Labor subcontracting is a process whereby a person or company, hires another company to render employee services; this is known as “Outsourcing”.
For decades, Outsourcing has been used to simplify the management of the workforce or for other reasons.
In this regard, authorities detected certain companies using Outsourcing for the sole purpose of evading labor and tax obligations regarding payroll, such as withheld taxes, state payroll taxes, Social Security (IMSS) fees, INFONAVIT fees, in addition to decrease in benefits to employees such as seniority, employee profit sharing, among other rights.
Due to this, the Federal Labor Act, which regulates rights and obligations between employers and workers, was amended in 2012 regarding Outsourcing companies, with the purpose of regulating these undue practices.
Changes were made so that companies paying for Outsourcing services would be also deemed employers of the personnel upon default of any of the following requirements:
- Outsourcing cannot include all the activities performed by the company.
- Activities performed must be specialized and justified.
- Subcontracted employees shall not perform tasks that are equal or similar to those of other employees of the company who has retained these services.
In addition, the company retaining the Outsourcing service shall enter into an agreement with the service provider and obtain assurance that the contractor has sufficient elements to comply with the corresponding labor obligations.
The additional issue arising in connection with personnel subcontracting companies is regarding Value Added Tax (IVA), as the companies retaining the service, upon payment of the invoice to the Outsourcing supplier, credit VAT and occasionally request balances in favor as a refund or compensation.
In April 2016, the Court (third collegiate circuit) ruled with regards to a conflict between a taxpayer (company) and the tax authority (SAT), the criteria stated argued the taxpayer paying for Outsourcing services was unable to prove compliance with requirements on the Federal Labor Act mentioned above, therefore, they deemed that payments made to the company for the rendering of the Outsourcing service were salaries and not a service.
Value Added Tax Act states that salaries are not an expense generating the payment of this tax, taking this situation into consideration, the Court stated on its resolution that services paid via Outsourcing and failing to comply with the Federal Labor Act, these payments are without VAT.
Due to the foregoing, some tax authorities have begun to reject VAT crediting by companies who have retained these services, with grounds on the criteria published by the Court, thus generating detriment to taxpayers requesting balances in favor regarding this tax as a refund or compensation.
The Taxpayer Defense Bureau (Procuraduría de Defensa del Contribuyente “PRODECON”), which is an organism providing consulting, defense and other services to complaint procedures against all events of abuse by tax authorities has indicated that tax authorities shall not determine whether the payment for this service complies with the requirements established on labor laws, and that the treatment in federal taxes, such as VAT, are separate situations that should not be considered by them.
Due to the recent nature of this situation, we must wait and observe the behavior the authority will take in these kinds of cases in order to revise it in a particular manner.
Finally, it is recommended that companies paying for Outsourcing services revise the situation with their labor and tax advisors in order to comply with the legal provisions mentioned in this article