With more than 2 million overseas Filipino workers (OFWs) around the world, remittances, or the money they send home to their families, are considered a key factor in the resilience of the Philippine economy. Based on Bangko Sentral ng Pilipinas (BSP) data, OFW cash remittances in 2016 reached $26.9 billion.
While taxing remittances in the Philippines could be a rich source of revenue, it may not be worth pursuing because it would, in effect, raise the overall cost of money transfers.
The government’s tax reform package includes a proposal to tax goods and services, which are currently exempted from value-added tax (VAT), at 12 percent. Remittances, which fall under “sale or exchange of services,” would be affected should this proposal pass. Sure enough, this has elicited strong opposition from the OFWs and even some party-list lawmakers, who vowed to block it in Congress.
To allay the apprehension of the parties concerned, the Department of Finance (DoF) pointed out that it is the service of remittance centers that would be subjected to VAT, not the actual remittance amount. The DoF proposal states that the bill targets businesses such as pawnshops, which were not initially registered as remittance centers. The plan, it said, is to clean up the VAT system in order to reduce leakages and unfair treatment.
For instance, under the proposal, if someone wants to send P5,000, the money transfer center would charge P125, and the VAT would amount to P15, or only 0.3 percent of the remittance amount. Basically, this means that the money you send will not be subjected to VAT in its entirety, rather only a portion of the remittance fee for sending the money would be liable to VAT.
Filipino workers should be aware that once this proposal gets the green light, all the service fees of money remittances, whether coming from overseas or from within the Philippines, will likewise be subjected to 12 percent VAT.
This proposal is a regressive tax because the ones who will shoulder the burden are the poor and the middle class. And OFWs are not the only ones who will be burdened because all remittance fees made locally will also be subjected to VAT.
Take, for example, an individual who is earning P20,000 monthly and remits P1,500 on a weekly basis, with a transaction fee of P45. If the tax proposal passes, this individual will be charged an additional fee of P5.40 weekly (P45 multiply by 12 percent), or P21.60 monthly (P5.40 multiply by four weeks) as VAT. Unfortunately, the take-home amount left for his family or loved ones will be reduced by this VAT on the remittance fee.
Few people contest the fact that money transfers are a big convenience, but putting an additional burden on the families who receive them would be senseless, a form of added suffering. When this VAT is applied to remittances, it is possible that people will revert to sending money home in the form of cash carried by friends and relatives. They might also resort to informal “hawala” systems of money transfer – or informal gray transactions that are very difficult to track and secure.
To sum it up, the government may want to reconsider its proposal to tax the service fee on money remittances, considering that this will burden both the OFWs and domestic money senders. Obviously, the additional VAT on the service fee will directly hit the remitters and not the remittance companies. However, if this proposal pushes through, then perhaps the government can specify a threshold or a minimum remittance that will be the only amount subjected to VAT to protect poor and middle class Filipinos.
It can be recalled that the government allowed an exemption to the Documentary Stamp Tax (DST) for OFWs. In the same vein, it shouldn’t be a stretch for the government to consider maintaining the VAT exemption for remittance fees. We are all in agreement that OFWs are our modern-day heroes. If we really see them as such, then it should be a legal imperative that we accord them all the exemptions and privileges provided under our Philippine tax laws.
The author is a Senior with the Tax & Corporate Services division of Navarro Amper & Co., the local member firm of Deloitte Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu Limited – comprising Deloitte practices operating in Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.