On November 12, 2020, President Andrés Manuel López Obrador introduced a bill in Congress to amend several provisions of the Federal Labor Law and other-related laws including the Social Security Law, Institute of the National Housing Fund for Workers Law, Tax Code, Income Tax Law and VAT Law, to substantially alter and further regulate the outsourcing regime in Mexico. The bill is still pending to be reviewed, commented on and, as the case may be, approved by the House of Representatives (Cámara de Diputados) and the Senate (Cámara de Senadores ). Below are the highlights of the bill:
Federal Labor Law
- As a general rule subcontracting or outsourcing personnel will be prohibited except for very limited situations described in the bill.
- Subcontracting or outsourcing may be permitted to the extent it refers to specialized services or specialized works that are not part of the corporate purpose or main activity of the beneficiary of the services. In such case, the service provider must obtain certain authorizations described in the bill.
- The authorizations to become a service provider of specialized works or services must be renewed every three years; however, the Ministry of Labor may refuse or cancel such authorizations at any time if the person in question fails to comply with statutory requirements. Service providers will have to register in a special registry called “Padrón de Prestadoras de Servicios Especializados u Obras Especializadas” that will be available to the public online.
- All arrangements with an authorized service provider must be in writing and the beneficiary and the service provider will be jointly liable for any violations involving labor and social security matters related to the employees involved in the service.
- The bill introduces fines that can go as high as US$220,000.
Social Security Law
- In case of violations to the Federal Labor Law, the beneficiary and the service provider will be jointly liable for violations on social security matters related to the employees involved in the service.
- Service providers will be required to make regular filings and comply with other reporting obligations to the Social Security Institute and the Ministry of Labor regarding of the services agreements they have entered into and other employee-related information, such as contributions and employee’s base salary.
Tax Related Laws
- Payments for unauthorized subcontracting or outsourcing will not be deductible for tax purposes: (i) when employees were originally employed by the beneficiary and then transferred to a service provider in an attempt to circumvent the law; or (ii) when employees performed all activities for the beneficiary of the services, as opposed to specialized work only.
- The beneficiary of the services must obtain from the service provider copies of (i) its authorizations, (ii) salary payment tax receipts, (iii) withholding tax return, and (iv) payments to the Social Security Institute and the National Fund for Workers Housing (INFONAVIT).
- Value Added Tax paid in connection with unauthorized subcontracting or outsourcing will not be creditable.
Unfortunately, the bill does not expressly address or gives a transition or correction period for current outsourcing regimes to become compliant with the bill. This needs further analysis.
Based on the above, the question then becomes: How to properly and lawfully subcontract or outsource personnel (if possible, at all) once, and if, this bill becomes law? These questions will be part of an ongoing analysis of the bill as the legislative process moves forward.
Stay tuned for our follow-up analysis.
Juan Tejedo, juan.tejedo@gmt.mx
Alfonso García-Mingo, a.garciamingo@gmt.mx
Carlos Acle, carlos.acle@gmt.mx
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