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Reform initiative on subcontracting in Mexico presented by the Federal Executive.

On November 12, 2020, the President, Andrés Manuel López Obrador, announced the Initiative with Draft Decree that seeks to modify the Mexican legal system regarding subcontracting and that will be presented for discussion before the Chamber of Deputies (hereinafter the “Initiative”).

This Initiative involves various amendments to provisions of 6 (six) laws in order to harmonize the legislation with the proposed changes, which are as follows: (i) Federal Labor Law (hereinafter “LFT”), (ii) Social Security Law (hereinafter “LSS”), (iii) Law of the National Workers’ Housing Fund Institute (hereinafter “LINFONAVIT”), (iv) Federal Tax Code, (v) Income Tax Law, and (vi) Value Added Tax Law. The most relevant changes are described below:

With respect to the LFT, the Initiative provides for the express prohibition of subcontracting of personnel as stipulated in Article 13. Now, under the Initiative, the contractor may only provide specialized services or perform specialized works that are not part of the beneficiary’s corporate purpose or economic activity.

The above will also imply the execution of a service contract between the contractor and the beneficiary (hereinafter the “Contract”), the content of which becomes subject to verification by the labor authorities and the obligation of the contractor to report it on a quarterly basis. Additionally, the contractor must request an administrative procedure before the Ministry of Labor and Social Security (hereinafter “STPS”), through which it will be authorized to be registered in a Specialized Services Providers Register (hereinafter the “Register”), accrediting the specialized nature of the services provided or the works executed.

A second effect of the Padrón will be to keep the contractor’s compliance with its labor, tax and social security obligations up to date, since it will be required to renew the authorization every three (3) years. With this information, the STPS is empowered to enter into coordination agreements with various authorities (for example, with the Mexican Social Security Institute or the National Workers’ Housing Fund Institute) with the intention of exchanging information to enable the proper continuity of the proceedings and the full exercise of acts of authority.

In addition, it is proposed to modify the concept of intermediary, understanding this as the individual or legal entity that intervenes in the hiring of personnel, which may include the processes of recruitment, selection, training, training, among other aspects. However, at all times, the beneficiary of the services will be considered the employer of the contracted personnel, so that in no case may the intermediary be considered as such.

A last amendment to the LFT is regarding labor substitution, by means of which it is intended to establish that when a substitution is carried out and in order for it to take effect, the assets of the company or establishment must be transferred to the substitute employer. In addition, LINFONAVIT establishes a joint and several liability in such case, so that the replaced employer is jointly and severally liable with the substitute employer for the obligations arising from the period prior to the date of the substitution and up to 6 (six) months after the substitution.

With respect to the LSS and LINFONAVIT, the Initiative seeks to foster a competitive business environment through which workers’ social security and housing rights are safeguarded both now and in the future (in terms of pensions and/or access to housing financing), eradicating evasion of payment of quotas and eliminating bad practices through the use of subcontracting.

It is also intended to establish joint and several liability between the contractor and the beneficiary of the specialized services or the execution of specialized work with respect to the obligations set forth in such laws in relation to the persons used to execute such contracts.

On the other hand, the Initiative provides for several amendments to the tax provisions, among which are the following (i) the prohibition of giving tax effects (such as deductibility and creditability for value added tax purposes) to payments for subcontracting of personnel; and (ii) the qualification in the commission of the crime of tax fraud for the use of simulated schemes for the rendering of services or the execution of specialized works.

Non-compliance or non-observance of the provisions set forth in the Initiative will give rise to the established sanctions, such as the imposition of fines or the commission of a crime.

Finally, in accordance with the transitory articles of the Initiative, the Decree provides for two periods of entry into force, as follows (i) the day after its publication in the Diario Oficial de la Federación; and with the exception that (ii) as of January 1, 2021, the amendments to the tax provisions will become effective. However, various deadlines for compliance with the established provisions are also ordered:

Within 4 (four) months after the entry into force of the Decree:

a) The STPS shall issue general provisions to establish the procedures related to the authorization to render specialized services or perform specialized works.

As of this publication and within the following 6 (six) months, contractors rendering specialized services or executing specialized works must obtain the authorization of the STPS for such purposes and register in the Register.

b) The Instituto del Fondo Nacional de la Vivienda para los Trabajadores shall issue the rules establishing the procedures for contractors to provide the information required in Article 29 Bis of the LINFONAVIT, as well as the Contract, on a quarterly basis.

Within 6 (six) months after the entry into force of the Decree:

a) Contractors rendering specialized services or executing specialized works must begin to provide information regarding the authorization of the STPS and the Contracts entered into for the rendering of such services.

We note that the spirit of the Initiative maintains the need to safeguard the rights of people who have been affected, mainly in the labor field. However, the business sector is seeking dialogue with Congress so that the full picture of the Initiative is taken into account and the interests of all parties involved in labor relations are considered.

We will continue to report on the legislative process of this Initiative and on any modifications that may be presented.

Acedo Santamarina

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