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The UAE is the sixth top remittance-sending country in the world, with the country’s expatriates sending more than $19 billion (Dh70 billion) in one year to friends and families back home.

The United States remains in the No.1 spot, sending the biggest amount of remittances at $56.3 billion. Saudi Arabia ranks second at $36.9 billion, followed by Russia ($32.6 billion), Switzerland ($24.7 billion) and Germany ($20.8 billion).

Most of the 7.8 million expatriates in the UAE originate from countries such as India, the United Kingdom, Egypt, the Philippines, Bangladesh, Pakistan, Indonesia, Sri Lanka and Yemen, and according to the World Bank migration and remittances factbook, which looks at the global remittance outflows, the Dh70 billion aggregate outflows represent 4.8 per cent of the UAE’s gross domestic product.

The UAE VAT rules model the European Union countries exempt financial service firms, including the remittance houses. This means that those firms cannot charge VAT on the remittance services charged to their consumers and cannot deduct the input VAT they have paid on their purchases. Considering the low number of expatriate workforce in comparison to the local workforce in the EU countries, such treatment may not have significant impact in the VAT revenue to the government. However, if this would have been the same treatment in the UAE or any other GCC countries where the expatriate workforce is the majority population – as stated earlier – this may reduce the potential VAT revenue to the respective government.

The VAT-exempt status may also put remittance houses at a disadvantageous position in the UAE as most of the supplies they purchase such as rent, security services, are expected to be subject to standard VAT rate. This may further impact the pricing on the services for their customers, that is, the effect may be more than the actual five per cent standard VAT rate.

Based on the latest information from the Ministry of Finance, it is planned that financial services will be subject to a narrow exemption model. Fee-based financial services will generally be subject to the standard rate (5 per cent) of VAT. Fees charged on remittance services can be categorized as "fee-based financial service". The forex gain or loss for the remittance houses within their supply chain may not be subject to VAT.

Lastly, it’s important to note that the concept of VAT on remittance services shall not be mistaken with tax on remittances. If remittance services would be subject to standard VAT rate, the VAT due will be based on the fee charged and not the amount of the remitted money. Thus, the eventual impact of VAT on remittance services can be very small in comparison to taxes on the amount remitted.

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