If President Trump’s proposal to impose a 3.5% excise tax on outbound remittances by non-citizens becomes law, remittance and money transfer companies operating in the cross-border payments space will need to significantly update their product design and compliance strategies. While the full impact of the tax on transaction volumes and sender behaviour remains uncertain, it is very likely that the 3.5% excise tax will become law. In our view, the real winners will be those fintechs that design and deploy compliance-ready products well ahead of the January 1, 2026 implementation date. Thus, we believe that, now is the time to begin modelling how the excise tax could shape product features, compliance processes, and user flows.
Some Product & Compliance Considerations for Remittance Platforms
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Automated Sender Verification
Since the 3.5% excise tax does not apply to U.S. citizens or nationals, remittance and money transfer platforms would have integrate sender verification into the onboarding process to verify the sender’s citizenship status to determine eligibility for tax exemption. -
Automated Tax Deduction Modules
Remittance and money transfer platforms would need to implement automated systems to calculate the 3.5% excise tax on each remittance, deduct the tax in real time from non-verified senders at the point of transfer, and maintain audit logs capturing remittance amounts, taxes deducted, sender status, and timestamps. -
Quarterly Remittance to the U.S. Treasury
Remittance and money transfer platform providers would be required to remit the 3.5% excise tax collected to the U.S. Treasury on a quarterly basis. -
IRS Annual Reporting
Remittance and money transfer platform providers would be required to submit an annual information return to the IRS detailing the total number and value of remittances, sender information for those intending to claim the tax credit, and, for others, the total amount of tax collected and remitted. -
Issuance of Payee Statements to Senders
Senders who pay the tax, file U.S. taxes, and possess a Social Security Number (SSN) may be eligible for a refundable credit. Thus, remittance and money transfer platform providers would be required to issue payee statements to such senders, confirming their identity and the tax data submitted to the IRS. -
Treasury Compliance Agreements
Remittance and money transfer platform providers would be required to enter into a written agreement with the U.S. Treasury to verify the citizenship status of senders in accordance with Treasury-issued procedures. -
Contracts and Partnership Reviews
It would be prudent for remittance and money transfer platforms to review and update their terms of use, internal policies, and third-party partnership agreements to reflect new tax obligations and ensure appropriate risk allocation and indemnities. For instance, Nigerian-registered International Money Transfer Operators (IMTO) would have to review agreements with foreign technical partners/agents to assure that their commercial interests are protected and that new regulatory risks are properly re-allocated. -
Financial Liability
Remittance and money transfer platform providers may also bear financial liability. For instance, if a remittance platform fails to withhold the tax or misclassifies a sender’s status, the liability may rest with the remittance platform provider. The risk of IRS enforcement is high, and financial exposure could be material.
Final Comments
While it may be too early to ascertain the full impact of the 3.5% excise tax on transaction volumes and sender behaviour, the 3.5% excise tax can potentially depress already tight margins for money transfer operators and also increase operational costs. It may therefore help to anticipate and model a possible revenue impact based on a possible volume decline. It would also be important to communicate clearly with users on how the 3.5% excise tax may affect their remittances
There could also be some macroeconomic implications. Diaspora remittances play a key part in stabilizing the FX market in Nigeria. Here are some key data points here:
(a) Nigeria received approximately $20.93 billion in personal remittances during 2024, marking an 8.9% increase compared to 2023.
(b) A key regulatory objective of the 2024 IMTO regulations issued by the CBN is to boost diaspora remittances.
(c) The United States is easily the single largest source of remittances to Nigeria, reflecting the size and engagement of Nigeria’s diaspora in America.
Within this context, a decline in remittances can potentially deepen Nigeria’s existing foreign exchange challenges and impact Naira volatility, potentially forcing more frequent interventions by the Central Bank of Nigeria.
Balogun Harold insights are shared for general informational purposes only and does not constitute legal advice. For tailored guidance, please contact our Product and Fintech lawyers at bhlegalsupport@balogunharold.com
