“Corruption in Lebanon is widespread and permeates all levels of society, as reflected by the country’s global and regional average performances scores in most governance areas,” Transparency International bluntly said regarding Lebanon’s corruption index.
Earlier this month, Bank Audi released its 2018 Q2 report on the economic situation in Lebanon, showing that the aforementioned corruption has brought upon a not-so-uncommon problem in Lebanon: tax evasion.
Tax evasion is endemic in the country
Bank Audi’s report estimated that tax evasion in the country amounted to around $5 billion in 2017, about 10% of GDP.
The taxes that are being evaded include income taxes, VAT and custom duties, Electricity Du Liban (EDL) revenues and property taxes.
“There is no doubt that Lebanon’s resource mobilization (actual public revenues to GDP ratio) of around 20% over the past year is low relative to international norms (36% for advanced economies and 26% for emerging market and developing economies),” the report reads.
“This is partly because Lebanon has relatively lower tax rates but more importantly this is tied to the large fiscal evasion gap that Lebanon suffers from. While it is increasingly difficult to raise taxes in a slowing down real sector environment, the reinforcement of resource mobilization should come from fighting tax evasion, which is a prerequisite for any fiscal soft landing scenario for Lebanon.”
Indeed, it is the lack of stricter controls on tax collection that are resulting in this fiscal evasion.
As it currently stands, Lebanon needs every penny, as it was revealed by the IMF at the start of the year that the Mediterranean country has the third highest debt-to-GDP ratio in the world, at 156.1, or 149%.
The $5 billion that the government is missing out on could go to funding public sector projects, like updated infrastructure and better hospitals and schools. Teachers in public schools often go on strike in demand for higher wages, and a part of this sum could be used to make sure they are paid fairly.
So, which of these taxes are the 3 biggest offenders when it comes to fiscal evasion?
“The largest source of tax evasion is tied to income taxes, estimated at near $2 billion, the equivalent of 3.9% of GDP,” the report states. The source of this is the fiscal evasion in taxes on salaries and profits.
“The former’s estimate is based on a total of salaries accounting for 35% of GDP with an average tax rate of 10%, yielding to potential taxes on salaries of $1.5 billion, while actual collection stands at $0.6 billion, leaving $0.9 billion of evasion. As to taxes on profits that account for 30% of GDP, tax evasion is estimated at $1 billion, after adjusting the actual profit tax figures from the tax paid by banks on financial engineering operations and that is estimated at $775 million.”
Evasion of value-added tax is the second cause of this financial deficit. It is estimated at around 3% of GDP, at about $1.5 billion in lost revenue.
“The IMF analysis measures the overall gap between actual VAT receipts and receipts under a perfectly enforced VAT levied on consumption,” the report explains. “In particular, the VAT compliance gap estimates the impact of imperfect compliance within the current tax system.”
The country could stand to gain a lot if VAT revenue is properly processed and received, “as the structure of the Lebanese economy is oriented towards private consumption and high share of imports.”
Custom duties are next on the list, and the third source of this fiscal evasion. Custom duties are relatively high in the country, so it would make sense why offenders would attempt to bail on paying them.
“On the basis of a 13% average customs on the import bill of $20 billion, potential custom duties should amount to over $2 billion, while actual duties levied amount to $1.5 billion, leaving a fiscal evasion gap of $0.5 billion, the equivalent of 1% of GDP.”
With countries like the UAE and Saudi implementing VAT just this year, they have prepared for instances of fiscal evasion.
The UAE, for one, has taken precautionary measures. In 2017, the Ministry of Finance announced that a business found guilty of tax evasion may be closed up to 72 hours, and charged up to 500% in penalties on the value of VAT owed.
Perhaps if such laws were implemented and more importantly enforced in Lebanon, companies would adhere to tax law.