Mexico amends tax rules on outsourcing, insourcing services

By Arturo Treviño Villarreal, Tax Partner, Fratelli Consultores, Monterrey, Mexico

Mexico’s authorities on April 23 published in the federal official gazette a series of amendments and new rules which will prohibit outsourcing and insourcing local arrangements. Practices related to outsourcing and insourcing activities may only be now allowed in certain cases and if relevant conditions and requirements are met.

These rules implement a new tax regime which will enter into force on August 1.

Federal fiscal code

The new rules deny any tax benefits (i.e., deductions or credits) to payments made in connection with outsourcing or insourcing services if those activities are related to the corporate purpose and main economic activity of the service beneficiary.

Additionally, tax benefits will be denied in cases in which the service provider’s employees were previously assessed as employees of the service beneficiary and those employees were transferred to the service provider through any legal arrangement, and the activities of the service provider’s employees correspond to the main economic activity of the service beneficiary.

However, under the new rules, tax benefits (deductions or credits) would be allowed for payments related to the outsourcing of specialized services or the execution of specialized works which are neither connected with the corporate purpose nor the main economic activity of the service beneficiary. Certain requirements must be met for these purposes.

Insourcing, i.e., supplementary or shared services or works by and between entities of the same corporate group, would have a similar tax treatment if the services are assessed as specialized. It will be required that those services are not connected with the corporate purpose and main economic activity of the service beneficiary.

Joint and several liability has now been extended to those entities or individuals who may be assessed as beneficiaries of outsourcing or insourcing services or works. Such liability focuses on taxes and levies that apply to employees involved in the execution of works or provision of services.

The amendments to the law also introduce a new class of infringements subject to fines. The fines range from USD 7,000 to USD 14,000 and can be individually imposed per each default.

Moreover, certain simulated arrangements, e.g., the simulation of specialized services or execution of specialized works, will be prosecuted, which, in turn, could give rise to criminal offenses. The use of prohibited outsourcing will have similar implications.

Income tax law

 Deductions for tax purposes for payments related to specialized services or the execution of specialized works would be allowed under certain conditions.

Specifically, the service beneficiary must verify that the service provider is effectively registered before relevant labor authorities. In addition, the service beneficiary must obtain from the service provider copies of tax receipts/evidence corresponding to the employees’ salaries and wages, including any withholding tax, and obtain evidence of payment of contributions to social security and to the national workers housing fund institute.

Under the new provisions, the service provider must make available this information and these documents and deliver them to the beneficiary.

The new rules explicitly deny a tax deduction to payments made in connection with prohibited outsourcing and insourcing activities as described by the federal fiscal code.

Value-added tax (VAT)

The obligation to withhold VAT (6% levied on the amount effectively paid) in cases of outsourcing and insourcing activities is now repealed.

Additionally, any VAT credit will be denied in relation to prohibited outsourcing and insourcing services under the provisions of the federal fiscal code. Therefore, it will not be possible to claim or take any VAT credit under these conditions.

However, it could be possible to credit VAT with respect to specialized services or the execution of specialized works. Under these circumstances, it will be necessary to fulfill certain requirements. Among these requirements, the service beneficiary must verify that the service provider is duly registered before labor authorities and obtain copies from the service provider of the relevant VAT returns corresponding to the period in which payments are made by the beneficiary. In addition, the service provider must make this information available and provide it to the beneficiary.

Failure to comply with the VAT information and documentation obligations (either by the provider or the beneficiary) will result in the reversal of any credits already claimed.

Additional remarks

These tax amendments to the domestic regime of outsourcing and insourcing services form part of a broader reform, comprising other laws such as labor, social security, national workers housing fund, and even provisions regulating bodies and agencies of the federal government.

The new rules will inevitably impact providers and beneficiaries of these type of services, which became quite popular in Mexico, e.g., incorporating and maintaining the so-called operating companies and services/personnel entities. The effects of the rules will be far-reaching, covering current structures or arrangements of both related and non-related parties.

Although the new tax provisions will enter effect on August 1, certain rules for labor, social security and the workers housing fund institute purposes already apply to taxpayers.

Companies should perform individual assessments, if they have not already, to determine whether it might be necessary to modify the business/operating model of a relevant enterprise. Naturally, in-house areas such as tax, human resources, legal, information technology, finance, treasury, etc., should be working closely with management to deal with the implications of the new rules as needed.