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This article is written by Ruchi Dhawan Diploma in Labour, Employment and Industrial Laws (including POSH) for HR Managers from Lawsikho.

Introduction

Subcontracting and outsourcing laws were reformed in Mexico and were published on 23 April 2021 (the ‘Reform’). This Reform leads to many amendments in Mexican laws which include the Federal Labour Law, Social Security Law, National Workers’ Housing Fund Law, Tax Code, Income Tax Law and Value Added Tax Law.

We discuss the labour law reforms and tax law reforms in detail in this section  

Mexican labour Law

Mexican Labor Laws are unique and special because of their paternalistic nature. It is codified in Mexican Constitution and Federal Law -1970. Few points which make it unique are 

  1. Profit-sharing – It is mandatory for employers to share 10% of profit with employees. This profit amount must be the pre-tax amount for calculating profit sharing.   
  2. If termination is done without a cause, then the employee is entitled to get severance pay and seniority pay.
  3. For every day of work one rest day with full wage is allowed  (which is there in most countries) the uncommon part is if the employee willingly works on the rest day the employer has to pay triple wage for that day.
  4. It is mandatory for all the employees to contribute to the country’s social security fund (Mexican Institute of Social Security)
  5. In December every employee is entitled to get 15 days wage as Bonus. In case someone has worked for less than a year then the same is paid on a pro-rata basis 
  6. In case an employee willingly works on a mandatory holiday he/she is entitled to three times of wage for that day.
  7. If an employee works for 15 years or above, he/she is entitled to a seniority bonus which is 12 days of salary for each year of work.

Mexican Tax Law

All the companies operating in Mexico local or foreign, are subjected to the following taxes 

  1. Federal Taxation – This includes Value added tax, income tax and asset tax.
  2. Foreign trade tax – Import Tax, customs duty, and VAT 
  3. Local and state tax – Payroll Tax, Property Tax, Land/ Property acquisition Tax.

80% of the tax for Mexico comes from income tax. There is the US- Mexico Treaty which helps in avoiding double taxation. Thus, the treaty allows the company to credit tax in one country against what is payable in another country, to avoid double taxation on the same income. The Treaty also provides a guide as to when a foreign company will be considered a permanent establishment  

Details of the tax that are levied under federal taxation

  1. Income Tax – An income tax of 29% is levied on the companies of the income they derive from Mexican sources. This 29% is of total taxable income.
  2. Value-added Tax – VAT is levied in case of sale of property, providing an independent service, imports. VAT is calculated at @15%. The tax must be collected by the buyer from the seller. It is not applied to the sale of residential property, on exports from Mexico. It is also not applicable to medicine, food, doctor’s fee, and books. If foreign companies operating in Mexico are not registered, they cannot charge VAT from customers and suppliers.
  3. Asset Tax – This is charged [email protected] 1.8 % on company assets . Assets for the purpose of taxation is financial assets, fixed assets, property and inventory   If income tax is greater than the asset tax then assets tax is not required to pay in case it ( income tax ) is less than assets tax is to be paid.
  4. Import tax – two types of import are there in – definite import, on this import the importer has to pay VAT, GIT ( General Import Tax – this is a type of tax which is determined by the country of origin), Custom Fee. Another is temporary imports these are usually a machine, equipment, the raw material on which further activity is to be performed before exported to other countries 
  5. Local Tax – Local Taxes of state taxes are like property tax, tourism tax and payroll tax. Property tax is generally low; this tax is determined by the area where the property is located and the value of the property. Property acquisition tax is 2% of the purchase price.

Payroll tax is almost 2% this is charged by the state where the company is domiciled 

The reforms in Mexican Labor Law 

The Mexican Labor Law was amended on 23rd April 2021. The key points are as follows: –

  1. Sub-Contracting: As the new reform the subcontracting was not permitted except for the following exceptions  
    1. Specialized Services – Services that are not part of core business can subcontract. The core business is the business for which the company has registered itself in Tax administration.  
    2. Subcontracting to the companies of the same group is allowed.
    3. The role of an outsourcing agency will be in recruitment selection and training and not in hiring. Hiring to be done by the company directly.
  2. Profile Sharing by employees – to avoid 10% PBT profit-sharing with employees, organizations indulged in creating multiple companies. The new reform of the 10% of PBT profit sharing is removed. The amendment maximum of three months salary or an average of total salary received in the last three years, whichever is higher.

Major obligations under the new Reform 

Obligations of sub-contracting companies 

  • Sub-contracting companies must mandatorily obtain registration certificates from the Ministry of Labor and social welfare. 
  • They need to produce evidence that taxes are paid regularly and contribute to social security. This registration certificate must be renewed every three years.
  • Proper contract to be executed for rendering specialized services 
  • Quarterly report to be submitted to Social Security Agency and Housing Agency of Mexico on contracts executed and specialized services rendered and 
  • Copy of registration certificate and tax receipts to be provided to the contractor for salary payment 

The obligation of companies contracting specialized services  

  • Must validate that the specialized service that they are contracting is not part of their core business 
  • The company from whom they are taking services are registered under STPS.
  • Keep Copies of registration certificates, tax receipts before salary payment, receipts of payments of withholding taxes, receipt of payments of employer contributions, value-added tax returns and any corresponding payments.

Consequences of Non-Compliance of Mexican labour law

  • Imprisonment or a fine of up to USD 222,000 can be imposed in case of non-compliance.
  • In case the above requirements are non-fulfilled, the subcontractor’s tax can neither be deducted nor credited  
  • Companies will owe criminal liability in case they do not comply with sub-contracting obligations.
  • Both company and subcontractor will be liable for all the defaults of social security, tax and other labour law related obligations 

The reform is Mexican Tax Law 

Amendments in the Income Tax, VAT and Federal Law was announced on 8th Dec 2020 however the effective date of implementation was 1st Jan 2021 

  • As the revised Article 28 (XXIII) of the Mexican Income Tax Law states that any payment made by a Mexican resident taxpayer to a related party directly or through a structured agreement will not be deductible for the purposes of income tax.
  • As per domestic law, an income is supposed to be subject to a preferential tax rule if it is not taxed abroad. Also in case, the rate of income tax is lower than 75% as per the applicable income tax rate of Mexico
  • Title III of the income tax act was modified which stated that civil societies and associations who are performing certain types of activities will only be considered as “Non-Profit Units”. They will not have to pay tax in case they have authorization from tax authorities to receive donations that are deductible. In case they do not fulfil the stated conditions, the authorization can be cancelled.
  • There were modifications in Value Added Tax Law, on the provisions related to private/ foreign organizations giving medical services or digital services in Mexico and that has not been registered before Mexican tax authorities or have not been complying with its tax obligations.
  • Federal Tax Code – Many modifications were made to the provisions regarding “business reason”, resulting in offshoot companies. The process to clarify the causes of the suspension of electronic certificates, tax refunds, joint liability, obligations regarding the registration before tax authorities. 
  • Provisions regarding withdrawal of the registration are prescribed. Details of documentation that should be kept as part of the accounting period for which the records to be kept.
  • If the quantifiable economic benefit (present or future) is lower than the tax benefit received, then it is considered as not having a business reason. Tax benefit in this is explained as any discount, deferment, or exclusion of a contribution.

Conclusion 

This reform has regulated the subcontracting rule in Mexico. In case of non-compliance, the implication is quite severe. The tax reform has not done any tax increase in the form of new taxes or higher rates. It has changed the association between taxpayers and their advisers and the tax government. 

The tax reforms were proposed to expand the revenue collection and provide sturdier legal tools for the tax authorities. At an international level, it intends to avoid aggressive tax planning and the erosion of the tax base. In addition, the implementation of the new bill tracks the goal to cover the number of taxpayers and to reduce the economic disparity of the country.


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