Deal Reportedly Struck on Profit Sharing Tax Element of Mexico Outsourcing Ban

March 31, 2021

Last week, reports began to emerge out of Mexico that a deal had been struck on the key point of contention of the proposed outsourcing/subcontracting ban introduced by President López Obrador last November.  According to those reports, with the agreement done, the bill is expected to become law before the close of this session of the Mexican Congress.
 
Deal Made Implementing Salary Limits as Part of PTU Calculation:  The key point of contention over the outsourcing/insourcing ban was the “Participation in Company Profits Tax” – the “PTU” –  which employers are required by Mexican Law to share with employees.  In short, if there was no such thing as this tax, employers in Mexico would be much less likely to outsource/insource.
 
Reports this week describe that a deal has been struck which alters the way the tax is calculated.  According to a report by El Economista (article in Spanish), the PTU will have a maximum upward limit of three months of the worker’s salary.  
 
With this element agreed upon, the Bill reportedly is poised to be adopted soon.  
 
Background:  As noted, last November, Mexican President López Obrador made good on a campaign promise and introduced a bill banning job outsourcing/subcontracting.  In Mexico, employers must pay “Social Security” and “Housing Fund Contributions” and share 10% of the employer’s pre-tax profits (Participation in Company Profits Tax – the “PTU”) with their employees. The profit-sharing requirement is particularly inflexible because it does not consider important factors such as profit gain or loss from the previous year or the size of the company or the number of employees in Mexico.  As a result, Mexican and multi-national employers use either outsourcing or insourcing to avoid paying the PTU.  
 
The bill was introduced to close this perceived “loophole” as well as to target bad actors which actively fired/rehired employees to avoid paying the tax. 
 
Hurry Up!...And Wait…:  If adopted as introduced, the Bill would have had serious implications on workforce strategy for companies in Mexico.  Facing a straight 10% pre-tax profit tax, it likely would have discouraged some multi-national corporations from even being in Mexico in the first place.  
 
As a result, it was worrisome that upon the Bill’s introduction in November, President López Obrador pledged to pass it by the end of 2020.  However, a delay was announced to allow for negotiations with private employers and industry groups.
 
HR Policy Global Outlook:  With the PTU revisions agreed upon, multinational employers should be prepared for changes in Mexico.  It is expected that the bill will now be adopted.  As written, the bill still bans outsourcing/insourcing for “core” business applications instituting penalties for violations.  
 
Thus, companies in Mexico which currently utilize either outsourcing or insourcing will likely need to prepare for two things:  (1) changing workforce composition and agreements to hire “core” business roles previously filled through in/outsourcing; and (2) paying the PTU to employees.
 
We will continue to track the bill’s progress.