TAX and LABOR. Amendment that prohibits the Labor Subcontracting regime November 12, 2020
On November 12, 2020, the Federal Executive Branch announced 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.
The statements of reasons appoint that, by prohibiting the subcontracting of personnel and establishing rules for individuals or legal entities to only contract provision of specialized services or execution of specialized works, the practices currently operating through several forms of simulation to the detriment of workers and the public treasury, will be eradicated.
The use of the figure of labor subcontracting is strictly prohibited, establishing supposed rules to be able to contract, only and exclusively, the provision of specialized services or the execution of specialized works and, setting the corresponding sanctions in the event of non-compliance.
It will not be considered labor subcontracting in those cases in which the specialized services or execution of specialized works that are not part of the corporate purpose or the economic activity of the beneficiary, are provided or executed by a contractor who has authorization from the Ministry of Labor and Social Welfare. This authorization will be valid for 3 years.
The contractors must have to submit certain data and information every three months to the Mexican Social Security Institute and every four months 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), inclusive may be a joint and several liability for the legal entities or individuals who receive services or contract works derived from a prohibited labor subcontracting, regardless the sanctions applicable to each Party (beneficiary and contractor).
In those cases in which the beneficiaries receive specialized services or for the execution of specialized works that are not part of their corporate purpose or their economic activity, they must have to obtain certain information and documentation from the authorized contractors, so that the expenses incurred can be deductibles 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 a prohibited labor subcontracting will be considered aggravated tax fraud.
The aforementioned draft Decree completely misrepresented the legal figure of labor subcontracting, so it will be essential to review and analyze the contracting schemes for the provision of services implemented with its several contractors and restructure them, as appropriate, being necessary to establish a diagnosis and recommendations to continue operating such schemes, paying special attention and emphasis on tax issues due to the potential contingencies that may be generated.
If you have any questions regarding the foregoing, please do not hesitate to contact us.
Mexico City, November 12, 2020