U.S. Remittance Tax Threatens Somalia’s Economic Lifeline

 U.S. Remittance Tax Threatens Somalia’s Economic Lifeline

A new U.S. tax targeting money transfers is raising alarm across the developing world—especially in Somalia, where remittances are vital for survival. Set to begin on January 1, 2026, the policy introduces a 1% fee on all international remittances. Initially framed as a 3.5% tax on non-citizens under Donald Trump’s immigration bill, the law aims to fund enforcement measures but could devastate low-income countries.

Remittances: Somalia’s Lifeline

Somalia received around $1.73 billion in remittances in 2023—more than all humanitarian and development aid combined. These funds support families with essentials like food, medicine, education, and water. With foreign aid already being slashed—over 40% of USAID funding to Somalia was suspended in 2025—the added tax on remittances threatens to tip many households into crisis.

Wider Economic Consequences

According to economists, the new tax could cause a 5–6% drop in formal remittance flows, leading to reduced household incomes and weakened consumer demand. In Somalia, where remittances make up to 50% of GDP, the consequences could be catastrophic.

Pushing Transfers Underground

History shows that when remittance costs rise, people switch to informal channels. A 5% fee could reduce official transfers by 17.7% and increase informal flows by over 21%. Migrants may turn to unregulated systems like hawala, courier services, or even cryptocurrency, undermining efforts to build safe and transparent financial systems.

Remittance Services Under Pressure

Somali money transfer companies already face high compliance costs and razor-thin margins. The tax could decrease transfer volumes and increase per-transaction costs, affecting both senders and recipients.

Alternatives to Taxation

Experts argue that lowering transaction fees would be more effective than taxing remittances. Currently, the average global cost of sending money is 6.6%—far above the UN’s 3% goal. Reducing this fee could compensate for more than half the aid losses in several countries, including Somalia.

What’s at Stake

For millions of Somali families, the difference between receiving $100 or $99 could mean the difference between eating or going hungry. While the tax is expected to generate only $10 billion over 10 years, it may cost poorer nations over $2.5 billion annually in lost remittance flows and ripple effects.

As Somalia and other vulnerable nations brace for this change, global policymakers face urgent questions: Is it worth hurting the poorest to fund enforcement measures? Or can there be a smarter, more humane approach?