In 2016, an amount of $440 million of migrant remittance flowed to developing countries. The official development flow to these countries is one-third of the amount. In many countries, the largest source of foreign exchange is remittances. In India and Mexico, they surpass the Foreign Direct Investment (FDI); in Egypt, they are the much more than the revenue from Suez Canal; and in Pakistan, the country’s international reserves are much less than remittance.
Recently, some of the rich countries that host lot of migrants are considering taxation on outward remittances to raise revenue, and also to discourage undocumented migrants. The lists of countries who have considered such taxes are Oman, Kuwait, United States of America, Bahrain, Saudi Arabia and the United Arab Emirates. While this increases the nation’s revenue earning but remittance taxation is not at all a good idea for the following reasons:
Double taxing: Since the income of migrants is already taxed in the recipient country, taxing remittances actually amounts to double taxation. This is a highly regressive policy as remittances are usually sent to poor families of migrants, the tax would be born ultimately by them.
Increases remittance cost: Remittance taxation will raise the cost of remittances, which directly contradicts the G20 commitments and the Sustainable Development Goal of increasing financial inclusion and reducing remittance costs.
Channelizes remittance flow to the informal sector: It is natural for the poor migrant workers to be highly sensitive to the costs of remittances. A tax on remittances will channelize these flows to unregulated and informal means. That will reduce the tax revenue, increase the cost of tax administration, and money flow through informal channels raising security risks.
Uncontrollable impact: Tax on remittance will also impact small-value transfers for trade, tourism, investment or philanthropy.
Barring specific nations: Some countries are taxing remittance to some selected countries which have led to sending money overseas to the third country. For example, Iranians in the USA send remittance back home through Europe or UAE to avoid tax. Thus they pay remittance fees twice.
Reduction in revenue: According to experts revenue base of the developing countries is more than the amount secured by tax of remittance. According to IMF (2016) remittance tax at a rate of 5 percent would result in a revenue of about $4 billion i.e., 0.3 percent of GDP of the GCC countries. United States Government Accountability Office suggests that a fine of 7% on remitters without legal status would raise less than $1 billion in revenue.
Reduces revenue from remittance service providers: Taxation on remittances would decrease the business volume of remittance service providers, thereby reducing their tax payments.
Loss of entrepreneurs: It will encourage expatriate employees and entrepreneurs to move to other countries with lower taxes.
In past, such taxes have failed. In Gabon (2008) and Palau (2013), remittance tax collections were found to be insignificant (IMF 2016). Many developing countries have been tempted to tax inward flows of remittances, but only a few countries actually did. Taxing inward remittances have similar drawbacks of taxing outward flows. This will be a burden on poor families. Countries who ever taxed inward remittances ultimately removed them. Vietnam’s removal of 5% remittance tax in 1997 increased flow through normal channels. Formal remittances grew from $78 million to $256 million from 2002 to 2003 when Tajikistan exempted state tax on cross-border bank transactions. Remittances in the Philippines were subjected to a documentary stamp tax but not for overseas Filipino workers. Send money to Vietnam, Singapore or any such countries with remittance companies instead of banks for cheap exchange rates. India imposes a small GST on the fees charged by money transfer agents, but not on remittance.
A systematic study of feasibility and implications of taxation of outward and inward remittance flows is necessary. Such a study must be conducted involving preparation of country case studies and interviews of remittance service providers, migrants and their household members back home and tax authorities. Since the literature on taxation of remittances is silent, an analytical modeling of such taxes must be done before taking such policies.