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Focus On Mexico: New Payroll Tax Reporting Requirements Challenge Employers [3 Examples]

By Araceli Ruiz, Sr. Project Manager, LATAM HCM Practice

May 2016

Over the past 12 – 18 months, the Mexican government has raised the stakes for employers in their country with regard to corporate and individual tax reporting requirements.  As a result, employers are struggling with keeping up with the new requirements and associated deadlines, figuring out how to interpret and implement them and, most importantly, how to avoid incurring costly penalties and fees.

The tax filing requirements in Mexico are becoming far more cumbersome than in the past and these requirements are particularly more complex with regard to full-time employees.  Companies don’t necessarily have the additional time or staff on hand to respond appropriately to these requirements, but they realize that delivering these reports past a required deadline can result in costly fees.  Additionally, providing incomplete or inaccurate information can result in even more time-consuming paperwork and possible penalties.

As an example, the Mexican Social Security Institute requires that employers provide certain employee information filed electronically and within very specific timeframes.  Examples of information that must be provided by employers include:

1. Any change in an employee salary
2. Any changes in variable compensation, such as a bonus or commission
3. All information regarding hiring and dismissal of employees

Some reporting is required monthly and bi-monthly, but employees’ movements may be required to be reported within five days of the event taking place.

Companies are scrambling to meet these obligations.  There is the basic issue of data capture, requiring the implementation of procedures and systems to catch all of the required information as it occurs.  The data must also be compiled into a format that complies with government requirements and sent out on time.  The administration of these processes is no small task.  Policies must be developed to oversee the entire tax reporting structure and new individual policies and procedures for the workflow must be implemented as systems are put into place.  Most payroll providers have specialized systems to meet these obligations, however it is very common that companies receive penalties for not following appropriate procedures or specific internal controls.  Companies must also understand that they cannot outsource this risk; they are fully responsible for reporting errors, even if performed by a fully qualified service provider.  Further, if you don’t understand the requirements, then it is impossible to develop and adhere to controls required to ensure compliance.

“Spencer Thomas Group has assisted employers with interpreting the Social Security Institute obligations and have helped clients meet their obligations in a timely and accurate fashion.”
-Araceli Ruiz, Senior Project Manager, LATAM HCM Practice, Spencer Thomas Group

Spencer Thomas Group and Payroll Tax Reporting
Spencer Thomas Group (STG) has assisted employers with interpreting the Social Security Institute obligations and have helped our clients meet their obligations in a timely and accurate fashion.  In fact, we have assisted organizations in working through compliance issues created by their payroll service providers across the entire Latin American region.  Typically, it involves providers not keeping up with the evolving regulations, while no one at the company is tasked with monitoring the law changes or the provider’s compliance on their behalf. In these cases, like all others, the company is ultimately responsible for the compliance infractions.

When considering income tax implications, employers in Mexico are responsible in most cases for preparing an electronic income tax form for each person they employ.  In the case of foreign employees, STG has observed that when companies prepare that individual’s tax report, they often only consider what they are paying the individual and do not account for any other income that person might receive, such as revenue on investments.  This becomes problematic when the Treasury inevitably notices the discrepancy between the company’s and the individual’s income tax report.  When this occurs, the Treasury will send requests to both the employee and the employer to explain the discrepancy.  The company will then be responsible for analyzing the discrepancy, reporting back to the Treasury, and possibly paying an associated penalty or fee.  In this specific case, it is the employer’s responsibility to determine the total income of each individual employee.  Therefore, employers must develop a reliable method of requesting this information so as to obtain a complete income picture.  All of this adds additional burden to the payroll staff and undesired exposure to the firm.

STG is deeply engaged in Mexico and, in our experience, have found that stock options and interest income are two of the most easily missed forms of employee income.  In one large multi-national corporation, employees in Mexico are receiving stock options from the company’s headquarters in the United States, and the Mexican Treasury may not detect it.  This is just one example of many that a company needs to account for.  When the many possible examples are multiplied by the thousands of affected employees across the country, the need for expertise and procedure becomes paramount.

STG understands the complexities, the rapidly changing compliance requirements and employment trends in Mexico.  We deploy our in-country team of payroll professionals to help companies interpret and understand new and changing laws and advise our clients so that they can avoid the steep penalties and fees associated with non-compliance.  Our payroll experts help companies strategically prepare for the legal and regulatory requirements across their workforce, develop effective compliance policies and procedures, and set up accurate reporting in their payroll systems so that deadlines and requirements are met.

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