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The Trump administration has proposed a new remittance tax that could significantly increase the compliance burden for firms moving money out of the US.
Last month, the House of Representatives passed the 'One, Big Beautiful Bill', a key item in the administration's legislative agenda on tax, which now heads to the Senate.
The main aim of the bill is to extend many of the tax cuts that were introduced by the Trump administration in 2017.
In addition, the bill would abolish taxes on tips, overtime and auto loan interest — measures that President Trump campaigned on prior to his election.
However, payments firms will be most interested in the 3.5 percent tax that the bill would impose on outbound remittances from the US.
The bigger picture
As proposed, the tax would be paid by the remittance sender but collected by the remittance provider.
If a remittance provider facilitates a remittance without collecting the tax, it would be the provider, rather than the sender, that violates federal tax law.
The only exception offered is for US citizens and US nationals, but these senders must choose their remittance provider carefully to benefit from the exception.
Specifically, they must use a remittance provider that has “entered into a written agreement” with the Secretary of the Treasury to verify the status of senders as US citizens or US nationals.
The exact procedures that remittance providers must follow are not stated in the bill, but would be specified at a later date by the Secretary of the Treasury.
In the alternative, if a US citizen or US national does not use a Treasury-approved remittance provider, they would still be charged the 3.5 percent tax, but they could claim it back as a refundable tax credit.
The proposed tax would come into effect on December 31, 2025, as would the proposed refundable tax credit.
Sponsors of the bill have pitched the tax as a “fee” on remittances sent by “illegal immigrants” living and working in the US.
As such, the tax is designed to discourage illegal immigration to the US and to penalise those who have already entered the country illegally.
However, although its supporters have touted the measure as a targeted intervention, it is clear that it would impose something of a “catch-all” system.
In its current form, the bill would inconvenience legitimate US senders, penalise legal migrants to the US (including green card holders), and create a major new compliance burden for firms.
For example, after collecting the 3.5 percent tax on each qualifying transaction, remittance providers would be responsible for remitting the funds to the Department of Treasury.
The bill states that remittance providers must remit these funds on a quarterly basis, “at such time” and “in such manner” as specified by the Secretary of the Treasury.
They must also submit records of qualifying transactions and taxes collected to the Department of the Treasury.
Why should you care?
Although the enactment of the bill is not guaranteed, the administration remains committed to its passage and the House vote moves it one step closer.
Remittance providers should therefore consider planning their response, which may include:
- Monitoring Treasury communications closely to understand the nature of the “written agreement” sought.
- Developing plans to verify that all senders who claim to be US citizens or US nationals provide documented proof.
- Preparing to handle the taxes collected on covered remittances, which may require investment in accountancy, data and record-keeping systems, as well as legal staff to handle disputes that may arise between firms and regulators.
- Planning for a separation of funds to ensure that the Treasury is paid its due on time.
Most remittance providers operate a tiered “know your customer” (KYC) approach, whereby senders of smaller remittances can transact without ID verification, but senders of larger remittances are asked to provide a form of national or state ID.
However, if the bill is passed, this tiered approach is likely to be rendered obsolete.
This is because US citizens and US nationals will seek out qualified remittance providers that can spare them the inconvenience of having to pay the remittance tax and then claim it back as a tax credit.
And the only way for a firm to ensure that it can offer the tax exemption from the outset is if it subjects all remittances from these senders to ID verification checks.
This will require new investments in KYC operations in the form of human resources, technology resources, or both.
Remittance providers that do not obtain authorisation will have to submit to the Treasury the full details of every US citizen or US national who sends a remittance and intends to claim the refundable tax credit.
