Introduction to the Legislative Package
The U.S. Congress is currently debating a legislative package called “The One, Big, Beautiful Bill,” which aims to reform the Internal Revenue Code by introducing a tax on remittances sent from the United States (U.S.) to foreign countries.
Understanding the Proposed Tax
This special service tax would apply at a rate of 3.5% on the amount remitted abroad, targeting individuals with irregular migration status. It’s crucial to note that this tax does not affect the recipients in foreign countries, who receive the full amount. The tax will take effect starting from 2026 and could potentially generate around $1.75 billion annually for the U.S., particularly in remittances to Mexico.
Who is Affected and How?
Any person sending money abroad could be subject to this tax, but U.S. nationals or citizens can qualify as validated senders and be exempt, or they can offset the remittance tax against other U.S. taxes owed. Those without U.S. tax liability won’t be able to claim a refund, effectively making it a permanent tax.
Mexican Perspective and Concerns
The Mexican government and legislators have expressed concern over this burdensome measure, claiming it’s discriminatory according to the U.S.-Mexico tax treaty and results in double taxation. However, these concerns may be imprecise.
Tax Treaty Analysis
Article 25 of the tax treaty prohibits differential treatment of Mexican nationals compared to U.S. nationals under similar circumstances. The treaty acknowledges that residents of each country are not in the same conditions, allowing both nations to have distinct tax regimes for residents versus non-residents.
Double Taxation Argument
The double taxation argument is unfounded since this isn’t an income tax. If a Mexican worker had already paid taxes in the U.S., they could opt for the offset mentioned earlier.
Potential Conflicts with T-MEC
As remittances are cross-border financial services, this tax might violate several T-MEC provisions related to free money transfers (Article 15.12.1) and the principle of non-discrimination in financial services (Articles 17.1 and 17.3). These regulations, which usually exclude tax measures (Article 32.3.6(b)), may apply due to the tax not being covered by the tax treaty.
Key Questions and Answers
- What is the proposed tax? A 3.5% special service tax on remittances sent from the U.S. to foreign countries, targeting individuals with irregular migration status.
- When does the tax take effect? The tax will be implemented starting from 2026.
- Who is affected by the tax? Any person sending money abroad, with exemptions for U.S. nationals who qualify as validated senders or can offset the tax against other U.S. taxes.
- What are Mexico’s concerns? Discrimination under the U.S.-Mexico tax treaty and potential double taxation, though these concerns might be imprecise.
- Could this tax conflict with T-MEC? Yes, it might violate provisions related to free money transfers and non-discrimination in financial services, as it’s not explicitly covered by the tax treaty.
