In practically every nation employee payroll incurs payroll taxes - especially in Mexico and the United States. So when a U.S. company like Halliburton with NAFTA operations in Mexico fails to pay mandated compensation to Americans working in Mexico, the U.S. company is also failing to pay applicable Mexican and U.S. payroll taxes.
Another Mexican Supreme Court ruling states that a foreign parent corporation is responsible for the acts of its subsidiary (filial) and visa versa. In the present issue, if Halliburton incurs a Mexican tax debt, Halliburton de Mexico can be held responsible. Likewise, if Halliburton de Mexico incurs a Mexican tax debt, Halliburton can be held responsible. The same can be said of any and all U.S. NAFTA companies.
The remittance of all payroll related taxes are the responsibility of the employer . There are two sources of payroll taxes, i.e., the employer and the employee. The company must compute all payroll related taxes due from either the company or the employee, report the types, sources and amounts of the payroll taxes, and remit all sums to the appropriate Mexican Government revenue agencies.
What kind of payroll taxes are involved?
15% Professional Service Tax (income tax)
35% (up to) Social Security (includes 5% Housing Trust Fund)
2% Retirement Savings System
2% State Payroll Tax
In addition, Americans working in Mexico have been duped out of mandated compensation such as double and triple overtime pay, seventh day pay, holiday pay, vacation premium, Christmas bonus, seniority premium, profit sharing, trans-border travel to and from work, meals while at work and company sponsored employee benefits and perquisites.
The Mexican judicial system ruled I was defrauded the equivalent of 70% of my base pay. Various groups estimate that there are between 65,000 and 125,000 foreigners working in Mexico. I’ll use 100,000 for the prime reason that Mexican Law allows companies to import up to 10% of their Mexican workforce as foreign workers. The +4,000 U.S. companies claim they employ +1 million Mexican workers.
The major segment of the Americans working in Mexico are Vice Presidents, General Managers, Managers, Engineers and Technicians. The balance is comprised of supervisors. The preponderance of the salaries will be at the high end, so I’ll use a base pay of $65,000/year. Thus, 100,000 Americans @ $65,000/year X 70% equals $4.55 billion dollars the Americans might be defrauded.
The combined tax rate for the Mexican States and Federal Government are at its highest - 54%. Therefore, the U.S. NAFTA companies could’ve evaded up to $2.5 billion dollars in Mexican fiscal levies!
There is no doubt payroll has been withheld from Americans working in Mexico. The Mexican Supreme Court in its Halliburton rulings support this claim. I will demonstrate below why a large segment of the U.S. companies with NAFTA operations in Mexico are also culpable of this misdeed.
The U.S. companies and/or their subsidiaries have incurred what is called a contingent liability. A contingent liability is a sum of money that may or may not be paid by a company depending on the outcome of a future event such as an audit or court case. A contingent liability is recorded in a company's account’s and shown in the balance sheet. A footnote to the balance sheet describes the nature and extent of the contingent liability. The need to account for and report contingent liabilities is set down by the Financial Accounting Standards Board (FASB)
In 1973, the Securities and Exchange Commission (SEC) designated FASB as the organization responsible for setting accounting standards for public companies in the United States. FASB is a not-for-profit nongovernmental organization whose primary purpose is to develop generally accepted accounting principles (GAAP). The principles are promulgated through a series of statements. FASB Statements 5 and 11 define and delineate the what, why, where, when and how much concerning contingent liabilities.
In the matter at hand, the above does not infer the legal mandate for the payment of the sum of the withheld salaries and unpaid taxes is in question. The sums are owing, just not paid. The above states that the need for the company to remit payment is contingent on someone discovering the liability and/or someone, such a court, ordering the liability be satisfied.
However, defrauded payroll and evaded taxes are not the only contingent liabilities. Mexican Law requires that annually an employer must reserve 10% of the company’s profit and divide the profit among its employees. Per the American employees Work Permit (FM3), they are employed by the U.S. parent. As demonstrated, the profit sharing tally can be astronomical. The probability that Halliburton and the other U.S. companies have voluntarily paid an annual 10% of their profits to their American employees working in Mexico are also astronomical.
There is one more significant contingent liability. Of the twenty one Mexican Supreme Court cases that I’ve been able to locate, all carry a common theme, i.e., one or more Americans have been unjustifiably terminated and they sought redress through the Mexican judicial system. The oldest of the cases dates 1925 and the most recent (Halliburton) dates 2007.
In my almost fifty years of business on the U.S./Mexican border, I’ve realized a common theme, i.e., U.S. companies will select a small cadre of Americans who will be transferred to work in Mexico. The Americans are usually a core of employees that have survived a massive layoff because their jobs were exported to Mexico.
The Americans will sell their homes and pack up their families and relocate them to a U.S. border town or city. When they arrive, they realize their new home is in an economically depressed zone. They will soon realize their new home cost much less than the home they sold and guess what? Uncle Sam wants his cut of the profit on the sale of the home.
The spouses of the American workers will find it almost impossible to find meaningful work to supplement family income. There are two primary reasons. First meaningful jobs are difficult to find. Second, mastery of Spanish is almost always a requirement.
The strain on the family grows. Dad is at work for eleven to fourteen hours per day - sometimes six and maybe seven days per week. He can’t attend little Johnnies Little League games and little Mary’s swim meets. When the family does have free time, there’s little to do.
Within a year or two or maybe more, the company will determine some of their American workforce is unnecessary - expendable. The Americans are terminated for no other reason than they’ve done their job too well. If they complain or show animosity, they’ll be placed onto a do not hire list (blackballed) maintained by the local industry association. The only job he’ll be able to find is a minimum wage job flinging mystery meat at the local fast food outlet.
Soon, the proverbial bovine feces will impact the oscillating ventilator. The family is drowning in debt, the creditors are pounding on the door and the spouses are at each others throats. What’s left? Why bankruptcy of course.
According to an attorney acquaintance, a significant number of his clients are ex-employees of U.S. NAFTA companies who were transferred to the area and within a few years terminated. Most ended up being blackballed. He was surprised to hear from colleagues with offices along the border that they too had significant portions of their clientele who were ex-employees of U.S. NAFTA companies.
The common thread with my attorney friends clientele was they had not received any mandated Mexican termination indemnity compensation. For most, their sixty day window of opportunity to file an action to collect their termination benefits had lapsed.
Termination indemnity compensation in Mexico can be rather generous. Unjustifiably terminated fifteen year workers can demand ninety days pay as a minimum with an added 20 days for each year of employment plus 12 days seniority premium for each year of employment. The employee is further due any and all withheld mandated compensation plus any accrued benefits for the partial year before termination. Mexican Law requires companies establish a reserve account to accrue monies to cover the termination indemnity of its employees. Termination costs are a contingent liability.
The following example is necessarily a brief illustration of a complicated subject. John Smith is unjustifiably terminated after fifteen years as a production supervisor. He had worked in Mexico for three years and his highest salary for the last three months of his employment was $40,000/year.
90 days = $10,000
20 days X 15 years = $33,333
12 days X 15 years = $20,000
Withheld Overtime (est.) = $63,000
Withheld Xmas Bonus = $ 5,000
Withheld 7th Day Pay = $24,960
Withheld Vacation Prem. = $ 1,440
Profit Sharing = $30,000
Termination Pay (est.) = $187,733
That’s more than 4½ years salary for a $40,000/year ex-employee. No need for bankruptcy. Using the above example, a $65,000/year ex-employee could expect up to $305,000 in termination indemnity.
For arguments sake, I will estimate that 5,000 Americans are unjustifiably terminated each year. That’s more than $1.5 billion dollars per year they‘re not compensated. Moreover, the Mexican taxes due for the termination indemnity totals up to $800 million dollars.
Let me summarize the total of the contingent liabilities incurred by the scofflaw U.S. companies:
Unpaid Payroll = $4.55 Billion Dollars
Unpaid Taxes = $3.3 Billion Dollars
Unpaid Termination $1.5 Billion Dollars
Sub Total $9.35 Billion Dollars
That’s 10% of the reported production costs incurred in Mexico by the U.S. NAFTA companies. Yes, I do mean Sub-Total. The Mexican subsidiaries of U.S. NAFTA companies must because of their affiliation and control by the U.S. NAFTA company, compute a transfer price. The transfer price is used by the Mexican Government to levy income taxes on an otherwise break even operation.
Transfer prices contain a computed profit that is usual for the industry. Most often 10% has been deemed usual. Therefore, 10% of $9.35 Billion dollars times 28% income tax rate equals $261,800,000 of further taxes due of $3.5 billion and a Grand Total of $9.55 Billion Dollars!
This is the real reason the U.S. companies have gone to Mexico and not China. If the U.S. companies reserve these dollars as part of their budget for Mexican costs of production and do not incur the costs - the reserve dollars go straight to the bottom line. These dollars create the false impression the executives and managers have excelled at their jobs and should be rewarded with promotions, raises, bonuses, automobiles, stock options, etc.
If there are contingent liabilities in Mexico, there are contingent liabilities in the United States. But, in the U.S. the issue of fraud and evasion are compounded. If Mexican taxes have been evaded, so have U.S. payroll and taxes. The U.S. NAFTA companies have left themselves open to a multitude of enforcement actions.
Most of the Americans working in Mexico live in a U.S. border city and daily commute to work. The salaries of each of the Americans is subject to State and Federal payroll taxes. Remember, they live in the U.S. and are employed by a U.S. company, but their compensatory benefits and perquisites are mandated by Mexican Law.
Whatever taxes the Americans pay to the Mexican Government can be offset through tax credits provided for under the Internal Revenue Tax Code. Payroll taxes have been paid on already paid salaries and payroll taxes will be due on the illegally withheld mandated salaries.
Moreover, the States and Federal Government rely on periodic company financial reports and Transfer Pricing Schedules to compute the duties and taxes to be paid by each of the U.S. NAFTA companies. The financial reports and Transfer Pricing Schedules lack the due but unpaid mandated payroll and taxes. Therefore, duty and tax computation are erroneous.
U.S. Customs fraud actions actions under 18 USC 542, 18 USC 1001 and/or 19 USC 1592 are onerous. If an importer is found culpable of fraud, the fines and penalties can total the full value of the imported articles. The full value would not only include the value declared when the articles were imported, but also the deficient costs.
Likewise, shareholders and potential shareholders rely on audited financial reports when deciding on investing into U.S. companies, some of which are U.S. NAFTA companies. The SEC monitors annual financial reports to spot anomalies that portend trouble.
Most if not all of the U.S. NAFTA company financial reports and Transfer Pricing Schedules do not reflect billions of dollars in contingent liabilities. In its PASQUANTINO ruling, the U.S. Supreme Court upheld the premise that evasion of foreign taxes by a U.S. company is a violation of the RICO Statutes.
In reality, the scofflaw executives have engendered a huge ruinous liability that endangers the shareholders investment.
But, what about the expert counsel of internal and outside attorneys, accountants and auditors that are charged with the responsibility of protecting the companies and their shareholders from liability?
Where were these experts when Halliburton so grievously violated the Mexican Labor, and Workplace Health and Safety Laws? Where are these experts as Halliburton annually prepares and files inaccurate audited financial reports with State and Federal revenue agencies, State and Federal monitoring agencies and with actual and potential shareholders?
I’ve shown that going back to 1925, the issue of foreign workers rights in Mexico has been defined and delineated by the Mexican Supreme Court. The principle is fundamental and no basis should exist for violation of the mandated civil and labor rights of foreigners working in Mexico. There are at least six levels of scrutiny and protection, so why the blatant violations?
That accounting firms have previously breached codes of ethics is well known. Examples are:
Arthur Anderson; Enron, Global Crossing, Peregrine and Halliburton (what a surprise).
Delloitte & Touche; Adelphia, Duke Energy, Rite Aid and Parmalat.
Ernst & Yound; AOL Time Warner, Dollar General and HealthSouth.
Coopers-Lybrand; Network Associates and Phar-mor.
That multinational corporations have pushed the envelope and breached the law is well known. The list is longer than your arm and grows daily.
After fourteen years of NAFTA, the fraud could total up to $160 Billion Dollars owing to American workers and the State and Federal Treasuries of nations of Mexico and the United States.
Why hasn’t the Mexican Government auditors (Hacienda, Seguro Social, Secretaria de Trabajo y Prevision Social and Gobernacion) detected the violations in at least one U.S. company?
Why have U.S. law enforcement agencies such as the SEC, FBI, ICE, IRS and U.S. Attorney rebuffed my efforts to make known the various transgressions of the U.S. NAFTA companies?
Why haven’t internal and/or outside attorneys, accountants and/or auditors uncovered and exposed the misdeeds to company executives, shareholders and/or the appropriate agencies of the Mexican and United States Governments?
Intriguing questions. There are several answers. I’ll go into the possible reasons and the impact the reasons have on the United States in my next posting.
Labels: Americans Working in Mexico, Halliburton, Mexican Profit Sharing, NAFTA, Payroll Fraud, Tax Evasion, Unjustified Termination
