In the past days, Tax reforms inherent to Income Tax (Impuesto Sobre la Renta (ISR)) and Value Added Tax (VAT) were approved, in connection with Labor sub-contracting, said reforms will become effective as of January 2017.

One of the most important aspects to highlight on this tax Reform is the known “Outsourcing”scheme, whereby for companies requiring subcontracted personnel, the authority intends to thoroughly regulate tax evasion transactions executed in Mexico under this figure in the past.  The following is a discussion of the most relevant changes in connection with this subject:

Income Tax

Regarding Income Tax (LISR), for payments made on labor subcontracting in terms of the Federal Labor Act, in order to be able to deduct the corresponding payments, the person retaining the services will be required to obtain from the contractor (Outsourcing) a copy of the following tax receipts:

1. Payment of the salaries of the workers providing the subcontracted service.
2. Return receipts
3. Payment of Income Tax Withholdings for salaries to the Tax Administration Service for the subcontracted employees
4. Payment of Employee-Employer fees to the Mexican Social Security Institute (IMSS Instituto Mexicano del Seguro Social)

For this purpose, contractors are under the obligation to submit Tax receipts (CFDIS) and the information to the contracting party.

Value Added Tax Act

In connection to the Value Added Tax Act (LIVA), said Act, will establish that regarding labor subcontracting activities in terms of the Federal Labor Act, the contracting party (Outsourcing) shall obtain, in addition, the following information:

5. Copy of the corresponding return, (VAT payment)
6. Return receipt of the tax payment (VAT)
7. Information reported to the Tax Administration Service, regarding VAT that was transferred.

As in the case of Income Tax Act, the contractor (Outsourcing), shall provide a copy of the documentation mentioned during the month the payment was made.

In the event the contracting party does not obtain the documentation, an additional return is to be filed in order to decrease the crediting carried out in the payment of its taxes.

Financial Intelligence Unit Criteria (Unidad de Inteligencia Financiera (UIF))

Last October, the Secretaria de Hacienda y Crédito Público (SAT), published on its website that transactions by companies using personnel subcontracting schemes will be deemed vulnerable activities, in terms of the Federal Act for the Prevention and Identification of Transactions with Funds from Unlawful Sources (Ley Federal de Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita (“LFPIORPI”)).

A vulnerable activity is the rendering of professional services, in an independent manner, without a labor relation with the respective client, in cases where the following transactions are prepared or carried out in the name or on behalf of the client:

Management and administration of resources, securities or any other client asset;

Digital Tax Receipt via Internet (Payroll CFDI)

Another important subject to highlight is that, as of January first, 2017, Digital Tax Receipts via Internet (CFDI) payroll payments issued by employers to their employees shall contain more and thoroughly detailed information.  This new information adhered to receipts among other data, contains the following:

- TIN of the person being subcontracted,

- Indication that the employee is under a subcontracting scheme,

- Employee service rendering percentage.

These new adjustments and regulations finally seek for the tax authority to have more information for cross referencing data when verifying compliance with tax obligations.

Evidently, the tax reform will generate an excessive burden of new regulations and requirements for taxpayers subcontracting personnel.  It has become an infallible fact that the taxing authority will be auditing tax planning schemes regarding Outsourcing next year.

Due to the foregoing, we suggest you analyze the outsourcing scheme with your attorneys in light of these new tax provisions.

We are at your service to provide help and orientation in this new compliance that affects companies who have subcontracted employees.