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Expense Reimbursements in Mexico: A Guide for Overseas Employees

Typical expense reimbursement practices used in many countries cannot be followed in Mexico.  For example, if you are a US or UK company you are used to reimbursing employee expenses directly based on paper receipts in the employee’s name.  These reimbursements are made outside of payroll and are tax free if they have a business purpose.

This is not the case in Mexico, which has fairly strict rules when it comes to the format and method of both paying and reimbursing employee business expenses.  The main difference is that receipts for employee expenses have to be in the form of an electronic, certified invoice in the employer/company’s name, or it will be viewed as a taxable payment to the employee.

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If you are used to direct reimbursement in your home country, how will you learn the correct process in Mexico in order to remain in compliance?  How can you ensure that employee reimbursements are deductible for your company and tax free for the employee?

This guide can give you the basics of expense reimbursements in Mexico, along with an example showing how we worked with one of our clients to navigate Mexico’s expense policy.

What to Look Out for When Reimbursing Expenses in Mexico

There are a few core requirements to be aware of for expense reimbursement in Mexico.  These include the contents of the receipt/invoice, how it is paid, and from what account.

Tax Receipts

The electronic tax receipt/invoice has to contain the following detailed information:

  • Name of the employer/company and legal address
  • Date of the month the reimbursement was requested
  • Currency
  • Name of the company (vendor) that provided the invoice i.e. hotel, airline
  • Payment method (cash, credit, etc.) or a copy of a voucher

Also, the receipt has to be electronic in either a .pdf or .xml format, so standard paper receipts will not meet the Mexican requirements.

Method of Payment

Another unusual requirement is that for any expenses over MXN 2000 (US$100), the expense has to be paid from the employer’s bank account.  That is a fairly low threshold and does seem to present logistical barriers for travel and other expenses.  There is a way to handle it however, through pre-paid services and allowances.

Pre-Paid Expenses and Allowances

The following are expenses that can be pre-paid by the company so they are tax free to the employee and deductible by the employer (within maximum limits).

  • Gas Cards (one time or rechargeable)
  • Food Cards (for groceries)
  • Travel Expenses (pre-paid prior to travel)
  • Cell Phone and Internet Service (contracts in employer name and paid directly)

Of course, not every travel or business expense can be pre-paid, and there will be some expenses only supported by normal receipts, and not the certified invoices.  Because of this, the employer will have to find a way to offset the taxability of some employee expenses.

Client Case Example: Taxable Expense Procedure

Context:

An employee of one of our clients had questions about the expense procedure and requirements in Mexico as it was new to them.  Specifically, they wanted to know whether certified receipts were still needed, and if they had to be in Shield GEO’s name as the local employer of record.  Further, they needed clarification about the policy of ‘grossing up’ expenses even when there were standard receipts available.

Resolution:

Tax-free Expenses

We were able to inform the employee that the Mexican rules were clear, and that all receipts needed to be in the right format and certified as paid by Shield to be tax free to the employee.  If not, then the expenses would be a taxable payment to the employee, as are all expenses that are not on the government authorized expense list.

Those authorized expenses include hotel, flight, transport, meals, car rental and mileage reimbursement, but there may be limits for deductibility and tax free status.  Any expenses that fall outside the limits would be taxable to the employee along with any standard, non-certified receipts.

Taxable Expenses

Those valid expense amounts approved by the employer, but taxable in Mexico, could then be ‘grossed up’ in payroll, which means we would add the income tax and social security contributions to the expense amount.  This would prevent the employee from unexpected taxation and dilution of compensation based on taxable expenses, and they would get the expense amount back in payroll.

We explained to the employee how it works:

  1. Employee submits expense reports to the end client/company.
  2. Client approves the expense amount.
  3. Shield/Employer of Record calculates ‘grossed up’ amount of expense.
  4. Shield/EOR includes the grossed up amount in the invoice to the client/company, and then when funds are received the amount will be added to the next payroll.
  5. Employee received the expense amount in their net salary.

Do you need more information about payroll in Mexico?

This is a good illustration of how something as simple as expense reimbursement can present some real payroll and tax challenges for overseas employers.  If you are hiring employees in Mexico, you may need more information about:

How to set up, request and process the certified, electronic receipts from vendors.
Calculating grossed up expense amounts, and including those in payroll.
Learning the tax free limits on expenses, by category.

With the assistance of our local partners and in country experts, we guide our clients in all areas of immigration, payroll and taxation in all major global markets.  We make international employment simple.

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