If approved by Congress, the agreement will very likely have an important economic impact on Mexican structures that contemplate outsourcing services. Taxpayers should analyze how this Bill and the terms of the agreement would affect their operations in Mexico.

On April 5, 2021, Mexico's government and representatives of the labor and business sectors in Mexico reached a verbal agreement on the outsourcing prohibition included in the proposed legislation introduced by Mexico's Executive branch in November of last year (the Bill). This Bill has not yet been enacted. For more information, see Tax Alerts 2020-2697 and 2020-2824.

Although the labor and business sector representatives filed several petitions on the Bill's potential effects on the distribution of profits, the essence of the November Bill remains. If the Bill is enacted, outsourcing services would be prohibited. Individuals and entities could only hire entities to provide services of a specialized nature or to perform specialized work to the extent the services or work (1) are not part of the business purpose or the "main" economic activity of the beneficiary, and (2) comply with certain requirements.

As part of the agreement, an amendment to the Bill would add the word "main" to a provision that could allow groups of companies to contract shared services. The agreement also:

• Does not allow individuals and legal entities to provide their employees for the benefit of another
• Allows for regulation of the outsourcing of specialized services for activities other than the business purpose and main economic activity of the contracting party
• Requires companies that conduct specialized services to register with labor authorities and the public registry of subcontracting companies performing specialized services
• Establishes joint and several liability for the contracting company and service company for labor and tax-related liabilities resulting from non-compliance
• Grants a three-month transition period for subcontracted employees to become part of the actual employer's payroll
• Establishes a profit-sharing cap that aims to avoid possible distortions in capital-intensive (or highly profitable) companies but also maintains profit-sharing levels for existing employees

Legislators will consider these items when amending the Bill. Regarding the three-month transition period to transfer employees to the actual employer's payroll, it is unclear whether this transition period will apply to labor and tax regulations, so this would have to be reviewed once Congress amends the Bill. Congress is expected to approve the Bill during April 2021.

Given the Bill's potential economic impact on service company structures, taxpayers should carefully analyze how the Bill would affect their operations in Mexico and consider whether restructuring would be required to comply with the Bill.

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