TAX and LABOR. Update regarding the Amendment that prohibits the Labor Subcontracting regime April 12, 2021
On November 12th, 2020, the Federal Executive Branch submitted the draft Decree amending several provisions of the Federal Labor Law, the Social Security Law, the National Institute Housing Fund for Workers Law, the Federal Tax Code, the Income Tax Law, and the Value Added Tax Law regarding the labor subcontracting (Original Proposal).
On April 5th, 2021, the Federal Executive Branch, as well as some representatives of the labor and business sectors, and the Legislative Branch itself, reached various consensus in connection with the Original Proposal.
On April 7th, 2021, the Labor and Social Welfare Commission, and the Finance and Public Credit Commission of the House of Representatives, issued the Positive Opinion with a draft Decree amending the aforementioned provisions regarding the labor subcontracting, which will be discussed for approval this Tuesday, April 13th, 2021 in the House of Representatives Assembly.
In said Positive Opinion, non-substantial modifications are noted with respect to the provisions contained in the Original Proposal, such as:
- Labor subcontracting is prohibited, except that it will be allowed in cases in which the specialized services or execution of specialized works that are not part of the corporate purpose or the predominant economic activity of the beneficiary, and the contractor is registered before the Ministry of Labor and Social Welfare (MLSW).
- The contractors must have to submit certain data and information every 4 months to the Mexican Social Security Institute and to the National Institute Housing Fund for Workers.
- Labor subcontracting expenses will not have tax effects regarding the income tax (deductions) and the value added tax (credit), when carry out activities related to corporate purpose or the predominant economic activity of the beneficiary.
- The considerations derived from the aforementioned specialized services or execution of specialized works will have tax effects, and the contractor is registered before the MLSW.
- There will be joint and several liability for the legal entities or individuals who receive services or contract works derived from illegal labor subcontracting, regardless the infractions and sanctions to each Party (beneficiary and contractor).
- In those cases, in which the beneficiaries receive the aforementioned specialized services or for the execution of specialized works, they must obtain certain information and documentation from the registered contractors, so that the expenses incurred can be deductible for income tax purposes and creditable for value added tax purposes.
- Finally, the use of simulated schemes for the provision of specialized services or the execution of specialized works or carrying out an illegal labor subcontracting will be considered aggravated tax fraud.
However, in such Positive Opinion some aspects that we consider sensitive and relevant are noted, such as:
- For both labor and tax purposes, it is established that the complementary or shared services or works provided between legal entities that are part of the same business group will be considered as “specialized”, as long as they are not part of the corporate purpose or the predominant economic activity of the legal entity that receives them. In connection with the foregoing, it follows that in certain cases and complying certain requirements, the internalization of labor subcontracting (insourcing) will be allowed, which the Original Proposal does not foresee.
- The MLSW will have a period of 3 months following the entry into force of the Decree to issue the general rules regarding the registration before her. It should be noted that the Original Proposal states a period of 4 months for this purpose.
- Individuals or legal entities that provide specialized services or execute specialized works must obtain their registration before the MLSW within a 3 months-period from the publication of the general rules issued by said Ministry. For this purpose, the Original Proposal foresees a term of 6 months.
- It is specified that, in relation to the employer substitution due to a labor subcontracting regime, it will not be a requirement to transfer the goods of the legal entity or establishment to the substitute employer, as long as the respective workers are transferred to the beneficiary within a 3 months-period following the entry into force of the Decree. It should be noted that the foregoing would enter into force 3 months after the aforementioned Decree enters into force (6 months for practical purposes). The Original Proposal only mentions that for the employer substitution takes effect, the goods of the legal entity or establishment must be transferred to the substitute employer, without specifying the aforementioned 3 months exception with respect to said transfer.
- The amount of the workers’ profit sharing will have a maximum limit of 3 months of the worker’s wage, or the average of the participation received in the last 3 years. The amount that is most favorable to the worker will be applied. The Original Proposal did not contemplate setting a maximum limit on the amount of the workers’ profit sharing.
It has been spread by several means that the intention is that on May 1st, 2021, the Decree amending the mentioned provisions on labor subcontracting shall enter into force.
We estimate that the aforementioned Positive Opinion that will be discussed this Tuesday, April 13th, will hardly undergo any significant changes, so we suggest expediting the pertinent preventive actions and review and analyze the contracting schemes for the provision of services implemented in order to determine how to continue operating said schemes or carry out the necessary modifications or restructures, pursuant the potential contingencies that may be generated.
If you have any questions regarding the foregoing, please do not hesitate to contact us.
Mexico City, April 12, 2021