New broom, sweeping reforms

The recent overhaul of Mexico's tax and labor laws is guaranteeing workers' rights, improving revenue collection, providing tools to combat tax evasion, and much more.

For Mexico, 2019 was a year of change and record reforms, the most important ones being the 2019 Labor Reform and the 2020 Tax Reform. While the former was deemed necessary as per the new United States-Mexico-Canada Agreement (USMCA), the latter followed the recommendations of the OECD Base Erosion and Profit Shifting (BEPS) action plan.

2019 Labor Reform
The labor reform was approved by the senate on April 29, 2019 and was published by the Ministry of Labor and Social Welfare in the Federal Official Gazette on May 1. It is in full compliance with Article 23 and Annex 23-A of the USMCA, which set forth important amendments to the labor and employment legal framework to ensure the rights of freedom of association and collective bargaining and to implement a new system of labor justice.
Under the new labor reform, various aspects of the Federal Labor Law (LFT) were amended. For starters, the reform included the obligations set forward in the International Labor Organization’s Convention 98 to guarantee the freedom of association and collective bargaining. This was a major milestone for Mexico, where, for more than five decades, workers had little say in choosing the unions that signed contracts with employers.
Known as Protection Agreements, these contracts often set employer-friendly terms, and due to limited accountability, the majority of unions chose to accommodate the needs of the companies. And although there were independent unions in a handful of industries, such as mining and airline, most unions were non-confrontational. As a result, while FDI skyrocketed, wages remained low.
Fortunately, the government of López Obrador is doing its best to fullfil its promise to upend this system. According to the new law, a union may be recognized as the exclusive bargaining representative with 30% of employee support; however, ratification of a collective bargaining agreement (CBA) requires majority support of all workers. The idea behind this is to do away with Protection Agreements.
The new law also made way for the Federal Center of Conciliation and Labor Registry, a new administrative body to oversee union elections and contracts, and new labor courts. Moreover, it includes provisions that aim to spread awareness of labor rights amongst workers, ensure gender equality, and increase maternity protection.

2020 Tax Reform
Given Mexico’s tax-to-GDP ratio of 16.1% in 2019, the lowest when compared with the OECD average of 34.3%, the tax overhaul was indeed the need of the hour. In fact, the latest reform is part of a larger trend that saw the Mexican government enforce domestic reforms in line with the BEPS.
The tax bill was published in the Federal Official Gazette on December 9, 2019. Interestingly, the reform did not make any changes to the existing tax rates; instead, it made amendments to the Income Tax Law, the VAT Law, and the Excise Tax Law, introduced various measures to tackle tax avoidance and evasion, and addressed the tax challenges created by the digital economy. These changes impact businesses with cross-border transactions, maquiladora arrangements, independent agents, and sellers of digital goods and services. Notably, while most of the amendments came into effect in January 2020, a few will not become effective until 2021.
Under the new law, Mexico has restricted deduction of payments made by Mexican subsidiaries if the foreign recipient isn’t sufficiently taxed. The restriction applies to any kind of payment, expanding beyond passive payments such as royalties and dividends. But certain exceptions may apply, such as income derived from trade or business.
One of the highlights of the new reform is the General Anti-Avoidance Rule (GAAR), which has significantly broadened anti-avoidance rules and allowed tax authorities to disregard certain transactions for tax purposes. Overall, perhaps the biggest revision in the sweeping reform package is the imposition of VAT on digital goods and services provided by both local and foreign companies. A VAT of 8% is applied to individuals and 16% is applied to those without a Mexican tax ID.
Both the 2019 Labor Reform and the 2020 Tax Reform are certainly game changers in many aspects. More than anything, they are paving the way ahead for the kind of comprehensive reforms that will be needed to tackle the challenges that lie ahead for Mexico.

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