Remittance tax passes first leak in US Congress

This Wednesday, a proposal to impose a 5% tax on remittances sent by migrants advanced in the U.S. House of Representatives as part of the Republican Party's tax reform package.

With 26 Republican votes in favor and 19 Democrats against, it was approved by the House Ways and Means Committee, despite diplomatic efforts to prevent this measure from passing, as it still requires congressional approval.

Before the vote, experts from the Center for Monetary Studies of Latin America (Cemla) and BBVA said that low-income migrant workers tend to be very sensitive to the costs of remittances.

Imposing a tax on these remittances will likely force them to direct their flows toward informal and unregulated channels, but they will continue to support their families of origin.

According to Jesús Cervantes González, director of the Cemla Remittance Forum, immigrants can use digital remittances and cryptoassets to send funds to their families if the initiative to tax remittances in the United States Congress advances.

He acknowledged that this would mean losing the information and transparency we currently have about operations, which would be "undesirable and inefficient." But resources would continue to flow to support their families.

As the document drafted by the Republicans stands, only remittance senders who lack the necessary documentation to work in that country will have to pay the tax on remittances.

According to BBVA Mexico's chief economist, Carlos Serrano, this means that four million of the 12 million Mexicans living in the country will be subject to this provision.

And he agreed with the CEMLA expert in hoping for the use of alternative channels for sending funds, such as a US citizen friend who can carry out the transaction; bank transfers; and informal channels like fintech companies.

The problem with bank transfers is that they are more expensive than remittances, he said, and they wouldn't be recorded like remittances sent by immigrant workers to their families in Mexico.

Up to $30 more for a 400 turn

According to the BBVA expert, immigrants who send remittances could easily absorb the tax and ensure that their relatives in their home country continue to receive the same amount of pesos. An average remittance amounts to $400, and the cost per remittance is about $10, he explained.

If the 5% tax passes Congress's second filter, the sender of an average $400 remittance would pay $20 more for inspection and $10 more for the delivery.

That is, it would be $30 more than the immigrant will surely absorb in the United States, he noted.

“Twenty years ago, senders paid $40 for remittances and still sent them,” he recalled.

Information from Cemla, which has a specialized center to improve information on remittances as a crucial tool for understanding monetary institutions, shows that Mexican workers use 16.7% of their income to support their families of origin with remittances.

I would be more concerned about the slowdown in the United States and its effect on the labor market and the sectors where Mexican immigrants are employed, because if it continues to deteriorate, it will have a greater impact on shipping capacity, he noted.

Immigrants too pay taxes

The Cemla expert explained that, as the document stands, the payment will be effective after December 31, 2025.

Immigrants' remittances will be subject to the tax, whether they are citizens or non-citizens, but the former will have the opportunity to offset it in their annual tax return.

Cervantes González clarified that Mexican immigrants with citizenship, permanent residency but no citizenship, and undocumented immigrants are subject to inspection.

They pay income tax, since there is withholding when they earn their employment income. They also pay sales tax on the products they purchase, and there may be some local taxes, such as property taxes, etc.

However, some people in the United States have the perception that immigrants, particularly undocumented immigrants, do not pay taxes.

Undocumented immigrants file a statement

In fact, thousands of undocumented immigrants file their annual tax returns using what's known as an ITIN. Some file these returns by hiring tax assistance companies.

The Cemla expert noted that there are no reports among advanced economies regarding the imposition of taxes on remittances.

Reducing the cost of remittances has been a goal of the international agenda pursued by advanced countries, particularly the Group of Eight (G8), which includes the United States, he commented.

The World Bank has also been pursuing a reduction in the cost of remittance transfers for many years, and a tax on such transactions will make them more expensive, he said.