Labor Regulation and Switch Pricing – Taxes

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background

There are many companies in Mexico that are involved in rendering
Personnel, administrative or specialist services. These services
could be used by related or unrelated parties within a
multinational corporation. One of the most common services is the provision of
Administration (accounting, taxes, law, finance, human resources,
among others), IT, Marketing, Technology and Manufacturing
Services.

Operating companies have made use of services from these service providers.
Such service structures, as they are commonly called, were
Business strategy for operational units, as personnel, law,
Social security, among other risks related to the direct hiring of theirs
Staff was relieved as the staff was hired
directly from service companies that have performed the required activities
or services take on the burdens that arise from work
Perspective.

Workers in Mexico are entitled to as a constitutional right
10% of the profit of the company that hires them (the employer),
this is defined as employee profit sharing (commonly known as
PTU after its acronym in Spanish). This PTU obligation is calculated
on a pre-tax income of the hiring company, as stated by the Mexican stated
Income Tax Act (MITL).

In this sense, the employees hired by a service company calculated the
PTU based on the service company's pre-tax profit rather than the
operational unit or another company in the group.

In general, the provision of these services constitutes a
Consideration that could be analyzed on a cost-plus basis. This is
the service company charges a consideration that includes all costs
and expenses for the provision of services, plus a profit
Markup. This consideration could be set as a variable fee, a
Fixed fee or a direct cost-plus-consideration that might be billed
monthly, quarterly, etc. In light of this compensation scheme, it is
it is implied that the PTU obligation, which is an operating expense, of
Means of the applicable accounting standards in Mexico
(NIFs per is an acronym in Spanish) was part of the fee paid by. was raised
the service company to the operator.

It goes without saying that multinational corporations operating in
Mexico is more likely to have related party transactions that have the
Provision of personnel services.

Mexican labor and tax reform

On April 23, 2021, a labor and tax reform was published in the a
Mexican Official Gazette with general entry into force in April
24. 2021, with the exception of certain provisions, such as tax regulations,
which comes into force on August 1, 2021. This reform is
commonly known as "outsourcing reform".

As a result of such reform, provisions were made for the outsourcing of labor
have been repealed, and under these new provisions
Structures are expressly forbidden. Outsourcing is known as
the subcontracting of staff.

The operators have to hire the staff in order to
carry out their core business activities and / or the activities
be incorporated into their corporate purposes in accordance with their articles of association.

This outsourcing reform will result in service structures
should be discontinued or restructured, otherwise all units
Those involved risk doing activities now
Prohibited from a labor and tax law perspective.

In general, the new legislation applies to outsourcing
Personnel is defined as cases in which a natural or legal person
provides or provides its own employees for the benefit of
another natural or legal person.

As an exception, employment agencies that are in the
The hiring process can continue at the
Recruiting, selecting and training staff as they
not to be considered an employer as this property of
the person / organization who will benefit from the services provided.

The outsourcing reform specifies that specialized services or
Carrying out special work that is not part of the company
Purpose or main economic activity of the beneficiary (business
Entity) are allowed as an exception. There are some requirements on
to be met by these specialized companies, including registration
before the Ministry of Labor and Social Affairs.

For services provided by related parties, complementary or
Shared services (like back office activities) could be
viewed as specialized, taking into account the concept of business
Group as defined in Mexican law. In this sense,
related parties could implement an updated service structure that
only takes into account the provision of specialized services and / or
Execution of specialized work as specified in outsourcing
Reform that could relate to IT, surveillance and security,
Cleaning, among other things.

In all cases, the related parties should provide a detailed
Functional analysis with regard to the permissible service provision
Determination of the applicable arm's length criteria, based on
the functions performed, the assets used and the risks assumed
involved bodies.

Verification of transactions that affect the appearance of
Services has the highest priority as facilities that
the now prohibited outsourcing of personnel or services without the
corresponding registration, will be penalized with the calculated amounts
than 2,000 to 50,000 times the value of the unit of measure and
Update (approximately between $ 9,000 and $ 225,000).

In addition, companies would be faced with the non-deduction of expenses
related to the outsourcing services or the non-credibility
VAT and in extreme cases these services could
qualified as tax fraud that could be the result of a criminal act.

Given the scale of this outsourcing reform, it will add to the workforce
and tax matters, affecting areas such as social security
Contributions, transfer pricing, companies, etc. could
thus creates the compliance of this outsourcing in all cases
The reform should be dealt with in an all-encompassing approach.

Alternatives for attempting to comply with the new regulations may be available
Consider the employer representation system through which the
the operational unit would take over all labor and employee services
Obligations as a new employer; or a restructuring in which the
Operating and service companies could be merged.

Transfer pricing considerations

The effects of this outsourcing reform are varied
Areas, including transfer pricing, as a very important issue.
Looking at the employer representation system, a common controversy
is related to the provision of employees from the service company
to the operator, in particular the analysis of whether a consideration
should apply between both parties.

The result may vary due to the specific
Characteristics and circumstances of the service structure,
including the staff, the service provided and the possibility
the intangible assets transferred as part of the transaction
(Know-how, intellectual property, formulas, etc.).
A transfer pricing analysis should therefore be carried out
in relation to the position of the companies before and after the restructuring
involved.

In addition, work liabilities may arise due to the
Service unit to be analyzed in this restructuring, and
these positions should also be included in the transfer pricing
Analysis.

As stated in the MITL, taxpayers must conduct the transactions
with related parties, are obliged to determine their income and
Deductions taking into account the prices that would have been used in
comparable transactions between independent parties. in addition,
as part of MITL's transfer pricing provisions, es
found that the source for the interpretation regarding
Transfer Pricing Issues, the Transfer Pricing Guidelines for
Multinational corporations and tax administrations ("OECD
Guidelines ") apply.

There are no specific provisions in the MITL regarding the
Temporary employment from a transfer pricing point of view,
therefore this point should be taken into account by the OECD
Guidelines.

It is also advisable to check the intercompany agreements in order to
determine whether the handover or the hiring of the
Service provision, could activate "termination clauses"
which can trigger additional effects.

Another point to check is the PTU obligation for companies
Hire new employees directly. Generally an increase in spending
of the operating companies derived from the PTU obligation
to be expected.

This effect would have implications for transfer pricing matters
because the PTU obligation as an expense for financial
Purposes, so this PTU commitment will adjust the profit level
Indicators (PLI) of the operator for test purposes
the arm's length principle.

On the other hand, the markup effect was earlier
would be invoiced by the service providers to the operators
no longer be applicable, which leads to a reduction in expenditure
of the operating units.

A complete transfer pricing analysis, functional and economical,
be carried out to determine the applicable PLI's
Operating company and the financial implications of the new PTU
Obligation effect compared to the previously paid performance surcharge.

Conclusion

The approved outsourcing reform implies several relevant factors
and effects in various matters (labor, taxes, transfer pricing,
Social security, business, etc.) that should be assessed
for each specific case, preferably through a holistic approach
Minimize all possible liabilities and contingencies that could be
generated to all entities that are affected by the rendering of. are affected
Services.

In terms of transfer pricing, in any case, a thorough functional
and economic analysis, should be worked out to allow for an adequate assessment
the positions of the companies involved before and after the restructuring
to determine the corresponding arm length
Compensation

Originally published by Expert Guides.

The content of this article is intended to be general
Instructions on the subject. Expert advice should be sought
about your particular circumstances.