Should I tell my boss the truth about the new guys "bilingualism"?

You have to use your best judgement of the guy. If you think he's worth it, then work with him to improve his Spanish. That would be the kind thing to do. But if this guy is not kind and is a liar too, then do what you think needs to be done. I would probably try to help him first, but if things did not improve, I would tell the boss later that I tried to help but his Spanish is not exactly professional level and you just wanted to let him know.