The Effects of Outsourcing and Insourcing Reform on Mexico's Private Sector

On September 1, 2021, Mexico’s Outsourcing Reform entered into force, eliminating Outsourcing and Insourcing in Mexico. As a result, any company that engages in these practices is subject to severe sanctions.

Meeting between Mexican Foreign Minister Marcelo Ebrard, National Security Advisor Jake Sullivan, and Secretary of Homeland Security Alejandro Mayorkas directed the United States’s delegation.

Key Points

  • On September 1, 2021, Mexico’s Outsourcing Reform entered into force, eliminating Outsourcing and Insourcing in Mexico. As a result, any company that engages in these practices is subject to severe sanctions.

  • Its entry into force was originally extended in order to allow companies to have more time to register their workforce in the Registry of Specialized Services or Specialized Works Providers (REPSE).

  • On October 11, 2021, Mexico’s Labor Ministry (STPS) announced that it had begun inspections of companies’ REPSE that have generated “red lights” and merit a second revision.

General Information

Outsourcing is defined as a hiring service in which a company hires workers who are provided with their basic legal benefits, but then transferred to a different company than the one they have a signed contract with to perform their work. This labor scheme became a target of the current administration as it has been used by companies to disguise benefits for their workers or to evade paying taxes in different circumstances.


As a result, the reform includes the Registry of Specialized Services or Specialized Works Providers (REPSE), which provides a platform for companies to register workers that were hired under an outsourcing scheme and continue operating under the same model. However, only workers that are hired for services that are completely different to the hiring company’s purpose will be allowed to be subcontracted. According to data, to date 70,000 companies have registered in the REPSE and 2.3 million workers have left the subcontracting scheme. Relatedly, subcontractors will also periodically provide information to Mexico's Social Security Institute (IMSS) and the National Workers' Housing Fund (INFONAVIT).


Registration in the REPSE closed on September 1, 2021 and by then, 71,000 companies had been registered with 93% receiving a notice of reception, 88% of which received a “green light” and 12% were denied by the STPS. Companies that were denied were notified of the reasons for which they were denied and were given a second chance to complete the registration.


Impact

Mexico's outsourcing regulation is designed to bring more workers into Mexico's formal economy and to reclaim the rights of workers who have not received adequate protection as subcontractors.


As a result of the reform, companies that are not registered in the REPSE will not enjoy tax benefits of deduction, or crediting of payments made by the supply of personnel, so they may be subject to committing the crime of tax fraud. Tax fraud may lead to preventive imprisonment as it is a federal crime, and according to article 108 of the new law, the following penalties may also be applied:


I. Imprisonment for three months to two years, when the amount of taxes evaded is below MXN$1,932,330.00.

II. Imprisonment for two to five years when the amount of taxes evaded exceeds MXN$1,932,330.00 but does not exceed MXN$2,898,490.00.

III. With imprisonment of three to nine years when the amount of taxes evaded exceeds MXN$2,898,490.00.


Moving Forward

The new Outsourcing Law completely changes the structure and operation of companies that have depended on this labor scheme for a variety of reasons, be it efficiency, reduced costs, greater profits, etc. Outsourcing companies that did not register with the REPSE will have to cease operations or face serious federal penalties such as tax fraud.



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