Mexican bill would reform tax law for subcontracted services
November 16, 2020
Mexico’s Executive branch submitted a bill to Congress on November 12 that would reform labor and tax laws related to the tax treatment and legal permissibility of subcontracted services. Given the political context, Congress likely will pass some version of the proposed legal reform and that the effective date could be as early as January 1, 2021.
Subcontracted services are a widespread feature of Mexican business both through third-party personnel providers and, more commonly, through related-party service companies. For decades, Mexican businesses often have maintained their employees in legal entities that are separate from the operating entity.
Additionally, Mexican Labor Law mandates an annual 10% profit-sharing payment to employees. The payment is made directly to the employees and is not a tax. Labor Law bases the payment on the employer’s taxable profits. As a result, an employee´s profit sharing is limited to a portion of the fair market value profit at the legal entity employer rather than the consolidated business profit of a group of entities.
For MNCs that house their employees in a separate legal entity, the proposed legal reform could disrupt various aspects, including legal structure, people planning, income tax and value-added tax (VAT). Companies that provide workforce solutions such as staffing to unrelated parties also should consider the proposed legislation’s impact.
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