Taxing Remittances ? a rejoinder

Thu, 6 Apr 2006 Source: Jeffrey, Peter Nee

Remittances are not a new phenomenon, however one cannot separate this phenomenon from emigration and the globalisation processes and the benefits that can accrue to both labour exporting and labour receiving countries. Ghana is now at the incipient stage of managing and using remittances in a productive manner. Countries such as India, Mexico, Egypt, The Philippines and Turkey and before them Italy, Spain and Portugal were able to tape into this huge resource to the benefits of their countries.

In Mexico and Turkey, remittances are the second largest source behind Foreign Direct Investment. In my native Ghana, worker remittances are now the 3rd largest foreign earner behind Gold and Cocoa.

Remittances to developing countries have grown fast over the last decade and currently amount to over $250 billion a year. In Ghana over $4.5 billion was remitted last year with about $1.27 billion remitted by individuals in November and December 2005 alone.

With the current trend in Ghana, it is estimated that remittances may soon constitute the single largest source of foreign exchange and exceed our traditional export revenues (Timber, Gold and Cocoa), foreign direct investment and other private capital inflows.

In Ghana, remittances and good economic management has help to improve our development prospects For the first time in our country?s history we have been able to set ourselves a target date of achieving middle- income status by 2020, now known as the VISION 2020 project.

At the micro level, remittances to Ghana have allowed families, especially those in the rural areas to maintain expenditure on basic consumption such as housing, education and small-scale business formation. Deregulation of the financial sector and the proper regulation of remittance-service providers by the Rawlings government gave the Diasporean community much confidence in sending money to Ghana.

However there has been question mark as to the uses of this resource and its role in poverty reduction strategy in the country.

Although the notion behind the government?s idea of taxing remittances may be noble, however, until and unless answers are given to its uses, the prospects of this project will fail.

The data quoted by the government, it must be emphasised, reflect official balance of payments statistics, exclude remittances that occurs through informal channels such as cash carried by friends/relatives and others, thus the unofficial figure may be higher than the $4.5 billion as quoted by the government. Thus the magnitude of the remittances underlies the Ghana government?s intention of taxing the inflows.

The original article that appeared in the Ghanaian Daily (The Daily Graphic of 21st March 2006) stated that the tax is to enable the government to meet the expenditure of providing social amenities and infrastructure that come with developments such as housing.

In his analysis (Ghana web feature article 1st April 2006) Amegashie argue that he is against the notion behind the tax. Amegashie?s disagreement about the proposed tax relates to the Ghanaian government not making clear about either targeting consumption transfer (remittances that goes to pay school fees, look after those left behind, small scale businesses and building houses in home towns etc) or investment transfer. Most people are remitting to build houses for renting and/or rest houses, hotels and commercial residential lettings. Thus if the government wants to target the second inflows in order to improve infrastructure, that is understandable.

The motive of Ghanaians to remit to the motherland (after their country was hailed as an "African Success Story" and "An Economic Miracle" in the 1990s by the Britten Woods Institutions) became obligatory irrespective of residential status (Jeffrey 1999).

At the micro level, my studies in the late 1990s agrees with the other studies in the literature. Using the Turkish data, Straubhaar (1986) argue that the size of remittances is influenced by the income situation and the labour market in the immigration country and more crucially by the home country?s political stability.

Amegahie?s comparison of the domestic Ghanaian homeowner and the Diasporean Ghanaian homeowner and their tax obligations does not hold water. The fact the domestic Ghanaian uses most of the amenities that the tax is aimed for whilst the Diasporean Ghanaian who equally pays property tax do not enjoy those amenities is pure nonsense.

The question that needs to be ask is, what has the government done with the large inflows (remittances goes through the central banks before they are converted into local currencies and onward to beneficiaries, a vital source of foreign currency for the country) from 1992 to 2005? In the 1990s this writer wrote to the finance ministry in Accra to demand an answer to the uses of the remittances but there was no reply.

The tax on remittances can be built into the transfer fees charge at source and I believe most Ghanaians would not mind to pay a pound or dollar extra in they knows that money is going to the government to alleviate poverty.

In a related discussions that this writer had with Osahene Kojo Boakye Djan and others regarding voting rights (ROPBA) and tax obligations of the Diasporean Ghanaian, Osahene stated that in principle he has no objection about giving the Diasporean the right to vote in domestic elections. However to have this right, then people must be prepared to make an annual contributions to the Ghanaian exchequer. These contributions would be used as part of the Poverty Reduction Strategy funding in strategic projects that would benefit the poor.

The notion behind Osahene?s argument is as valid just as asking Disaporeans to pay a pound or dollar extra for the same purpose. But coming out to impose blanket tax on remittances is ridiculous and nonsensical. It was right that the government came out the next day to vehemently denied this notion of thinking on their part. As Amegashie stated, ?In principle, a government can use the coercive power of the state to tax anything???.

The downside to remittances is it fuels brain drain as is the case in Ghana now. However it is becoming increasingly clear that remittances are of significant important to our development and it was on this basis that the government floated the idea of tapping into remittances by taxing the source.

In Ghana and many other developing countries, remittances are higher than private capital flows and thus morally it is right to earmarked some of these flows into social development. With the high prevalence of crime in most major cities, two areas that would need much injection are the Ghana Police Force and the Ghana Fire Brigade. Hence taxing remittances to provide logistics and equipments and better accommodation for these 2 institutions then I think most would support such a noble cause.

Peter Jeffrey London.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.

Columnist: Jeffrey, Peter Nee

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