Background
On April 23 of the current year, the Official Gazette of the Federation published a decree that amends, adds, and repeals various provisions in the Federal Labor Law; the Social Security Law; the Law of the National Housing Fund Institute for Workers; the Federal Tax Code; the Income Tax Law; the Value Added Tax Law; the Federal Law of Workers at the Service of the State, Regulatory of Section B) of Article 123 of the Constitution; and the Regulatory Law of Section XIII Bis of Section B, Article 123 of the Political Constitution of the United Mexican States, concerning Labor Subcontracting.
This decree, through Article 12 of the Federal Labor Law (LFT), prohibits personnel subcontracting, understood as when a natural or legal person provides or makes available their workers for the benefit of another. Related to this provision, Article 15-D of the Federal Tax Code (CFF) extends this prohibition even to cases in which the contractor receives services from the contractor through personnel that previously worked for them and were transferred to the contractor through any legal mechanism.
The only allowed subcontracting, according to Article 13 of the LFT, is that of specialized services or specialized works, provided that they do not form part of the corporate purpose of the company receiving the services, nor of its predominant economic activity, and that the contractor is registered in the public registry enabled for this purpose (see REPSE STPS), having previously confirmed compliance with tax and social security obligations (Article 15, LFT). Additionally, specialized services must be formalized through a contract, as required by Article 14 of the LFT.
Regarding intra-group operations, Article 13 of the LFT establishes that complementary or shared services or works provided between companies within the same business group will be considered specialized services, provided that they meet the general requirements of not being part of the corporate purpose of the recipient or its predominant economic activity and (presumably) are registered in the REPSE of the STPS. The LFT defines a “group” as stated in Article 2, Section X of the Securities Market Law, which describes a business group as a set of legal entities organized under direct or indirect shareholding structures in which a single entity maintains control over the others. Likewise, financial groups constituted under the Law to Regulate Financial Groups are also considered business groups.
Finally, the reform proposed in Article 127 of the LFT establishes that employees will participate in the profits of the companies where they work up to three months of the worker’s salary or the average of the participation received in the last three years, whichever is more favorable.
Tax Implications
The reform proposed by the Executive Branch is primarily of a labor nature. Within this framework, and with the objective of discouraging the use of outsourcing schemes, Article 1004-C of the LFT imposes significant penalties, including fines ranging from 2,000 to 50,000 Units of Measurement and Update (UMAS) on those who persist in personnel subcontracting activities or fail to obtain registration in the REPSE of the STPS. Additionally, preventing inspection or oversight by authorities at the workplace entails penalties ranging from 250 to 5,000 UMAS according to Article 1004 of the LFT. (The value of the UMA in 2021 was 89.62 pesos per day).
However, the most significant penalties are not labor-related, but fiscal. Article 15-D of the CFF establishes that taxpayers hiring specialized services will be unable to deduct expenses for income tax purposes (ISR) or credit VAT (IVA) if such expenses originate from personnel subcontracting or unregistered specialized services.
Furthermore, the deduction of expenses for income tax purposes could be conditioned if the service recipient fails to verify that the provider complies with the requirements established in Article 27-V of the ISR Law, including:
- Registration in the STPS registry (REPSE) as required by Article 15 of the LFT.
- Copies of tax receipts for salary payments to workers involved in the service.
- Payment receipts for tax withholdings on wages, issued by a banking institution.
- Proof of payment of employer contributions to the IMSS (Social Security Institute).
- Payment of contributions to the National Housing Fund Institute (INFONAVIT).
Failure to comply with these requirements could result in fines ranging from $150,000 to $300,000 per missing document, as stated in Articles 81 and 82 of the CFF.
Similarly, taxpayers receiving these services cannot credit VAT if they fail to obtain:
- REPSE registration confirmation from the provider.
- A copy of the VAT declaration and proof of payment for the period in which the service was paid.
- All required documentation by the last day of the month following the payment.
Failure to collect this documentation would require the taxpayer to file a complementary tax return to reduce the credited amounts.
Additionally, the reform modifies Article 75 of the CFF to consider the deduction or crediting of personnel subcontracting operations as an aggravating factor in tax violations. Article 108 of the CFF now classifies the use of simulated specialized service schemes as tax fraud, especially when services involve personnel who were previously employed by the contracting entity and were transferred through any legal mechanism.
Finally, the tax reform takes effect on August 1, 2021, with an extension until September 1, 2021.
Main Implications for Transfer Pricing
With the outsourcing reform, many business groups in Mexico will have to choose between employer substitution, mergers, or spin-offs. Each alternative has different transfer pricing implications.
In employer substitution cases, companies may transfer tangible assets to comply with Article 41 of the LFT and the fourth transitory article of the decree. These transactions should ideally be valued using the Comparable Uncontrolled Price (CUP) method, ensuring that pricing aligns with comparable market transactions.
The most significant impact on transfer pricing will occur when former outsourcing companies transform into specialized service providers through employer substitution, as per Article 7 of the transitory provisions. In these cases, business groups must realign their corporate purpose, ensuring that service providers do not overlap with the core activities of the service recipients.
Service providers must clearly define their functions, assets, and risks. If they offer different services (e.g., IT administration vs. legal support), a transactional analysis may be required under Article 76-IX of the ISR Law, unless clear contractual terms establish the nature of services provided.
Moreover, contracts for specialized services must be formally registered with the STPS as required by Article 14 of the LFT. Given that these are related-party transactions, agreements must reflect arms-length conditions, including precise descriptions of activities, resource allocation, and risk-sharing, in line with OECD Transfer Pricing Guidelines (Section 1.D.1.).
Another key issue is Mexico’s recent tax-criminal reform, which penalizes simulation under Article 108 of the CFF. Service providers must prove they have the expertise, infrastructure, and resources to legitimately provide specialized services. Transfer pricing analysis will be critical in ensuring compliance.
Finally, in cases where no employer substitution occurs, leading to mergers or spin-offs, taxpayers must value shares at arm’s length, potentially applying the CUP method for fair valuation.
Final Comments
This reform demands significant adjustments from taxpayers. While most concerns focus on labor and tax compliance, transfer pricing documentation is equally crucial. Failure to document transactions properly could result in lost tax deductions, VAT disallowances, and potential recharacterization of operations.
Thus, taxpayers must align their business models with the new regulations to avoid adverse tax consequences and potential legal risks.
Article published in IDC Asesor Fiscal Jurídico y Laboral No. 492, and reproduced in the Special Edition on Outsourcing, August 2021.
By Jesús Aldrin Rojas M., Transfer Pricing Expert, QCG Transfer Pricing Practice.
