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The Proposed Tax on Remittances will Drive Flows Underground

Ismail H. Genc's picture

Recently, some news outlets in the Gulf region have hinted at the possibility of the United Arab Emirates’ (UAE) government imposing a tax on remittances. In the GCC countries foreign workers constitute a large portion of the total population (an average of 60 percent in 2010 with almost 90 percent in the UAE).  Expatriates in the Gulf cannot obtain local citizenship nor invest in real estate, and those with low skills cannot sponsor their immediate family members to join them. Remittance outflows from the GCC countries have surpassed 70 billion USD in 2011 making the region rank as the largest remitter in the world. With such significant remittance outflows, the rationale behind imposing a tax is to keep a portion of the money leakages as potential investments in the domestic economy.

There are two ways to impose a tax on remittances in the GCC countries. The first is to tax wages assuming that a large share would be used as remittances. In that case, a tax on remittance is essentially an income tax. Another way is to tax the act of sending money at money transfer houses. To avoid being taxed, remitters would resort to unofficial channels of money transfers (cash transfers through friends, relatives or simply carrying money themselves). Further, the Gulf region includes a vibrant hawala system that rely on trust (through a number of hawala agents in both sending and receiving countries) to channel money from the GCC countries to mainly South Asian countries. A tax on remittances would therefore push people to hide money transfers raising serious concerns on the quality of the data. International organizations along with policy makers have worked hard to improve remittances data in terms of methods of collection to better estimate their total values and eventually their effects.

Interestingly, to our knowledge, the only study on the effects of remittance outflows from the GCC countries actually points to a positive effect (Termos et al 2013). It shows that remittance outflows exert deflationary pressures on inflation in the GCC countries. Therefore, attention should be paid to the multiple dimensions of the role of remittance outflows on the local economies. Further, the GCC countries have been a preferred destination for millions of migrants due to their tax-free environment. With a mean monthly wage of 1,594 USD and a median monthly wage of 681 USD, a tax on remittances would greatly affect the large expatriate population in the UAE. This could have long-term implications on the movement of labor to the region.

But if local governments’ priority is to redirect some of the remittance outflows to the local economies then the incentives to remit need to be altered. That includes a potential citizenship path, a clearer and effective way for foreigners to invest in the local economy and the opportunity for family reunions. In the meantime, the local population also has to go through a transformation where government sector jobs should not be considered a natural right for a citizen. This is the only serious alternative to weaken the heavy reliance on foreign workforce in the long run by increasing the participation of the local labor force in the private sector. Nevertheless, one should never have the illusion of doing away with the foreign workers completely as such huge economies in the GCC cannot possibly be self-sufficient given the current population dynamics of the indigenous people.

 

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