Approval of the Subcontracting Reform (Outsourcing)
Emmanuel Ibarra Castillo
On April 13th, 2021, a reform bill amending several provisions of the Federal Labor Law, Social Security Law, INFONAVIT Law, Federal Tax Code, Income Tax Law and VAT Law regarding subcontracting or outsourcing was approved, both in committees and in the plenary session of the Chamber of Deputies.
With the foregoing, the reform bill passes to the Senate for its discussion. It is expected to be approved by the Senate and eventually published in the Official Federal Gazette on May 1st.
By virtue of the above, we will briefly summarize the content of the reform and some practical considerations related to it.
I. SUMMARY OF THE PROPOSAL TO AMEND THE FEDERAL LABOR LAW ON SUBCONTRACTING MATTERS.
What is prohibited?
The initiative prohibits the subcontracting of personnel, defining this as the provision of employees by an individual or legal entity for the benefit of another.
This also implies the prohibition of schemes known as insourcing, in which corporate groups create their own service companies to hire and provide personnel to the legal entities of the group.
What is allowed?
The subcontracting of specialized services or the execution of specialized works is allowed. To be considered specialized, they must not be part of the corporate purpose or the predominant economic activity of the beneficiary or contracting company.
Shared or complementary services.
The operation of companies that provide shared or complementary services within the same corporate group is allowed.
Shared or complementary services:
- They must not involve the hiring of personnel.
- They must be specialized, that is to say, activities that are not part of the corporate purpose or main economic activity of the company that receives such services.
What is understood by a corporate group?
The reform refers to Article 2 of the Stock Market Law, which defines a corporate group as a group of legal entities organized under direct or indirect equity participation schemes, in which the same company maintains control of such legal entities. Financial groups will also be considered a corporate group in terms of the Law to regulate financial groupings.
How should the subcontracting of specialized services or the execution of specialized works be formalized?
It must be documented by means of a written agreement, stating the purpose of the services to be provided or the works to be executed, as well as the number of workers that will participate in the performance of such agreement.
What requirements must fulfill the individuals or legal entities that provide subcontracting of specialized services or execution of specialized works?
a. Both the providers of specialized services or works, as well as those who provide shared or complementary services in a corporate group, must be registered before the registry established by the Ministry of Labor and Social Welfare (Secretaría del Trabajo y Previsión Social) (hereinafter as STPS).
b. To obtain the registration, the specialized nature of the service they provide must be proved and be in compliance with their labor, tax and social security obligations.
c. The registration must be renewed every three years.
d. Once the registration is obtained, they will remain registered in a public registry and be available in an internet portal.
e. The STPS may deny or cancel the registration at any time in case of non-compliance with obligations.
Joint and several liability. The initiative establishes that whoever subcontracts the specialized services or the execution of specialized works that fails to comply with obligations to its employees, will be jointly and severally liable with respect to such obligations.
Employment agencies or intermediaries involved in recruitment processes. They may participate in the recruitment, selection, training and qualification, among others. They will not be considered employers; this character will only be held by those who benefit from the services of the employees.
New requirement for an employer substitution to take effect.
The reform proposes that in order for the substitution to be effective, the assets of the company or establishment must be transferred to the substitute employer.
New rule for the payment of profits.
The amount of the net profit to be distributed is maintained as the percentage determined by the National Commission for the Participation of Workers in the Profits of the Companies. (Currently 10% ten percent of the net profit).
The following criteria are incorporated for the payment of profits to employees entitled to them:
- The amount to be paid for profit sharing will have a maximum limit of three months of the employees’ salary or the average of the participation received in the last three years.
- Of the above criteria, the one most favorable to the employee will be applied.
New presumption regarding inspections. The employer who does not allow the inspection and surveillance of the labor authorities, will be notified by means of an instruction to appear to provide all the required information and will be warned that if he does not exhibit it, it will be presumed that he does not have it.
New sanction for impeding inspection or surveillance actions of the labor authority. This sanction will go from 250 to 5,000 UMAS, that is to say, from $21,720.00 pesos to $434,400.00 pesos.
New sanction for using subcontracting of specialized services or execution of specialized works without having the corresponding registration. This sanction will go from 2,000 to 5,000 UMAS, that is to say, from $173,760.00 pesos to $4,344,000.00 pesos.
New sanction to whoever benefits from subcontracting labor or the rendering of specialized services or execution of specialized works without complying with the requirements of the law. This sanction will go from 2000 to 50000 UMAS, that is to say, from $173,760.00 pesos to $4,344,000.00 pesos.
II. SUMMARY OF REFORMS TO OTHER CODES AND LAWS PROVIDED FOR IN THE INITIATIVE.
AMENDMENT TO THE SOCIAL SECURITY LAW
- Joint and several liability for the contracting party in social security matters. Whoever contracts the provision of services or the execution of specialized works with an individual or legal entity that fails to comply with its social security obligations, will be jointly and severally liable in relation to the employees used to execute such contracts.
- Obligation to provide information on a quarterly basis to the Mexican Social Security Institute (IMSS). Whoever contracts the provision of services or the execution of specialized works must communicate quarterly, no later than the 17th day of the months of January, May and September, the information of the contracts entered into during the four-month period in question.
- Collaboration between authorities for verification of compliance. In order to verify compliance with the obligations established in the Federal Labor Law and the Social Security Law, the Mexican Social Security Institute and the Ministry of Labor and Social Security must enter into collaboration agreements for the exchange of information and the performance of joint verification actions, within their respective areas of competence.
- Penalty for non-compliance. Failure to submit or late submission of the above-mentioned information is punished with fines from 500 to 2,000 UMAS, that is to say, from $43,440.00 to $173,760 pesos.
AMENDMENT TO THE LAW OF THE NATIONAL WORKERS’ HOUSING FUND INSTITUTE (INFONAVIT).
- Joint and several liability in case of employer substitution. In the event of employer substitution, the substituted employer will be jointly and severally liable with the new employer for the obligations derived from this Law, arising prior to the date of the substitution, for a period of up to three months, after which time all liabilities will be attributable to the new employer.
- Obligation to provide information periodically to INFONAVIT. Individuals or legal entities registered for the provision of services or the execution of specialized works must report quarterly, no later than the 17th day of the months of January, May and September, the information of the contracts entered into during the four-month period in question.
- Joint and several liability for the contractor regarding obligations before INFONAVIT. Whoever hires specialized services or the execution of specialized works with a company that fails to comply with its social security obligations, will be jointly and severally liable in relation to the employees used to execute such hires.
- Collaboration between authorities for verification of compliance. For the verification of compliance with the obligations established in the Federal Labor Law and the Social Security Law, the Mexican Social Security Institute and the Ministry of Labor and Social Welfare must enter into collaboration agreements for the exchange of information and the performance of joint verification actions, in their respective areas of competence.
AMENDMENT TO THE FEDERAL TAX CODE
- Elimination of tax effects of deduction or credit for the prohibited subcontracting of personnel. No tax effects of deduction or credit will be given to the subcontracting of personnel.
- Elimination of tax effects of deduction or credit to other forms of personnel subcontracting. Tax effects of deduction or credit will not be given to the subcontracting of personnel when any of the following cases occur:
a. When the employees that the contractor provides or puts at the disposal of the contractor, have been employees of the latter and have been transferred to the contractor, by means of any legal figure, and
b. When the employees provided or made available by the contractor cover the totality of the main activities of the contractor.
- Tax benefits of specialized subcontracting. Payments or considerations for the subcontracting of specialized services or the execution of specialized works, as well as shared or complementary services that are specialized and that are rendered between companies of the same corporate group, that are registered before the STPS and comply with the legal requirements, may be deducted or credited for tax purposes.
- Joint and several liability in tax matters of the contractor of subcontracting services or specialized works. Those who contract and receive services or specialized works will be jointly and severally liable for the taxes that would have been caused in charge of the employees with whom the service is rendered.
- Infringements and penalties. It is proposed to incorporate a case of recidivism as an aggravating circumstance for purposes of imposing fines for deducting or crediting payments or benefits in illegal subcontracting schemes.
- New sanction to the contractor for not providing necessary information for deductibility to the contracting. It is proposed to add an infraction and a penalty in the event that the contractor does not provide the contracting party with the necessary information for the expense to be deductible or the tax transferred to be creditable. The penalty will be from $150,000.00 to $300,000.00 pesos for each obligation to provide information not complied with.
- Qualified tax fraud for those who use illegal subcontracting schemes. It is proposed to establish that the conduct consisting of using simulated schemes of rendering specialized services or the execution of specialized works or subcontracting personnel constitute qualifiers in the commission of the crime of tax fraud and its equivalents.
AMENDMENT TO THE INCOME TAX LAW
- Requirements to deduct the provision of specialized services or the execution of specialized works. It is proposed to condition the deduction of the corresponding payments, for income tax purposes, by establishing as a requirement for deductions that in the case of the rendering of specialized services or the execution of specialized works the contracting must obtain from the contractor and the latter will be obliged to deliver to the contracting, a copy of the following:
a. The registration before the Ministry of Labor and Social Welfare.
b. The tax receipts for the payment of salaries of the employees who have provided the service or performed the work.
c. Declaration of the withholding of taxes withheld from such employees.
d. Payment of the employee-employer contributions to the Mexican Social Security Institute, as well as the payment of contributions to the INFONAVIT.
- Subcontracting of non-deductible personnel. Payments made under personnel subcontracting schemes will not be deductible for income tax purposes.
AMENDMENT TO THE VALUE ADDED TAX LAW
- Requirements to credit the Value Added Tax in subcontracting schemes of specialized services or execution of specialized works.
a. The contracting must obtain from the contractor a simple copy of the registration before the STPS.
b. The contracting party must obtain from the contractor a simple copy of the VAT return and the payment receipt corresponding to the period in which the consideration was paid and the VAT that was transferred.
c. The contractor must provide the contracting with the documentation indicated in the previous points.
III. TRANSITORY ARTICLES
- Entry into force. The transitory articles establish the entry into force of the reform:
a. The day after its publication in the Federal Official Gazette. The proposed amendments shall enter into force the day after their publication in the Federal Official Gazette, except for the following exceptions. (It is expected to be published on May 1st)
b. The amendments in tax matters will become effective on August 1, 2021.
c. 30 calendar days following its entry into force: term for the Ministry of Labor to issue provisions for the registration procedure of individuals or legal entities that provide services or execute specialized works.
d. 90 calendar days from the publication of the general provisions for the registration procedure. Deadline for persons providing services or executing specialized works to obtain their registration before the Ministry of Labor and Social Welfare.
e. 90 calendar days from the effective date. During this period, companies that currently operate under subcontracting schemes may carry out employer substitutions without having to transfer goods to the substitute employer.
f. 90 calendar days from the effective date. Period for employers who, prior to the entry into force, have requested the assignment of one or more employer registrations by class to register their employees at the national level, to cancel such registrations and, if applicable, request the IMSS to grant an employer registration under the terms of the corresponding regulations. Once this term has elapsed, the IMSS will deregister the employer registrations by class that have not been deregistered.
g. 90 calendar days from the effective date. Deadline for persons rendering specialized services or executing specialized works to start providing the IMSS with the information set forth in the reform, except for the information related to obtaining the registration before the STPS.
h. 60 calendar days from the effective date. Deadline for INFONAVIT to issue the rules for the provision of information referred to in the amendment.
- Non-retroactivity in the sanctioning of probable criminal conduct. Criminal conduct committed prior to the entry into force of the Decree will be sanctioned in accordance with the legislation in force at the time of the commission of the acts.
IV. PRACTICAL SUGGESTIONS REGARDING THE AMENDMENT
Although the complexity of the reform requires a particular analysis of each company’s situation, the following initial preventive measures are proposed:
For additional information, please contact our Labor Team.
Lic. Emmanuel Ibarra Castillo
