MEXICO: An Introduction to Tax: Non-contentious
A year has gone by since emergency measures were adopted worldwide due to the COVID-19 pandemic. During this time the scenario in Mexico has changed gradually, we have started the second semester of 2021 and the vaccination process is going forward; the reactivation of business and economic activities can be perceived. Analysts, politicians, entrepreneurs and the entire population of our country is wishing for Mexico's economy to grow. We all know that as the economy of the United States recovers, Mexico will be able to recover to some extent from the crisis caused by the pandemic.
The reactivation of key economy sectors such as the maquila industry, tourism and infrastructure will define the country's growth and recovery in the coming years. A few months ago the World Bank increased its forecast for Mexico's GNP growth for 2021 to 5%, as the service sector and the manufacturing industry are expected to benefit from an increase in the demand for exports linked to the growth of the United States (which receives most of the country's exports).
Midterm elections were held in Mexico at the beginning of June. As a result, counterweights to the executive branch were accentuated and a new distribution of the political map of the country was marked. MORENA, the political party of President Andrés Manuel López Obrador, lost the qualified majority that it held in the lower chamber of our Federal Congress, but the party won 11 governorships and will now govern 16 of the 32 states of the country, and will have control of 18 local congresses.
These midterm elections, which were among the most attended in Mexico's history, were marked by the pandemic and the economic situation that the country has had in the most recent years.
Prior to the elections, the President was in search of a symbolic goal, to have the necessary members of his party in the Federal Congress in order to undertake constitutional reforms, a goal that any president who aspires to unilaterally modify the rules of the game wishes to obtain. Andrés Manuel López Obrador has committed on several occasions to leave the presidency at the end of his six-year term (2024), but he seeks to approve structural reforms with a deep ideological content during his mandate.
Some of these legal reforms have already been approved by the Congress, such as reforms to the Electricity Industry Law and the Hydrocarbons Law, alarming both the productive sector of our country and foreign investors who have challenged the amendments to the laws before federal courts.
Other major legal and constitutional reforms are still expected to be pursued by President López Obrador’s government including those aiming to modify or disband independent government bodies such as the Federal Electoral Institute. The role to be played by the federal courts and the Supreme Court of Justice seems crucial to maintain the democratic institutions that have been built over the past years and to continue promoting democracy in our country.
There are important issues to address from the legal point of view, such as the United States–Mexico–Canada Agreement (USMCA), which entered into force in July of 2020 and has some new rules to which we shall pay attention. The agreement includes key changes that go beyond typical foreign trade issues, containing new commitments in labour matters specifically in terms of ensuring true union freedom and representativeness and improving the administration of labour justice.
Last April, the reforms on labour subcontracting, also known as "labour outsourcing" became effective; these reforms are meant to tackle abusive schemes that have been used by businesses to reduce or avoid certain employee payments such as profit sharing, as well as to reduce or avoid tax payments and social security dues. The reforms approved have repercussions on labour-management relations and seek to benefit the workers. The Ministry of Labour and Social Welfare stated that thousands of workers were hired under insourcing or outsourcing schemes; these employees shall now be recognized as the company’s own workers if they perform the main activities of the business and will be entitled to profit sharing payments subject to the limits established under the reforms (the profit sharing amount to be paid to each employee shall not exceed three months of salary or the average amount paid the three previous years to the employee, whichever is more favourable for the employee).
The outsourcing reform allows the hiring of specialized services if these are not part of the corporate purpose or the main economic activity of the company. Companies that provide specialized services shall now register with the Ministry of Labour and Social Welfare to be authorized to provide personnel under a subcontracting scheme.
To avoid legal loopholes that allow abusive tax deductions and simulated acts, the reform contains certain changes in tax matters that allow for the homologation of criteria among the different reformed laws. According to these changes, companies who benefit from the activities of subcontracted workers will not be entitled to deduct or credit for tax purposes the payments connected to such personnel, unless the services hired are specialized services and specific requirements set forth in the tax legislation are complied with.
Mexico is going through economic, political and legal changes which, even when anticipated by the President and his government, have caused uncertainty among many sectors of the population. As a consequence of the changes in the rules of the game that have been introduced and those that will be made, the efforts and work of private-practice lawyers will be directed at finding legal solutions to the various issues that have arisen and that will arise, as well as solving the concerns that exist among Mexican and foreign clients investing in Mexico so that they can be in compliance with the new obligations.