APPLYING TAX TO REMITTANCES

APPLYING TAX TO REMITTANCES

High-income countries around the world are increasingly considering the taxation of outward remittances due to their potential to raise government revenue and discourage undocumented immigrants. 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 remittance.

CASE STUDIES

Cuba

  • Prior to 1994, it was illegal for Cubans to receive remittance from relatives abroad, especially those residing in the United States.
  • In 1994, due to the downturn in the Cuban economy and increasing sanctions from the United States, which limited exports, the Cuban government launched a far-reaching policy to attract remittance from Cubans residing in the United States as a means of shoring up dwindling foreign exchange earnings.
  • Between 2004 and July 2020, the Cuban government legalized remittance and operated an indirect taxation policy on remittance inflow to the country, specifically on remittance denominated in US dollars. To achieve the taxation policy on remittance, the Cuban government removed all US dollars from circulation and replaced it with an equivalent government-backed promissory note, which could be used freely within the country. However, included in the conversion is a 10 percent levy charged to Cuban citizens anytime they convert US dollars to the promissory note.
  • Based on preexisting conditions in the country, such as the previous regime of remittance prohibition, the Cuban economy benefited greatly from the legalization of remittance, even with the 10 percent levy. The country’s cash remittance increased from $1.45 billion in 2008 to $3.44 billion in 2016.
  • In July 2020, the Cuban government announced the creation of shops that accept only foreign currencies and the end of the 10 percent levy on the US dollar. The Cuban government cited the negative impact of the coronavirus pandemic as a factor in eliminating the levy.

The United States

  • Oklahoma is the only state in the United States that currently places a levy on outgoing remittance from the state via wire transfer.
  • In 2009, Oklahoma began implementing a policy that attaches a levy to every wire transfer transaction in the state. Residents of Oklahoma are expected to pay $5 for the first $500 they transact as fees, and 1 percent of every amount beyond that. In addition, residents of Oklahoma are eligible for a tax credit equal to the amount they paid as fees.
  • Although the bill was carefully worded to avoid any mention of remittance, experts believe it was enacted to leverage remittances sent by undocumented migrants to their home countries. The main reason for this is because about 96 percent of wire transactions processed in the state are not written off against state income tax returns or claimed as tax credits — indicating that the vast majority of the fees are paid by non-state or unregistered residents.
  • At the launch of the program, the Oklahoma government projected revenue from the levy to exceed $8 million for FY 2010. By 2012, levies resulting from the policy had exceeded $8.9 million, an increase of 14 percent. The total revenue generated from wire transfer fees in the state surpassed $10.5 million in 2014, an increase of 7 percent. By 2015, the total collection had risen to $11.3 million, about 8 percent increase year-on-year. Total revenue rose to $12.8 million in 2017, and $13.1 million in 2019.
  • The levy imposed on wire transfer transactions by the state government did not result in the decline of remittance activities in the state. The growth of remittance actually almost doubled between 2010 and 2019, rising from $8 million in 2010 to $13.1 million in 2019.

Additional Findings

  • In the course of our research, we discovered that few direct policies exist to tax remittance across the globe. Most taxation arrangements exist as levies, as is the case of Cuba, Oklahoma, and the Philippines, or operate implicitly, as is the case of overvalued official exchange regimes observable in Venezuela, Pakistan, and Ethiopia.
  • The latest example of a direct taxation policy targeting remittance will go into effect in India on October 1, 2020. The Indian government plans to deduct a 5 percent income tax from all outward remittance above seven (7) lakhs ($1,834). Due to the recent nature of the policy, its long term impact on the country’s overall remittance is still unknown.

IMPACT OF TAXING REMITTANCE

Leeds School of Business

  • According to a report by the institution, remittance taxation is a potentially lucrative source of revenue for governments, as it tends to remain stable over time. However, the demand for formal remittance services, especially in developing countries such as the Philippines, is highly elastic and could potentially force inward remittance to be channeled through informal services.
  • The report further added that the demand for remittance services is elastic due to the presence of numerous informal or unregistered remittance services operating in developing nations, eroding years of financial inclusion programs.
  • A link to the report is available here.

The Times of India

  • According to an article published by the news service, taxing remittance directed outside India will significantly devalue the remittance and result in double taxation on money earned, which may lead to hardship and a decline in ease of living. The news service was responding to a recent government policy to tax all remittance exiting the country.
  • A link to the article is available here.

The Global Knowledge Partnership on Migration and Development (KNOMAD)

Center for Global Development

  • According to a recent report by the agency, remittance can be directly linked to financial development and inclusion in developing countries, and taxing it may result in sluggish economic growth.
  • The study also highlighted the fact that migration is often a financial management strategy for poor households, as people tend to leave places where there are little to no economic opportunities in search of better opportunities.
  • The report concluded that governments should not tax remittance because it makes an unfair imposition on a person’s liberty and autonomy, as such tax impacts poor households disproportionately. In addition, the report also noted that growth in remittance reduces demand for formal credit, which is usually unavailable to relatives of migrants.
  • A link to the report is available here.

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