A recent Mexican court ruling may have significant impact on certain operating structures

A Mexican court has recently issued a ruling intended to clarify the rules surrounding certain personal services structures commonly used in Mexico (e.g. outsourcing, insourcing, and subcontracting services). Companies that utilize a dual Mexican entity structure or a third party outsourcing company may be unable to obtain a credit or refund of the value-added tax (“VAT”) paid to the service provider if they do not meet the definition of specialized subcontract services as outlined in the Mexican Federal Labor Law (“FLL”). The new ruling specifies that payments made to non-specialized outsourced service providers will be deemed as salaries to employees and not subject to VAT payments.   As such, the underlying VAT paid could be deemed as unrecoverable.

Other Mexican oversight agencies, such as the Mexican labor authorities or Mexican income tax authorities, may also adopt this mindset regarding non-specialized personal services. The Mexican Labor Authorities may deem that the employees of the third party services company are eligible for profit sharing of both the services company and the company contracting for such services. Furthermore, the Mexican income tax authorities may even take the stance that payments made by the contracting company to the services company are non-deductible for income tax purposes.

The Mexican Federal Labor Law indicates that specialized personal services companies are required to meet certain criteria to be deemed specialized personal services in the eyes of the labor law. Personal services companies that do not meet the following criteria may be deemed to have a labor relationship with the contracting company, and both the contracting and personal services companies may have additional tax implications. The criteria for specialized personal services are as follows:

  • The service provider’s employees may not perform all of the activities of the contracting party
  • The service provider must be able to prove that the services performed are specialized in nature
  • The service provider cannot perform the same services that are completed by the contracting party’s team members

It is important to note that this ruling occurred in the State of Jalisco.   As such, Jalisco is the only State where this ruling should be considered precedent at this time.   It is unknown at this time whether other Mexican states will set similar presidents, or whether the Mexican authorities will attempt to apply this ruling in other States.

Companies that operate a dual Mexican entity structure or operate via an outsourcing agreement (such as a shelter operation) are encouraged to contact the Plante Moran Global Services team to determine the impact this may have on their operations.

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In a tax ruling handed down by the European Union, Ireland must recover unpaid taxes from Apple equivalent to 14.6 billion U.S. dollars.

The European Commission’s ruling finds fault with the company’s perceived diversion of profits to two Irish home office “shell” companies, which paid little or no taxes under the specific provisions granted by Irish tax structure at the time. The Commission asserts that profits of the companies weren’t an economic reality, and the deal with Apple unfairly favored the company, allowing it to pay little-to-no tax compared to other companies in Ireland enjoying the same benefits of the European Union’s state aid programs.

While Irish tax law at the time allowed for the structure used by Apple and agreed with the taxes paid by the company, it’s the disproportionate benefit of the state aid received that the Commission has deemed illegal. The Commission has essentially overridden the local state tax laws of Ireland to recuperate the lost tax revenue.

The implication of this ruling is widespread, as it creates uncertainty for businesses looking to invest in European jurisdictions. The commission is turning the states’ bargaining ability on its head by ignoring the local tax law, as well as the application of tax treaties agreed to by the two countries.

From a U.S. point of view, the ruling could serve to reduce U.S. tax revenue as the taxes paid to Ireland could be claimed as an offsetting foreign tax credit for Apple.

More importantly, jobs and investments in countries that are a part of the European Union could suffer. U.S. businesses making strategic planning decisions about business structure could be put off by the notion that they can follow the local state’s tax rules and still be challenged by an overreaching body.

The Apple case is just one of a few high profile decisions reached on similar structures. Other companies have also seen their structure and strategies challenged in the Netherlands and Luxembourg. The European Union intends to continue targeting these types of U.S. business structures used by Google and others.

Both parties will be actively fighting against the ruling, and the ultimate conclusion to this matter is uncertain. What is certain, in the meantime, is the question of whether or not multinationals can rely on the tax laws of EU member states as currently enacted.

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