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Should Remittances Be Taxed?

July 19th, 2016

Remittance Tax

The depression in oil prices has led GCC to accelerate their drive towards economic diversification. There is a renewed focus on rapidly creating soft power expertise, such as in technology and entrepreneurial ideas. There is an emphasis on seeking greater foreign investment, strengthening tourism and hospitality, and creating the infrastructure to power long-term success.1

Simultaneously, there have been moves to generate revenue through light taxation. Plans for a GCC-wide Value Added Tax (VAT) set around the 5% mark are being mulled 2. Some countries – Kuwait and Oman in particular – are also mooting the possibility of a tax on outward remittances from the countries3. Such a remittance tax has both pros and cons.

On the one hand, a flat-rate remittance tax could add a revenue stream to provide investment needed for economic diversification in the short-term. On the other, however, such a tax could pose longer-term challenges not just for the money transfer industry but also the economies imposing it.

One of the United Nation’s Sustainable Development Goals (SDGs) is to tackle inequality within and between countries by bringing remittance fees down near the 3% mark by 20304. The global cost average for 2015 was at least twice as high, standing at 7.4% of the remittance value ($200)5.

Taxation on remittances would in effect further raise the overall cost of money transfers. Rising costs might reverse gains made by remittance and money transfer brands in encouraging expats to use legal, licensed and safe channels of money transfer. There is a risk that people will revert to sending money home in cash carried by friends and relatives. They might also take recourse to informal “hawala” systems of money transfer.

Such informal grey transactions are very difficult to track and monitor. They stymie regional efforts against money laundering, counterfeiting and terrorism finance.

Further, making it more difficult for expats to transfer their earnings freely might reduce the appeal GCC markets have always held for global talent, which in turn could work against economic diversification goals.

There is no doubt that the GCC is right to consider innovative ways of increasing revenue. Perhaps an alternative to remittance taxes might be to incentivise expats to save and invest money in their countries of residence first and then send the balance amounts to their home countries.

Written by Sudhesh Giriyan, COO, Xpress Money