2021. The decree amends several Mexican laws, including the Federal Labor Law, Social Security Law, National Workers’ Housing Fund Law, Tax Code, Income Tax Law and Value Added Tax Law.
Restrictions on Outsourcing
Save as described below, subcontracting personnel (outsourcing) is prohibited. Outsourcing is defined as a person or company (Subcontractor) making available his/her/its employees for the benefit of others (Principal).
Subcontracting specialized services or services for specialized projects is permitted if such specialized services are not part of the Principal’s corporate purposes or preponderant business activity. Other requirements must be met, including the Subcontractor must register in a database to be created by Mexico’s Ministry of Labor and the subcontracting must be documented in a written agreement stating the object of the services to be provided and the approximate number of employees that will provide the services. Subcontractors must also register with, and provide periodic information to, Mexico’s Social Security Institute and the National Workers’ Housing Fund.
The Principal will be jointly liable vis-à-vis the employees providing the specialized services if the Subcontractor fails to comply with its obligations under Mexico’s Federal Labor Law, Social Security Law or National Workers’ Housing Fund Law. The Principal will also be jointly liable for failure to withhold or enter income taxes on the compensation of the employees that provide the services.
Cap on Profit Sharing
Under Mexican law, a portion of each employer’s annual profit (typically 10%) must be divided among and paid to its employees. The reform states that any individual’s share of the profits will be capped at the equivalent of the employee’s three month’s salary or the average profit received in the last three years, whichever is greater.
Non-Deductibility – Income Tax
Payments made by the Principal to subcontract personnel that perform activities related to the Principal’s corporate purposes or preponderant business activities will be non-deductible for income tax. Payments to subcontract specialized services may be deductible if the Subcontractor is duly registered and the outsourcing otherwise complies with all the requirements under Mexico’s Federal Labor Law, Tax Code and Income Tax Law. The Principal must, among other requirements, (i) verify the Subcontractor has the required registration and (ii) obtain copies of (a) tax receipts showing payment of the employees’ salaries and the withholding and payment of income taxes on such salaries, (b) payments of social security contributions and (c) payments of the contributions to the Housing Fund.
Non-Creditability – Value Added Tax
Similarly, value added tax paid by the Principal for the subcontracting of personnel that perform activities related to the Principal’s corporate purposes or preponderant business activities will be non-creditable. Creditability of value added tax on payments for permitted outsourcing services will have requirements similar to those described above for the deductibility for income tax. Also, the Principal must obtain a copy of the Subcontractor’s value added tax return and proof of payment of such tax; if the Principal cannot obtain such documents, it must amend its tax return to remove the value added tax previously credited.
Limitations on Employer Substitution
Going forward, employer substitutions (i.e. transferring employees from one employer to another) will require the transfer of the substituted employer’s assets to the substitute employer. There is a 90-day window where this requirement will not apply to certain businesses that want to use employer substitution to become compliant with the new outsourcing rules.
Non-cooperation with visits or inspections from the labor or social security authorities or violations of the restrictions or rules on outsourcing may subject the Principal and/or the Subcontractor to civil fines. These fines may be up to 50,000 Mexico’s UMAs (Unit of Measurement and Update); the UMA is currently set at 89.62 pesos, so the fine per violation may be up to 4,481,000 Mexican pesos. In addition, violations may generate or increase monetary penalties under Mexico’s Tax Code.
Potential Criminal Liability
Violations to the restrictions or rules on outsourcing may also create criminal liability. For example, using schemes to simulate the provision of specialized services or subcontracting personnel to perform activities related to the Principal’s corporate purposes or main business activities may constitute tax fraud.
The amendments to Mexico’s Federal Labor Law, Social Security Law and National Workers’ Housing Fund Law became effective April 24, 2021, but compliance with certain new requirements (e.g. creation of registry for Subcontractors, filing information by Subcontractors) will commence at later dates. The amendments to the Tax Code, Income Tax Law and Value Added Tax Law will become effective on August 1, 2021.
The amended rules on outsourcing in Mexico will have a significant impact on many businesses. The reform will affect specially companies that currently use outsourcing arrangements. Those companies must take all actions necessary to become compliant with the new rules as soon as possible but no later than August 1, 2021 (or July 23, 2021, if they want to use employer substitution to become compliant). In addition to complying with the new rules described above, many companies will have to assess the financial impact that implementing these changes may have on their bottom line and explore alternatives to address it.
While Mexico’s labor reform of 2012 already limited the use of outsourcing, many businesses ignored those rules and their enforcement was very lax. The current changes have significantly more punishing consequences for misusing outsourcing and it is expected that the current administration will enforce the new rules vigorously.