Obligation to withhold VAT by labour insourcing and outsourcing service providers has been eliminated
The Mexican government on 23 April 2021, finalized new rules to regulate the tax treatment of labour insourcing and outsourcing arrangements in Mexico. The reform encompasses sweeping changes to eight laws, including the labour and social security laws and the income tax and VAT laws.
Many corporate groups in Mexico regularly structure their operations to include a personnel service entity and an operating service entity, with the service entity rendering personnel services to the operating entity. This arrangement is commonly referred to as insourcing. In other common structures, the service provider is not part of the group, a practice known as outsourcing.
The general thrust of the reform is to prohibit the subcontracting or outsourcing of personnel. However, the new laws provide some exceptions to the general rule. For example, subcontracting will be allowed when the services provided are specialized in nature and are not part of the core business purpose or the predominant economic activity of the company receiving the services. For this exception to apply, the labour supplier must be registered as a provider of specialized services with the Mexican Ministry of Labour and Social Welfare.
Under the current VAT rules, taxpayers who receive labour subcontracting services are required to withhold VAT equivalent to 6% of the value of the consideration paid for those services. This regulation applies to both insourcing and outsourcing arrangements.
Under the labour reform, pure insourcing/outsourcing arrangements are prohibited, although they may be permitted under certain circumstances and subject to very specific regulations.
Because labour outsourcing and insourcing arrangement are now largely prohibited, the obligation to withhold 6% VAT is also eliminated for entities that receive this type of services. Pursuant to the amendments to the tax laws that will become effective on 1 August 2021, the obligation to withhold 6% VAT for these services will continue to apply for the period from 1 January to 31 July 2021. However, from 1 August, this withholding will no longer be mandatory, since insourcing and outsourcing schemes will be generally prohibited. New rules have been added that specify that VAT will not be creditable for any persons who continue to employ these arrangements (other than under one of the limited exceptions), and those persons will be subject to serious penalties.
If services are provided under the authorized specialized services exception, the Mexican entity that receives the services must obtain documentation confirming that the VAT payment relating to the service was made. If this information is not provided, the recipient of the services must file an amended monthly VAT return eliminating the VAT credit.
The new rules for outsourcing labour services established under the amended laws should lead domestic and multinational groups in Mexico to act immediately to restructure their operations through mergers and, in some cases liquidations of entities to avoid running afoul of the new rules after the 1 August effective date.
Rita Mireya Valdivia