Andres Armida, an external consultant, also contributed to this article.
On November 11, 2020, the President of Mexico submitted a bill proposing the amendment of the Federal Labor Law, Social Security Law, National Workers’ Housing Fund Institute Law, Federal Tax Code, Income Tax Law, and Value Added Tax Law (the “Presidential Bill”). In summary, the Presidential Bill intends to forbid subcontracting/general outsourcing of employees. In general, the bill can be dissected as follows:
- Outsourcing/subcontracting - Safe for the rendering of specialized services or works, the arrangements through which an individual or entity makes its own employees available for the benefit of others is prohibited.
- Professional Employment Placement Agencies (PEPA) - PEPAs are authorized to provide intermediation services during employer’s hiring process by recruiting, selecting, training, and capacity-building, among others. At all times, the employer will be the party benefiting from such services.
- Specialized Services and Works - To the extent that a service provider obtains its recordation and authorization to provide specialized services from the Ministry of Labor and Social Welfare (MLSW), the same may be legally retained by a company or an individual. To that end, specialized services or works are those that are not part of the corporate purpose or economic activity of the intended beneficiary. There is still no clarity on what should be construed as economic activity, nor of the rules to be recorded and authorized before the MLSW as a specialized service provider.
- Specialized Services Companies’ Registry - The MLSW will have a public registry where specialized service companies will be recorded and shall renew every three years.
- Social Security - The beneficiary of the specialized services/works will be jointly liable for the Social Security obligations of a contractor’s employees during such service/work. Specialized providers will need to provide to the Mexican Social Security Institute information about the beneficiary and employees available for such beneficiary as well as other general information.
- Taxes - Tax deductions or reimbursements of Value Added Tax and Income Tax for outsourcing (or insourcing) of personnel will no longer be permitted unless they come from a recorded and authorized specialized service company. The use of simulated transactions for the rendering of specialized services, the execution of specialized work, or the outsourcing of personnel will constitute elements toward the commission of criminal tax fraud.
The vast majority of companies that have set up operations in Mexico have relied on a model whereby an operations company is served by an employee services company (insourcing). Likewise, foreign companies that want to test the market normally turn to a Professional Employment Organization (PEO) to assist them while they assess the viability of the market. Under the Presidential Bill, such now-legal schemes will no longer be permitted and thus will require corporate and tax restructuring.
Since insourcing and outsourcing, as currently applied by companies are prohibited under the Presidential Bill, it should be considered that contrary to what was the corporate trend of having expansive corporate purposes to enable the operational company to perform all sorts of activities (manufacturing, commercialization, etc), such corporate purpose should be reduced to business units (e.g., finance, field operations, marketing, logistics, etc.) enabling exclusively the rendering of specialized services. However, it remains to be seen if the rules will enable deductibility once such business units obtain recordation as specialized service providers.
The referred reduction of activities will enable control on profit-sharing as well as employment-risk-factor of employees. (If all employees are retained by a single company, an accountant whose employment risks are minor would be compared with a welder or night pusher, thus increasing Social Security costs for companies.)