APPLYING TAX TO INBOUND REMITTANCES

APPLYING TAX TO INBOUND REMITTANCES

India and the Philippines both enacted policies to tax inbound remittances in their respective countries. For economies that rely on foreign remittance, the general trend has been to avoid directly taxing inbound remittance to prevent driving such transactions to the underground or shadow economy.

Taxing Inbound Remittances

In the past few years, governments have tactically avoided imposing a direct tax on inbound remittance in their various countries. The most practical method by which governments have achieved any form of taxation on inbound remittance has been to declare it as a tax-exempt entity and then proceed to tax services utilized in facilitating such remittance. Below, we have compiled some case study examples of governments that embarked on such programs and the impact it had on their revenues and remittance. In addition, we have also summarized independent reports and articles that focus on the impact of taxing inbound remittance.

CASE STUDIES

India

  • The Indian government’s taxation policy on inbound remittance is indirect in nature. Remittance into the country is free from any form of direct taxation or levies. However, the Indian government adopts two major indirect taxation mechanisms to take advantage of inbound remittances.
  • First, inbound remittance into the country can only be received in government-designated accounts for remittance. The approach ensures that all incoming remittance obtains government approval and can only be converted at government-designated rates. For inbound remittance funds denominated in foreign currency, the Indian government operates a parallel official exchange window, which helps it obtain foreign currencies at a much cheaper rate compared to other competitive market rates.
  • Second, the Indian government charges a service tax on all inbound remittance. The service tax, valued at 12.36 percent of the fee paid to money transfer service operators in India, was implemented in October 2014.
  • The added service charge did not seem to have much impact as India remained the world’s largest recipient of remittance in FY 2015 at $69 billion, a slight decline from the $70 billion recorded in 2014. By 2019, India’s inbound remittance had surpassed $83 billion. The service charge remains in effect to date.

The Philippines

  • The government of the Philippines also previously maintained an indirect taxation policy on inbound remittance before later terminating the program. Between 1995 and December 2010, the Philippines government charged a stamp tax on all inbound remittance into the country.
  • In the previous tax regime, Filipinos were expected to pay 0.30 pesos for every 200 pesos they receive in remittance. This tax was slashed to zero in 2010, and the Philippines government adopted a tax-free regime regarding all inbound remittance.
  • The creation and removal of the stamp tax did not significantly affect the level of inbound remittance in the country. Remittance in the Philippines has gradually grown over the past three decades. In 2008, total inbound remittance was valued at 141.9 billion pesos, which slightly increased to 156.3 billion pesos in 2011, a year after the removal of the stamp tax.

IMPACT OF TAXING INBOUND REMITTANCE

The International Monetary Fund (IMF)

  • The agency, in a report, concluded that governments should not directly tax inbound remittance, as it tends to be counter-productive for the economy. The organization also noted that inbound remittance does not necessarily lead to economic growth in a country.
  • The IMF added that tax remittance-receiving countries should adopt consumption-based tax systems, in place of direct taxation mechanisms, to benefit from any tax-induced increase in investment resulting from the remittance.
  • A link to the report is available here.

Leeds School of Business

  • The institution conducted a study to determine some potential impacts of taxing inbound remittance, especially in a remittance-dependent economy such as the Philippines. According to the report, inbound remittance is a potentially lucrative revenue source due to its large and consistent volume.
  • The report, however, highlighted the fact that many informal alternatives exist for individuals to remit funds back home without going through the formal route. According to the report, charging a 5 percent tax on formal remittance transfers in the Philippines could cause total remittance inflows to decrease by 9.9 percent.
  • Based on these findings, the report concluded that taxing inbound remittance, especially in developing countries such as the Philippines, would most likely not result in a considerable revenue increase for the government.
  • A link to the report is available here.

Kiel Institute for the World Economy

  • According to a report by the agency, the cost of inbound remittance is influenced by exchange-rate control by the recipient country, taxes on remittances, and regulatory burdens on money transfer services. The study highlighted the fact that tax burden is one of the main causal factors of the shadow economy.
  • The report concluded that there is a positive correlation between tax and the shadow economy — that is, an increase in one will naturally lead to an increase in the other. Based on these facts, the lower the tax burden, the lower the negative impact of inbound remittances diverting to the shadow economy, and vice versa.
  • A link to the report is available here.

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