It has been common practice for groups operating in Mexico
to subcontract all personnel in order to mitigate the impact of
mandatory employee profit sharing and labour risks. This has
generally been done by either setting up an intragroup service
company that houses the group’s employees and
renders services to the other group companies, or by
subcontracting third parties that render services with their
Service companies recognise as taxable income the service
fee received from the contractor, which covers the cost of
labour plus a mark-up, and are able to deduct their payroll.
Additionally, service companies should shift a 16% VAT on such
fees to the contractor. In turn, the contractor is generally
able to deduct the service fee for income tax purposes and
credit the 16% VAT paid on such services.
Several tax precedents emerged during 2016 when the Mexican
tax authorities intended to reject the deduction of the service
fee paid by the contractor, or disallow the corresponding VAT
credit, by making an assessment of the nature of the
contractor/subcontractor relation based on the provisions of
the Federal Labour Law. Tax and federal courts upheld opposing
positions and divergent approaches to reach their conclusions,
which generated a great deal of uncertainty for the
contractors, which in a couple of cases were deemed employers
of the service companies’ employees for tax
The tax authorities issued new rules for 2017 in order to
clarify their position and strengthen the requirements for
contractors to be able to deduct for income tax purposes the
service fees paid to subcontractors, and claim the
corresponding VAT credit. The reform included several
amendments to the Mexican Income Tax Law, Value Added Tax Law
and Miscellaneous Tax Rules.
In general terms, the recent changes require the contractor
to obtain certain information on the payments made by the
subcontractor to its employees, including copies of payment
slips and timesheets associated to the services provided to
them, and regarding actual payment of the VAT to be submitted
by the subcontractor to the tax authorities. Non-compliant
contractors would not be able to deduct the service fees for
income tax purposes and/or claim the corresponding VAT
It is worth noting that the new requirements included in the
tax laws refer in general to subcontracting arrangements
regulated under the Federal Labour Law, without making any
distinction among different types of service agreements. As a
result, it could be interpreted that the new legislation covers
all types of service agreements, even if not related to the
outsourcing of personnel.
The above conclusion is very sensitive because if
contractors make a distinction between personnel outsourcing
contracts and other subcontracted services they may weaken
their employee profit sharing planning.
Contractors must meet the new requirements as of January
2017. However, the tax authorities granted an extension that
allows them to meet such requirements by July 2017, regarding
services subcontracted from January through to June 2017.
Taxpayers must carefully review the documentation supporting
their subcontracting arrangements from a tax and labour
perspective to determine their tax position regarding the new
requirements included for 2017 and, if deemed necessary, obtain
all applicable documentation in order to submit it to the tax
authorities by July 2017 to avoid risking the deduction of the
service fees for income tax purposes and the corresponding VAT
It is also recommendable to evaluate if a ruling should be
requested from the tax authorities in order to confirm which
specific service contracts should be excluded from the new
reporting obligations (e.g. auditors, advisers, time charters,
brokerage agreements, freights, to mention a few).
This article was written by Oscar A. López Velarde
and Santiago Díaz Rivera Bravo of Ritch, Mueller,
Heather y Nicolau, S.C.
Oscar A. López Velarde (email@example.com)
Santiago Díaz Rivera Bravo (firstname.lastname@example.org)
Ritch, Mueller, Heather y Nicolau, S.C.