## 1lbnea2023001 — PREFACE and EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1lbnea2023001 — PREFACE and EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1lbnea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1lbnea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1lbnea2023001.pdf.json) --- ### Mission and consultations - A mission from the IMF Fiscal Affairs Department and Legal Department conducted a mission in Beirut during September 12-23, 2022. - Mission team: Shafik Hebous (mission head), Svetlana Cerovic (MCD), Michael Keen (FAD expert), Lydia Sofrona (LEG expert), Christophe Waerzeggers (LEG), Nate Vernon (FAD). - Meetings were held with: Deputy Prime Minister Mr. Saadeh Al Shami; Ministry of Finance led by Minister Youssef Khalil (including Mr. Georges Maarrawi and Mr. Louay el Hajj Chehade); Minister of Economy Mr. Amin Salam; Minister of Industry Mr. Georges Boujikian; Minister of Energy and Water Mr. Walid Fayad; Governor of the Banque Du Liban Mr. Riad Salameh; Lebanese Customs Administration; private sector (including banks and law firms); Association of Banks in Lebanon (ABL); Chamber of Commerce, Industry, and Agriculture; Regie Libanaise des Tabacs et Tombacs; Investment Development Authority of Lebanon (IDAL); civil society organizations; and the World Bank. - The mission thanks Ms. Sabine El Corm and Ms. Claudine Karaki for organization and data facilitation. ### Context and key numerical facts - Exchange rates: - Lebanese official exchange rate: USD1 = LBP 1,510. - Market rate: about USD1 = LBP 38,000 as of September 2022. - Estimated revenue loss from mis-valuation at the border (2022; % of GDP), using administratively fixed exchange rate LBP 1,507 versus market ~LBP 38,000: - Customs: 0.7 - Excise duties: 1.4 - Value-Added Tax: 2.7 - Customs + excises + VAT: 4.8 - Estimated revenue loss from erosion of the real value of specified excises (2022; % of GDP): - Excise duties (erosion): 0.8 - Total cost (mis-valuation + erosion): 5.6 - Comparable estimates for 2023: - Customs: 0.6 - Excise duties: 0.6 - Value-Added Tax: 2.3 - Customs + excises + VAT: 3.5 - Excise duties (erosion): 0.8 - Total cost: 4.3 - Inflation: - Inflation reached 211.4 percent in May 2022. ### Framing of problems - Mis-valuation at the border: underpricing imports for tax purposes due to use of administratively fixed exchange rates and non-market valuation methods has caused large revenue losses. - High inflation and unchanged nominal statutory rates/thresholds: failure to reindex excise schedules, VAT thresholds, and nominal tax brackets has eroded revenues and fiscal progressivity. - Preferential tax treatments and exemptions: preferential treatment for capital income (notably for non-labour earners), exemptions for certain corporate regimes, and inefficient investment incentives have weakened revenue and equity outcomes. ### Immediate corrective measures (recommended) - Valuation and exchange rate use: - Use the market exchange rate uniformly across the tax system for valuation purposes (with the option to use the "Sayrafa" platform rate during a short transition). - Do not adopt a pre-specified administratively fixed lower exchange rate for tax valuation purposes. - Link nominal-sized tax thresholds and schedules to an inflation index. - VAT and VAT on imports: - Use the market exchange rate (or "Sayrafa" during transition) uniformly to value imports for VAT purposes. - Restore the real VAT registration threshold to about $75,000. - Adopt automatic inflation linkage for VAT registration threshold and other nominal-value VAT rules (possibly beyond a certain reference value). - Excise duties: - Re-establish specific excise amounts to their pre-crisis real values. - Adopt automatic indexation of specific excise amounts to an inflation index (including banded rates where applicable). - Priority: impose a diesel excise in the near term; introduce propane and butane excises legislatively with automatic indexation, without requiring later parliamentary approval. - Income taxes and administration: - Automatically adjust income tax brackets for inflation. - Enable tax administration access to relevant bank information. - Begin receiving information from the Global Forum on beneficial ownership/foreign holdings of Lebanese residents for tax purposes. - Bring capital gains from individuals’ sales of listed shares within the taxable base. - Remove withholding tax exemptions on dividend distributions to individuals from holding or offshore companies. - Limit capital-gains exemptions on individual property sales to a single principal residence. - Eliminate preferential tax treatment for export proceeds under the corporate income tax. - Remove special reduced rates for profits that are reinvested (and revoke such reductions retroactively). - Subject corporate capital gains to the general corporate income tax rate. - Real estate taxes: - Use the market exchange rate for all property transaction taxes denominated in dollars or other foreign currencies. - Revoke automatic property tax exemptions for vacant properties and preferential treatment for second homes. - Expand registration fees to cover share transfers whose price derives at least 50% from underlying real estate. ### Short-term implementation priorities for 2023 - VAT: - Restore VAT’s effectiveness through measures to reduce compliance and policy gaps without increasing the VAT rate; moderate measures could yield additional revenue of 1% of GDP. - Specific short-term VAT measures: - Tax inputs for sectors/activities exempt under Article 59. - End the VAT refund system for tourists. - Excises: - Introduce a diesel and fuel oil excise of USD 0.25 per liter and restore pre-crisis specific excise levels for gasoline and kerosene in USD terms. - These excises can be phased in over three years, but should be legislated so subsequent parliamentary approval is not required. - Income tax and corporate measures: - Place professionals under the real-profit regime and apply withholding taxes on payments they receive. - Phase out offshore and holding company regimes, allowing current taxpayers to close operations tax-free. - Introduce a limit on net interest deductibility (thin-cap rules) with limited grandfathering for existing loan arrangements. - Strengthen residence rules for individuals and companies and define permanent establishment and comprehensive related-party definitions. - Begin estimating revenue losses from tax expenditures (for both income tax and VAT). - Real estate: - Simplify property valuation between central and local authorities to achieve a unified property valuation system. ### Medium-term reforms (preparatory actions in 2023 for implementation in 2024/2025) - Income tax law replacement: - Prepare a new, modern income tax law to replace the existing law that is no longer administrable. The new law should: - Ensure tax neutrality across income sources and legal forms. - Protect the tax base with modern anti-avoidance rules. - Provide cost-based, efficient tax incentives. - Introduce strong source-of-income rules, residence rules for controlled foreign companies, transfer pricing rules, and a general anti-abuse rule. - VAT medium-term changes: - Broaden VAT to include more property transactions, including new residential properties. - Revoke the recent VAT exemption for diesel. - Tighten exemptions on health and education. - Broaden VAT on fee-based financial services. - Improve cross-border VAT rules. - Excise medium-term changes: - Review implicit tax treatment of tobacco products in light of revenue and health objectives. - Income tax medium-term changes: - Tax rental income of individuals. - Introduce a simplified regime for businesses with turnover below the VAT registration threshold. - Make the real-profit regime mandatory for corporate taxpayers, businesses above the VAT registration threshold, and those registering voluntarily for VAT. - Harmonize tax rate schedules on wages and business activities for individuals. - Conduct a comprehensive review of investment-law incentives, replace them with cost-based incentives based on clear cost-benefit analysis, and begin regular publication of tax expenditure reports. - Real estate medium-term changes: - Improve property valuation quality and consider extending recurrent property taxes to include undeveloped land. ### VAT — performance, drivers, and reforms - Current features: - Single positive rate: 11 percent (raised from 10 percent in 2017). - Zero percent on exports; crediting and refund mechanism in place. - Performance facts: - VAT revenue peaked at nearly six percent of GDP in 2008, declined to 4.1 percent in 2019, then plummeted to less than two percent in 2020 and 2021. - C-efficiency: around 57 percent in 2008; around 33 percent in pre-crisis 2019; comparator average C-efficiency around 47 percent; fell to about 14 percent in 2020. - Revenue gains from reforms: - Revaluing imports to the market rate: revenue gain around 2.6 percent of GDP in 2022 (direct + indirect effects). - Improving VAT structure: additional revenue of around 1.7 percent of GDP could be raised without increasing the standard rate by raising C-efficiency from pre-crisis level to comparator average. - Potential VAT in ‘normal’ times might be around eight percent of GDP (standard rate applied to all consumption and perfectly enforced); current VAT gap compared to pre-crisis 2019 around 3.9 percent of GDP. - Recommendations (VAT): - Immediately: - Use the market exchange rate (possibly transition using the Sayrafa rate) uniformly to value imports for VAT purposes. - Return the real value VAT threshold to around USD 75,000. - Near term: - Tax inputs into the exempt sectors or activities specified in Article 59. - End the tourist refunds scheme. - Medium term: - Tax immovable property transactions, including new residential property. - Remove the recently introduced VAT exemption on diesel. - Tighten exemptions for health and education. - Tax fee-based financial services more comprehensively. - Improve cross-border rules. - Adopt automatic indexation (perhaps beyond some trigger value) of the VAT threshold and other nominal VAT provisions. ### Excises — erosion, fuel policy, and recommendations - Trends and shortfall: - Excise revenue: around 2.3 percent of GDP in 2011; 1.5 percent pre-crisis 2019; 0.5 percent in 2021. - Specific excises specified in LBP per unit have lost real value; estimated revenue shortfall in 2022 from erosion about 0.8 percent of GDP. - Fuels and diesel: - Proposed diesel excise path: increase from USD 0.10 in 2023 to USD 0.25 per liter in 2025. - Estimated revenue from diesel excise: raise 1.5 to 3 percent of GDP (assuming imports are half of the 2013-2019 annual average). - Recommended immediate restoration of gasoline and kerosene excises to pre-crisis USD levels: gasoline (95-98 octane) pre-crisis USD per liter 0.165; kerosene pre-crisis USD per liter 0.011. - Near-term recommendation: introduce an excise on diesel and fuel oil of USD 0.25 per liter; phase-in over three years with legislation providing automatic increases. - Specific vs ad valorem excises: - Specific excises: appropriate for quantity-based externalities (e.g., pollution); must be restored and indexed to maintain real value. - Recommendations: - Immediately restore specific excises towards pre-crisis real values. - Adopt automatic indexation of specific excises (possibly above some inflation trigger). - Distributional and climate considerations: - Top 25 percent by income consume 55 percent of fuels and 38 percent of electricity; poorest 25 percent consume 6 percent of fuels and 16.5 percent of electricity. - Fuel excises support UNFCCC commitments and renewable energy targets; complementary measures include targeted support for vulnerable households and investment in public transport. ### Income taxes — shortcomings and reforms - System features and problems: - Dual income tax features: progressive employment income (top marginal rate 25 percent) and flat capital income regimes. - Interest income tax: 10 percent (temporarily raised from 7 percent for three years from August 2019, later extended to the end of 2022). - Realized capital gains generally taxed at 15 percent; standard CIT 17 percent. - Dividends taxed at 10 percent but exempt if distributed by ‘holding companies’ or ‘offshore companies’. - Three business regimes (real, lump sum, estimated) create incoherence and avoidance opportunities. - Immediate individual-level reforms: - Adjust income tax brackets for inflation automatically. - Include capital gains from sale of shares in joint stock companies by individuals in the taxable base. - Abolish WHT exemption for dividend distributions to individuals from holding and offshore companies. - Limit capital gains exemption on sale of real property by individuals to one primary residence. - Enable tax administration access to banking information; begin receiving AEOI data. - Professionals and small businesses: - Place professionals manifestly capable of bookkeeping into the real profits regime. - Use withholding tax on payments to professionals by businesses and public entities (creditable). - Introduce a simplified presumptive turnover tax for businesses below the VAT threshold (recommended rate example: 2 to 3 percent; align threshold with VAT threshold ~USD 75,000). - Corporate tax base and incentives: - Abolish preferential CIT treatment for exports immediately. - Abolish reduced CIT rates for reinvested profits and tax holidays, with grandfathering of existing ones. - Include corporate capital gains in the CIT base taxed at the standard CIT rate. - Near term: eliminate offshore and holding company regimes (allow unwind without tax). - Medium term: subject all CIT taxpayers to the real profits regime; reform Investment Law incentives to cost-based, time-limited measures; publish annual tax expenditure reports. - Base protection and international norms: - Address gaps: no clear residence definition in ITL, no PE definition, weak source rules, no interest limitation rules, inconsistent transfer pricing definitions, no CFC rules, no offshore indirect transfers rule, no GAAR. - Near-term priorities: - Strengthen residence rules, introduce PE and comprehensive related-party definitions, introduce interest limitation rule (with limited grandfathering), and strengthen transfer pricing framework. - Medium-term priorities: - Introduce strong source rules, CFC rules, offshore indirect transfers rule, and consider a GAAR as part of the ITL reform. - Global Minimum Tax (Pillar 2) implications: - Pillar 2 aims for a 15 percent global minimum effective tax; application threshold: multinational groups with global annual turnover over € 750 million. - Table 6 country-by-country data indicate potential exposure; policy options include increasing CIT, introducing a minimum effective rate, or adopting a QDMTT. - First step: identify which entities in Lebanon will be in scope and their effective tax rates. ### Property taxes — problems and reforms - Components and immediate issues: - Property registration fee: 5 percent of transaction value (2 percent for commercial real estate); transaction contracts mostly denominated in USD and converted for tax at official exchange rate. - Built property tax: recurrent tax on estimated annual rental value; progressive rates from 4 to 14 percent; exemption threshold LBP 20 million per property up to two properties per owner; vacant properties exempt. - Inheritance and gift tax: rates range from 3 to 45 percent. - Immediate priorities: - Remove the built property tax exemption for vacant properties (estimated yield around 0.3 percent of GDP). - Use the market exchange rate for all transaction taxes on USD (or other foreign currency) denominated property transactions. - Extend registration fee to transfers of shares that derive 50 percent or more of their value (directly or indirectly) from real property. - Apply built property tax to all but one principal residence per owner; remove preferential treatment for second properties. - Valuation system: - Short term: convert USD-denominated property transactions for tax purposes using the market exchange rate. - Near term: streamline and centralize valuation across central and local government to achieve a single property valuation. - Medium term: improve valuation quality, update values regularly, and consider broadening recurrent property tax to unbuilt land. ### Revenue impact calculations and data notes - Appendix 1 summary: - Data sources: Customs values in USD and tax rates, exchange rates (official, Sayrafa, market), GDP, actual revenue collections up to 2021. - Adjustments: imported goods ratios adjusted to remove an “anticipation effect” for 2020–2022; imports-to-GDP prior to adjustment were 70-110 percent and adjusted toward 2017-2019 average of 38 percent. - Note: Since Sayrafa rate not available in 2020, it is assumed to be 80 percent of the market rate. - VAT threshold erosion: - VAT registration threshold originally LBP 100 million (equivalent around USD 75,000 historically); at market exchange rate the threshold is now well below USD 10,000. - Returning threshold to around USD 75,000 would eliminate three-quarters of taxpayers while preserving more than 90 percent of VAT revenue (illustration using USD 1 = LBP 12,000). - Selected exact figures preserved from source tables and text (examples): - VAT standard rate: 11 percent. - Excise pre-crisis gasoline (95-98 octane) USD per liter: 0.165. - Proposed diesel excise path: USD 0.10 in 2023 to USD 0.25 per liter in 2025. - Estimated diesel excise revenue: 1.5 to 3 percent of GDP. - Inflation: 211.4 percent in May 2022. - Offshore/holding companies (2019): over 3,000 holding and 6,000 offshore companies; holding companies earned USD 190 million and held USD 3.2 billion in fixed assets; offshore companies earned USD 1.5 billion and held USD 1.9 billion in fixed assets; applying CIT and WHT would raise USD 430 million (1 percent of GDP) under assumptions in the report. - Telecom sector: contributed 12.4 percent of total revenues on average during the last decade; transfers from telecom surpluses peaked in 2014 at 4 percent of GDP. ### Summary of timing for key recommendations - Immediate (now / 2023): - Use market exchange rate across tax system (Sayrafa allowed during brief transition). - Index nominal thresholds and specific excises to inflation. - Restore VAT threshold to around USD 75,000. - Restore specific excises to pre-crisis USD levels and introduce diesel excise with legislative automatic phasing to USD 0.25 per liter. - Abolish certain exemptions (dividends to individuals from holding/offshore companies; capital gains on shares; vacant property exemption); enable bank data access; begin AEOI receipt. - Near term (2023 actions for implementation / 2024): - Tighten VAT refunds and Article 59 refunds; end tourist refund scheme. - Place professionals under real-profits regime and introduce withholding on professional payments. - Phase out offshore and holding regimes with grandfathering. - Introduce interest limitation rule with limited grandfathering; strengthen residence and PE rules; estimate tax expenditures. - Streamline property valuation and widen registration fee to share transfers tied to property. - Medium term (2024/2025 and beyond): - Draft and enact a new modern ITL with source rules, CFC rules, transfer pricing, GAAR, and anti-avoidance measures. - Broaden VAT to property transactions and fee-based financial services; remove diesel VAT exemption. - Reform Investment Law incentives to cost-based, time-limited measures and publish tax expenditure reports. - Improve property valuation, consider recurrent tax on unbuilt land, and make real-profits regime compulsory for larger taxpayers. *Source: PREFACE and EXECUTIVE SUMMARY, IMF mission report (1lbnea2023001).* ### PREFACE ___________________________________________________________________________________________________ 6 ### PREFACE ### Mission and consultations - A mission from the IMF Fiscal Affairs Department and Legal Department conducted a mission in Beirut during September 12-23, 2022. - Mission team: Shafik Hebous (mission head), Svetlana Cerovic (MCD), Michael Keen (FAD expert), Lydia Sofrona (LEG expert), Christophe Waerzeggers (LEG), Nate Vernon (FAD). - Meetings were held with: Deputy Prime Minister Mr. Saadeh Al Shami; Ministry of Finance led by Minister Youssef Khalil (including Mr. Georges Maarrawi and Mr. Louay el Hajj Chehade); Minister of Economy Mr. Amin Salam; Minister of Industry Mr. Georges Boujikian; Minister of Energy and Water Mr. Walid Fayad; Governor of the Banque Du Liban Mr. Riad Salameh; Lebanese Customs Administration; private sector (including banks and law firms); Association of Banks in Lebanon (ABL); Chamber of Commerce, Industry, and Agriculture; Regie Libanaise des Tabacs et Tombacs; Investment Development Authority of Lebanon (IDAL); civil society organizations; and the World Bank. - The mission thanks Ms. Sabine El Corm and Ms. Claudine Karaki for organization and data facilitation. ### Context and executive summary — key numerical facts - Lebanese official exchange rate: USD1 = LBP 1,510. The market rate is about USD1 = LBP 38,000 as of September 2022. - Estimated revenue loss from mis-valuation at the border (due to using an administratively fixed exchange rate of LBP 1,507 versus market rate ~LBP 38,000 as of 22 September/September 2022): total estimated loss equal to 4.8 percent of GDP in 2022. Breakdown (2022; % of GDP): - Customs 0.7 - Excise duties 1.4 - Value-Added Tax 2.7 - Customs + excises + VAT 4.8 - Estimated revenue loss from the erosion of the real value of specified excises (2022; % of GDP): - Excise duties 0.8 - Total cost (mis-valuation + erosion of excise real values) 5.6 - Comparable estimates for 2023: - Customs 0.6 - Excise duties 0.6 - Value-Added Tax 2.3 - Customs + excises + VAT 3.5 - Excise duties (erosion) 0.8 - Total cost 4.3 ### Framing of problems - Mis-valuation at the border: underpricing imports for tax purposes due to use of administratively fixed exchange rates and non-market valuation methods has caused large revenue losses. - High inflation and unchanged nominal statutory rates/thresholds: failure to reindex excise schedules, VAT thresholds, and nominal tax brackets has eroded revenues and fiscal progressivity. - Preferential tax treatments and exemptions: preferential treatment for capital income (notably for non-labour earners), exemptions for certain corporate regimes, and inefficient investment incentives have weakened revenue and equity outcomes. ### Immediate corrective measures (recommended) - Valuation and exchange rate use: - Use the market exchange rate uniformly across the tax system for valuation purposes (with the option to use the "Sayrafa" platform rate during a short transition). - Do not adopt a pre-specified administratively fixed lower exchange rate for tax valuation purposes. - Link nominal-sized tax thresholds and schedules to an inflation index. - Correcting VAT and VAT on imports: - Use the market exchange rate (or "Sayrafa" during transition) uniformly to value imports for VAT purposes. - Restore the real VAT registration threshold to about $75,000. - Adopt automatic inflation linkage for VAT registration threshold and other nominal-value VAT rules (possibly beyond a certain reference value). - Excise duties: - Re-establish specific excise amounts to their pre-crisis real values. - Adopt automatic indexation of specific excise amounts to an inflation index (including banded rates where applicable). - Priority: impose a diesel excise in the near term; introduce propane and butane excises legislatively with automatic indexation, without requiring later parliamentary approval. - Income taxes and administration: - Automatically adjust income tax brackets for inflation. - Enable tax administration access to relevant bank information. - Begin receiving information from the Global Forum on beneficial ownership/foreign holdings of Lebanese residents for tax purposes. - Bring capital gains from individuals’ sales of listed shares within the taxable base. - Remove withholding tax exemptions on dividend distributions to individuals from holding or offshore companies. - Limit capital-gains exemptions on individual property sales to a single principal residence. - Eliminate preferential tax treatment for export proceeds under the corporate income tax. - Remove special reduced rates for profits that are reinvested (and revoke such reductions retroactively). - Subject corporate capital gains to the general corporate income tax rate. - Real estate taxes: - Use the market exchange rate for all property transaction taxes denominated in dollars or other foreign currencies. - Revoke automatic property tax exemptions for vacant properties and preferential treatment for second homes. - Expand registration fees to cover share transfers whose price derives at least 50% from underlying real estate. ### Short-term implementation priorities for 2023 - VAT: restore VAT’s effectiveness through measures to reduce compliance and policy gaps without increasing the VAT rate; moderate measures could yield additional revenue of 1% of GDP. Specific short-term VAT measures: - Tax inputs for sectors/activities exempt under Article 59. - End the VAT refund system for tourists. - Excises: - Introduce a diesel and fuel oil excise of $0.25 per liter and restore pre-crisis specific excise levels for gasoline and kerosene in USD terms. - These excises can be phased in over three years, but should be legislated so subsequent parliamentary approval is not required. - Income tax and corporate measures: - Place professionals under the real-profit regime and apply withholding taxes on payments they receive. - Phase out offshore and holding company regimes, allowing current taxpayers to close operations tax-free. - Introduce a limit on net interest deductibility (thin-cap rules) with limited grandfathering for existing loan arrangements. - Strengthen residence rules for individuals and companies and define permanent establishment and comprehensive related-party definitions. - Begin estimating revenue losses from tax expenditures (for both income tax and VAT). - Real estate: simplify property valuation between central and local authorities to achieve a unified property valuation system. ### Medium-term reforms (preparatory actions in 2023 for implementation in 2024/2025) - Income tax law replacement: prepare a new, modern income tax law to replace the existing law that is no longer administrable. The new law should: - Ensure tax neutrality across income sources and legal forms. - Protect the tax base with modern anti-avoidance rules. - Provide cost-based, efficient tax incentives. - Introduce strong source-of-income rules, residence rules for controlled foreign companies, transfer pricing rules, and a general anti-abuse rule. - VAT medium-term changes: - Broaden VAT to include more property transactions, including new residential properties. - Revoke the recent VAT exemption for diesel. - Tighten exemptions on health and education. - Broaden VAT on fee-based financial services. - Improve cross-border VAT rules. - Excise medium-term changes: review implicit tax treatment of tobacco products in light of revenue and health objectives. - Income tax medium-term changes: - Tax rental income of individuals. - Introduce a simplified regime for businesses with turnover below the VAT registration threshold. - Make the real-profit regime mandatory for corporate taxpayers, businesses above the VAT registration threshold, and those registering voluntarily for VAT. - Harmonize tax rate schedules on wages and business activities for individuals. - Conduct a comprehensive review of investment-law incentives, replace them with cost-based incentives based on clear cost-benefit analysis, and begin regular publication of tax expenditure reports. - Real estate medium-term changes: improve property valuation quality and consider extending recurrent property taxes to include undeveloped land. ### Other policy and technical recommendations - End excessive preferential treatment for capital income to restore revenue and equity. Specific measures recommended: repeal exemptions for: - Withholding tax exemption on dividend distributions to individuals from holding or offshore companies. - Capital gains on sales of shares in joint-stock companies by individuals. - Capital gains on sales of non-primary residential property by individuals. - Corporate tax base protections: include corporate capital gains in the corporate income tax base (rather than as separately taxed items). - Telecommunications and other sector-specific notes are included in appendices (not summarized here). *Source: PREFACE and Executive Summary, IMF mission report (1lbnea2023001).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and urgency - Lebanon’s tax revenue more than halved between 2019 and 2021, in the face of the deepest economic crisis since the end of the civil war. - Without taking active tax measures now, the decline in revenue is likely to continue in 2022 and 2023 with severe ramifications beyond foregone receipts, including: undermining the progressivity of the system, and aggravating inequality and distortions. - The report identifies tax policy reform options to stop the drain on Lebanon’s tax revenue in the immediate and near-terms and to move toward a more efficient, effective, and inclusive tax system in the medium-term. - The analysis emphasizes the need for a holistic view of the tax system to guide reforms and balance trade-offs, rather than a piecemeal approach with ad hoc uncoordinated measures, and for a strategic, sequenced approach to developing a rapid and powerful emergence from current difficulties. - It will be critical to assess the impact of recommended measures on the most vulnerable and adopt compensating spending measures as needed (including, potentially, through the Expanded Social Safety Net; ESSN). ### A package of immediate measures - Correcting mis-valuation - A single market exchange rate should be used for all valuations for tax purposes. - For a short-term transition, an index that is reasonably close, and converging, to the market exchange rate can be used. - The exchange rate for valuing taxes is not meant to (and should not) be a tax policy choice or set at some ad hoc preset value. - Adopting a lower rate than the Sayrafa or any preset value in absolute amount for tax purposes is strongly recommended against. - The mis-valuation of customs, excises, and VAT at the border—due to the use of the predetermined exchange rate of LBP 1,507 (compared to the market rate of about LBP 38,000 as of September 22, 20222)—is estimated to cause a loss of revenue of 4.8 percent of GDP in 2022. This cost is decomposed as below: - Estimated revenue loss from mis-valuation at the border (% GDP) - Customs: 0.7 (2022), 0.6 (2023) - Excises: 1.4 (2022), 0.6 (2023) - VAT: 2.7 (2022), 2.3 (2023) - Customs + Excises + VAT: 4.8 (2022), 3.5 (2023) - Estimated revenue loss from the lost real value of specific excises (% of GDP) - Excises: 0.8 (2022), 0.8 (2023) - Total cost: 5.6 (2022), 4.3 (2023) - Source: IMF staff calculation (as detailed in Appendix 1 and Section II of this report). - Correcting for high inflation - Specific excises and thresholds that are set in nominal values should be reset and indexed to inflation. - Failing to reset the specific excises (mainly on fuel) has led to a loss of revenue of 0.8 percent of GDP, bringing the total forgone revenue (from the lack of response to the depreciation and inflation) in 2022 to 5.6 percent of GDP. - The VAT threshold should be restored to an appropriate level to ease administrative and compliance costs. - Employment income tax brackets should be adjusted and indexed to inflation to reinstate the original schedule of increasing average tax rates and address the continuing damage to both horizontal and vertical equity. - In all cases, indexing should be automatic. - Ending excessively favorable capital income tax treatment - Under-taxation of the affluent, mainly non-wage earners, weakens revenues, the role of tax policy in income redistribution, and tax morale. - The following exemptions should be repealed to close loopholes: - the withholding tax on dividend distributions to individuals from holding and offshore companies; - capital gains from the sale of shares in joint stock companies; and - capital gains from the sale of real property for other than the primary residence. - Shortcomings in corporate taxation should also be addressed, including by: - eliminating the preferential tax treatment for export earnings (inconsistent with current international trade standards); - including corporate capital gains to the corporate income tax base (rather than taxing them separately). - Unlocking the potential of property taxation - The exemption of vacant properties—which ultimately discriminates in favor of idle resources and easing tax evasion—should be abolished immediately. - This measure should be part of greater efforts, in the immediate- and near-terms, to improve the quality of the property valuation system and keep property values current. ### Near-term measures (focus for 2023) - Making the VAT great again - Strengthen VAT design by near-term measures to lower the compliance and policy gaps. - Estimates suggest that—without raising the VAT rate—relatively moderate measures can yield extra revenue of 1 percent of GDP. - Specific recommendations to broaden the VAT base include removing the distortionary exemption of inputs into specified sectors and generally restricting entitlements to refunds (as much as possible) to VAT registered businesses by abolishing the tourist refunds scheme, inter alia. - Making better use of excises - Excises are efficient for revenue and environmental benefits with modest impact on prices. - An excise on diesel that increases from USD 0.10 in 2023 to USD 0.25 per liter in 2025 is estimated to raise 1.5 to 3 percent of GDP in revenues. - The tax on diesel is the priority and should be introduced in the near-term; excises on propane and butane could be phased-in automatically in the legislation without requiring further parliamentary approval. - Closing loopholes and modernizing the corporate income tax (CIT) - Professionals should be taxed in the real profits’ regime and with the use of withholding taxes on payments to professionals for services. - The regimes of offshore and holding companies (that no longer conform with international standards), and wasteful CIT incentives should be abolished. ### Medium-term measures (preparation in 2023 for effect in 2024/2025) - Upgrade income taxation with a new income tax law to replace the existing outdated one. - Ensure tax neutrality across income sources and legal forms. - Protect the base with up-to-date anti-tax avoidance rules. - Incorporate efficient and effective cost-based tax incentives. - Finetune the VAT by, among other things, removing the exemption on diesel and improving the design of the cross-border rules. ### Framing the problem: mis-valuation at the border and high inflation - Mis-valuation at the border - The disparity between the market (‘parallel’) exchange rate and the predetermined ‘official’ exchange rate—exceeding a multiple of 25 as of September 2022—has caused significant problems in the tax system. - Consequences include: - An immense loss in tax revenue, estimated at 3.6 percent of GDP for 2023: Customs, excises, and VAT are mis-valued at the border because they are imposed on imports using the predetermined exchange rate of LBP 1 = USD 1,507 rather than the market rate (about LBP 38,000 per USD 1 in September 2022), implying a base value of less than five percent of the tax base at the market rate. - Direct loss in revenues from customs and excises of 0.64 and 0.63 percent of GDP, respectively. - In practice, massive leakage in VAT revenue reaching almost 2.3 percent of GDP. - Regressive consequences impacting vertical equity and horizontal equity (example: an annual salary of USD 25,000 would face an average tax rate of 0.3 percent or about 23 percent depending on whether it is paid in USD or in LBP, respectively). - Distortions including nullifying policy tools and inconsistency in valuation across taxes and taxpayers. - Administration and compliance complications due to diminished real thresholds for VAT registration and inclusion in the Large Taxpayers Unit (LTU). - Table 1. Revenue Foregone Due to Mis-Valuation of the Tax Base of Imports (% of GDP) - 2020: Loss of revenue, assuming the Sayrafa exchange rate 0.72; Loss of revenue, assuming the market exchange rate 1.27 - 2021: Loss of revenue, assuming the Sayrafa exchange rate 2.27; Loss of revenue, assuming the market exchange rate 3.66 - 2022: Loss of revenue, assuming the Sayrafa exchange rate 4.18; Loss of revenue, assuming the market exchange rate 4.86 - 2023: Loss of revenue, assuming the Sayrafa exchange rate 3.10; Loss of revenue, assuming the market exchange rate 3.58 - Source: IMF staff calculation (see Appendix 1). - High inflation - Inflation reached 211.4 percent in May 2022. - Nominal tax brackets and specific excises have lost real value and need automatic indexation to restore equity and revenue. ### Summary of recommendations - Immediate recommendations — Valuation - Use the market exchange rate (possibly using the Sayrafa rate during a transition period) uniformly in the entire tax system for valuation. - Nominal magnitudes should be indexed to inflation. - Immediate recommendations — VAT - Use the market exchange rate (possibly transition using the Sayrafa rate) uniformly to value imports for VAT purposes. - Return the real value of the VAT threshold to around USD 75,000. - Adopt automatic indexation to inflation (perhaps beyond some trigger value) of the threshold and other VAT provisions that are specified in nominal terms. - Immediate recommendations — Excises - Restore specific excises towards their real pre-crisis values. - Adopt automatic indexation of specific excises, including bracket ranges (perhaps beyond some trigger level). - As with all other excises, adopt automatic indexation of the fuel excises (perhaps beyond some trigger level). - Immediate recommendations — Income Taxes - Adjust the income tax brackets for inflation automatically. - Enable the tax administration to access relevant banking information. - Start receiving and acting upon information on offshore holdings on Lebanese residents for tax purposes through the Global Forum framework. - Include capital gains from the sale of shares in joint stock companies by individuals in the taxable base. - Abolish the WHT exemption for dividend distributions to individuals from holding and offshore companies. - Limit the exemption from the capital gains tax of gains from the sale of real property by individuals to one primary residence. - Abolish the preferential CIT treatment for export earnings. - Abolish reduced CIT rates for reinvested profits, with grandfathering. - Subject corporate capital gains to the standard CIT rate. - Immediate recommendations — Property Taxes - Use the market exchange rate for all transaction taxes on property transaction that are denominated in USD (or other foreign currencies). - Remove the built property tax exemption for vacant properties and the preferential treatment for second properties. - Extend the registration fee to transfers of shares that derive their value primarily (50 percent or more) directly or indirectly from real property. - Near-term recommendations — VAT - Tax inputs into the exempt sectors or activities specified in Article 59. - End the tourist refunds scheme. - Near-term recommendations — Excises - Introduce an excise on diesel and fuel oil of USD 0.25 per liter and restore excises on gasoline and kerosene to pre-crisis levels in USD terms. - These taxes could be phased-in over three years but should avoid the need for subsequent parliamentary approval. - Near-term recommendations — Income Taxes - Subject professionals to the real profits regime and use a WHT on payments to professionals. - Eliminate the offshore and holding companies’ regimes, with existing taxpayers allowed to unwind their structures without tax. - Introduce an interest limitation rule, with limited grandfathering for existing loan arrangements. - Strengthen residence rules for individuals and corporations. - Introduce a PE definition and comprehensive related party definitions. - Estimate revenue foregone from key income tax (and VAT) expenditures. - Near-term recommendations — Property Taxes - Streamline the property valuation system between the different levels of government and agencies involved to achieve a single property valuation. - Medium-term recommendations — VAT - Tax immovable property transactions, including in new residential property, more comprehensively. - Remove the recently introduced VAT exemption on diesel. - Tighten exemptions for health and education. - Tax fee-based financial services more compressively. - Improve the design of the cross-border rules. - Medium-term recommendations — Excises - Review the implicit tax treatment of tobacco products, in the light of both revenue and health objectives. - Medium-term recommendations — Income Taxes - Subject rental income of individuals to income tax. - Introduce a simplified regime for businesses below the VAT threshold. - Make the real profits regime compulsory for all CIT payers, businesses with turnover in excess of the VAT threshold, and all who register voluntarily for the VAT. - Unify the rates schedules for wages and business activity of individuals. - Thoroughly review and reform Investment Law incentives and replace by cost-based incentives that are warranted by explicit cost-benefit analysis. - Start regular publication of tax expenditure reports. - Introduce strong source rules, CFC rules, transfer pricing rules, an offshore indirect transfers rule and consider a GAAR as part of the ITL reform. - Medium-term recommendations — Property Taxes - Improve the quality of the property valuation system and keep property values current. - Consider broadening the recurrent property tax base to unbuilt land. *Source: EXECUTIVE SUMMARY, 1lbnea2023001 - EXECUTIVE SUMMARY.* ### 7. While distinct from the problems of mis-valuating the tax base, relatedly, high ### 7. While distinct from the problems of mis-valuating the tax base, relatedly, high ### Effects of high inflation on revenue and efficiency - Specific excises, tariffs, and other charges set in LBP have lost their real values, reducing the VAT base into which they enter and nullifying their intended policy impact. - The time difference between collection and the taxable event reduces the real value of tax receipts (the ‘Tanzi effect’). - Inflation reduces the real value of depreciation allowances under the corporate income tax (CIT) and encourages finance by borrowing rather than equity. - Fixed penalty amounts become meaningless, eroding incentives to comply. ### Correction of mis-valuation and for high inflation - Valuation for tax purposes—at the border (customs, excises, and VAT) or for income taxes—should be at the same market exchange rate. The exchange rate for valuating taxes is not meant to be a tax policy choice or ad hoc preset value. - Most countries do not face a discrepancy between official and market exchange rates as in Lebanon. - During 2022-2023, the ‘Sayrafa’ rate can be transitionally used for valuation for tax purposes, with the prospect that it will converge to the market rate (IMF, 2022c). - At 29,000 LBP per 1 USD, the Sayrafa rate has been higher than the official exchange rate but remained below the market rate (by about LBP 9,000 as of September 2022). - Valuation of imports using the Sayrafa rate would still fail to recover 0.5 percent of GDP of revenues (from VAT, excises, and tariffs) compared to the market rate. - Adopting a lower rate than the Sayrafa or any preset absolute LBP value for tax purposes is strongly discouraged. - If tax policy seeks to mitigate a possible pass-through to retail prices of necessary food products and medicine, the rates of tariffs could be revisited. The VAT should maintain a uniform rate (Section III. B). Redistribution to low-income households is ideally, and feasibly, achieved using targeted spending measures. - Specific taxes and charges set in nominal LBP values should be indexed to inflation. - Discussions about levels for the VAT threshold, specific excises, and employment income tax brackets are in Sections III. C, IV. B, and V. C, respectively. - The Tanzi effect can be mitigated by automatic indexation (perhaps beyond some threshold inflation rate) of specific taxes and other tax provisions specified in LBP terms (for instance penalties). - Further measures include introducing quarterly installments of annual income taxes (IMF, 2004; IMF, 2018) and withholding on professional services (V.E). ### Recommendations (immediate) - Use the market exchange rate (possibly using the Sayrafa rate over a brief transition period) uniformly in the entire tax system for valuation. - Index nominal magnitudes to inflation, perhaps beyond some threshold rate. *The Sayrafa rate is adopted by the Banque Du Liban (BDL), and is ambiguously linked to the trading volume in the ‘Sayrafa platform’ that is accessible to money transfer companies and banks.* ### Revenue impact of mis-valuation (summary) - A figure (Figure 2) illustrates revenue impact of mis-valuation across 2013–2024 for Customs, Excises, and Import VAT, measured in Per cent of GDP (charts distinguishing Official exchange rate, Sayrafa exchange rate, Market exchange rate, Actual). - Note: the relatively high revenue gain in 2022, as compared to 2023, reflects the increase in imports-to-GDP caused by the documented anticipation effect in 2022 and the expected lag in 2023’s imports. This is especially relevant for excises applied to vehicles, as vehicle imports saw a disproportionately large increase in 2022. ### III. VAT — Current situation and performance - The VAT continues to be Lebanon’s main source of tax revenue. Introduced in 2002, it remains the single most important contributor to total tax revenue. - The VAT features: - Single positive rate—raised to 11 percent in 2017 from 10 percent at introduction. - Applied in principle on all goods and services whether imported or domestically supplied, with crediting and refund mechanism. - Zero percent rate on exports. - Generally clear drafting style. - Despite strengths, significant room for improvement exists after two decades. Key performance facts and trends - VAT revenue peaked at nearly six percent of GDP in 2008, declined to 4.1 percent in 2019, then plummeted to less than two percent in 2020 and 2021. - The current standard rate of 11 percent is notably lower than in all comparators. - C-efficiency (ratio of VAT revenue actually collected to revenue if compliance were perfect and all consumption taxed at standard rate): - From around 57 percent in 2008 to around 33 percent in (largely) pre-crisis 2019. - Comparator average C-efficiency around 47 percent. - Fell precipitately to about 14 percent in 2020. Drivers of poor VAT performance - Structural weaknesses in design and implementation drive poor and worsening C-efficiency. - C-efficiency decomposes into: - Policy gap: deviations of the base from all consumption. - Compliance gap: less than complete compliance with the system. - IMF (2016) found policy gap accounted for about 55 percent of total VAT gap (with about half of policy gap recoverable by limiting special treatment), compliance gap 45 percent. - Use of an over-valued official exchange rate to value imports causes undervaluation in LBP of the import VAT base, directly jeopardizing VAT revenue and indirectly weakening VAT-compliance incentives. Customs and excise undervaluation further amplify the effect. ### Improving the VAT — immediate and near-term measures Gains from removing mis-valuation of imports - The most immediate and urgent way to increase VAT revenue is removing the distortion from using an artificial exchange rate to value imports. - Example: an individual importing a car with a market price of USD 30,000 would pay USD 3,300 if the standard rate were applied to its real value; in fact they will pay only around USD 130. (Calculation note: 0.11×30,000×(1,507/38,000).) - For VAT, under-collection at import stage need not affect final LBP VAT revenue if importers are compliant taxpayers entitled to credit or refund and final sales are made at market LBP prices; reductions in import VAT would be exactly offset by reduced credit or refund to purchaser. - Under-collection at import stage does result in final LBP VAT revenue loss if the import is acquired by a final consumer or VAT-exempt firm. - Historical evidence shows little sign that reductions in import VAT have been offset by increased payments inland: - Prior to 2019, reductions in import VAT were accompanied about one-for-one with reductions in total VAT collections. - Between 2019 and 2020, domestic collections fell even more than import VAT. - Experience in the following year differed— increased inland collection more than offset continued reduction in import VAT—interpretation unclear. - Mis-valuation likely weakens compliance with the VAT by reducing input VAT real value and thereby weakening incentive to declare final sales and pay output VAT. Distorted proportion of credits/refunds claimed against output tax undermines audit and compliance risk management. - The revenue gain from revaluing to the current market rate would be around 2.6 percent of GDP in 2022. This reflects direct effects of revaluation and indirect effects through worsened compliance and mechanical understatement of VAT base via customs and excises. Gains from improving VAT structure - Additional revenue of around 1.7 percent of GDP could be raised, without increasing the standard rate, by raising C-efficiency from its pre-crisis level to the comparator average. - A reasonable estimate of potential VAT revenue in ‘normal’ times might be around eight percent of GDP (standard rate applied to all consumption and perfectly enforced). - This implies a current VAT gap, comparing pre-crisis 2019 with ‘normal’ times, of around 3.9 percent of GDP. - To close this gap: - Reducing the compliance gap by around one-third (benchmarked to pre-crisis 2019) would raise revenue close to 0.6 percent of GDP. Measures for narrowing the compliance gap are suggested in the 2016 ‘RA-GAP’ and 2018 TADAT assessments (IMF 2016, IMF 2018). - Eliminating ‘non-standard’ provisions could raise revenue by around 1 percent of GDP, given the estimate in IMF (2018) that these account for around half of the policy gap. - Note: one reallocation issue—allocation of part of the net VAT paid on telecoms (ten points out of eleven) lacks clear rationale and cannot be reformed without considering financial implications for municipalities. *Source: IMF staff calculations and assessments in the supplied chapter content.* ### 29. Specific base-broadening measures—including the elimination of non-standard ### 29. Specific base-broadening measures—including the elimination of non-standard measures—that would better serve the revenue and other objectives of the VAT ### Near-term measures: taxing inputs into specified exempt sectors; tourist refunds; VAT-registered refunds - Tax inputs into specified exempt sectors or activities (Article 59): businesses and organizations in specified exempt sectors or engaged in certain exempt activities are entitled to full refund of input tax (and so effectively zero-rated)—and this is so whether or not they are otherwise required to be registered for VAT. Both the type of expenditure (capital versus current) and the sectors/activities eligible for full refund have gradually expanded over time. Eliminating these refunds would improve the revenue productivity of the VAT by input-taxing these sectors and activities in line with standard practice, with their output continuing to be exempt from VAT. Exports from these sectors—for instance of agricultural products and foodstuffs—would of course continue to be zero-rated. - Refunds claimed by these activities amounted to 0.14 percent of GDP in 2019, though only around one-quarter are recorded as paid. - Remove the tourist refunds scheme and further restrict refunds to VAT registered taxpayers only. IMF (2010) puts the amount for 2003-9 at 0.5-0.7 percent of all VAT. Consider reducing refunds to diplomats to what is internationally required. ### (Mathematical expression included in source) - ΔR/Y = R/Y × ΔE_C / E_C. With R/Y = 4.1, E_C = 0.33 and ΔE_C = 0.47−0.33, this gives ΔR/Y = 1.74. - IMF (2016, Table 6) put the average for 2009-2013 at around 7.5 percent of GDP, since when the standard rate has increased from 10 to 11 percent. - Calculated as (3.9 × 0.5)/3. - Calculated as 3.9 × 0.5 × 0.5. - Activities specified in Article 59 include: the manufacturing of medicines, pharmaceuticals and other health and hygiene related products, exempted foods, paper and other printing materials; public transport; health care; education; and non-profits. ### Medium-term measures: property, health, diesel, financial services, cross-border rules - Tax immovable property transactions more comprehensively, including new residential property. Currently only inputs into construction and non-commercial rents are taxable, with the latter only raising net VAT revenue when paid by non-VAT taxpayers. - Tax all supplies of non-residential property whether by way of sale or lease—except for unimproved land; this would remove the current non-neutral treatment between sales (exempt) and leases (taxed). - Tax all first sales of new (including substantially renovated) residential property, while any subsequent sales and leases of residential property would remain exempt. To cushion the impact on the lower end of the property market a concession (such as a 50 percent reduction of the VAT base) could be provided to new homes below a specified value. A reform of this nature should be considered in conjunction with reviewing existing transaction and capital gains taxes on immovable property (Section V. D) and property taxes (Section VI). - Rationale: value added by property developers remains largely untaxed; net profit percentage for the lump-sum regime to private contractors is 15 percent, and 10 percent for civil engineers (evidence of undertaxed profits). - Tighten exemptions for health and education. Both sectors are largely VAT exempt while also benefiting from exemptions on certain key inputs or related supplies (such as medicines and pharmaceutical products, books, purchased immovable property). Imposing VAT on private health care providers would introduce formalization, enabling more comprehensive taxation of professionals and strengthen compliance (Section V. E). - Remove the recently introduced VAT exemption on diesel. The VAT (and customs and excise duty) exemption for diesel (gas oil) currently appears to largely benefit private electricity generators. Imposing VAT on diesel will raise revenue to the extent that purchasers are exempt (or not part of the public sector), also incentivizing private generators to formalize; this is not known with enough confidence to allow a quantitative estimate. - Tax fee-based financial services more comprehensively. Services by financial institutions that require to be licensed by the BDL are exempt from VAT, while transactions connected to those core activities are taxable (financial leasing, advisory services, letting of property including safe deposit boxes). Consider taxing more comprehensively all explicit financial fees and commissions earned by banks. It was reported to the mission that in 2019 banks accounted for 4.9 percent of all VAT receipts. - Improve the design of the cross-border rules. Article 14 of the VAT Law (place of supply of services) is insufficiently granular to provide clear and predictable rules with respect to international trade of services. As the authorities work towards introducing new rules to more effectively tax e-commerce including under the VAT, they should take the opportunity to also improve the design of the current rules in particular as they relate to services to ensure competitiveness of Lebanese providers on the world market as well as leveling the playing field on the home market. The draft e-commerce law prepared by the authorities does not currently achieve this and is not in line with international best practice. ### Increasing the standard VAT rate: limited yield and distributional concerns - A one-point increase in the standard rate would raise only around 0.37 percent of GDP in the relatively normal circumstance of 2019. The rough estimate is calculated as 0.01×(4.1/0.11) with VAT at 11 percent and collection of 4.1 percent of GDP. - The modest yield reflects imperfections of design and implementation; increasing the standard rate would amplify distortions and inequities from effective base-narrowing. - The single, modest positive single rate of the Lebanese VAT is a strength to be built on. ### Protecting the most vulnerable and targeting additional revenue - With 20 percent or more of the population projected to be in extreme poverty, it may be necessary and appropriate to allocate some part of additional revenue to compensate the most vulnerable for any adverse effect—how much depends on the nature of the change and requires analysis. - The Emergency Social Safety Net (ESSN; also known as AMAN) aims to deliver uniform cash payments (plus support for schooling) to 176,000 families living in extreme poverty. Eligible households are identified by proxy means-testing, with common per-person (USD 20 per month, for up to 6 people) and per-family (USD 25) amounts, with support also provided for schooling in age group 13-18; payment is by pre-paid card. The mission understands that around half of these families are now registered for the scheme, with plans for a rapid increase. Even with full coverage, on current plans the ESSN would cover only half of those in extreme poverty. ### Recommendations (VAT) - Immediately: - Use the market exchange rate (possibly transition using the Sayrafa rate) uniformly to value imports for VAT purposes—as discussed in Chapter II. - Return the real value VAT threshold to around USD 75,000. - In the near term: - Tax inputs into the exempt sectors or activities specified in Article 59 of the VAT Law. - End the tourist refunds scheme and explore ways to further restrict refunds to VAT registered persons only. - In the medium term: - Tax immovable property transactions, including new residential property, more comprehensively. - Remove the recently introduced VAT exemption on diesel. - Tighten exemptions for health and education. - Tax fee-based financial services more comprehensively. - Improve the design of the cross-border rules. - Adopt automatic indexation (perhaps beyond some trigger value) of the threshold and other VAT provisions that are specified in nominal terms. --- ### C. The VAT Threshold and Inflation: erosion, implications, and adjustments - Inflation has very substantially eroded the real value of the VAT threshold. At LBP 100 million, the threshold level of turnover at which registration for the VAT becomes obligatory was for many years equivalent to around USD 75,000; at the market exchange rate, however, the threshold is now well below USD 10,000. - It may be tempting to maintain the low real threshold; wide inclusion of even small enterprises eases distortion and inequity between competing businesses. - The balance of considerations favors returning the VAT threshold towards its pre-crisis real value: - Revenue from the smallest businesses is very limited: in 2020/21, the smallest 75 percent of active taxpayers accounted for less than 10 percent of all VAT revenue. - Additional compliance costs and administrative burden of many small taxpayers would detract from other urgent tax administration tasks. - Returning the threshold to around USD 75,000 would eliminate three-quarters of taxpayers while preserving more than 90 percent of VAT revenue (illustration based on Table 2 converted at USD 1 = LBP 12,000). - Setting an appropriately high VAT registration threshold improves progressivity features: small traders from whom poorer households are more likely to buy basic food and necessities would be outside the VAT net, tending to benefit the relatively poor. - Small businesses below the threshold should continue to be able to opt for registration to maintain competitiveness or to access refunds for exports. - Automatic adjustment of the threshold to inflation is recommended to avoid future erosion: index the threshold to domestic inflation, possibly applying only when the increase in the general price level has exceeded some trigger value. - Other VAT provisions specified in nominal terms require adjustment and indexation. Example: minimum penalties for failure to register or file (timely) returns of LBP 2 and 5 million are now (around USD 60 and 150) minimal. The requirement to pre-pay only 8 percent of a disputed tax amount can be an invitation to appeal. Practices that imply significant lags between determination of nominal liability and payment (including long tax dispute resolution periods) erode real revenue. ### Table 2 (VAT by Range of Turnover, 2020/21) — percentages from source (USD conversion at USD 1 = LBP 12,000) - Over 100,000 million LBP / Over 8.3 million USD: Active VAT payers 0.44; VAT paid 43 - 50,000-100,000 million LBP / 4.2-8.3 million USD: Active VAT payers 0.50; VAT paid 10 - 20,000-50,000 million LBP / 1.7 to 4.2 million USD: Active VAT payers 1.26; VAT paid 11 - 10,000-20,000 million LBP / 830,000-1.7 million USD: Active VAT payers 1.85; VAT paid 8 - 5,000-10,000 million LBP / 417,000-830,000 USD: Active VAT payers 3.11; VAT paid 7 - 1,000-5,000 million LBP / 83,000-417,000 USD: Active VAT payers 14.74; VAT paid 12 - 100-1,000 million LBP / 8,300-83,000 USD: Active VAT payers 35.70; VAT paid 8 - Less than 100 million LBP / Less than 8,300 USD: Active VAT payers 42.28; VAT paid 1 --- ### IV. Excises — current situation and the erosion of specific excises ### Current situation and trend - Revenue from excises decreased from around 2.3 percent of GDP in 2011 to 1.5 percent in pre-crisis 2019; and then fell precipitately to 0.5 percent of GDP in 2021. - Within the declining total, excises on petroleum and cars have become increasingly dominant: over the 5 years prior to the crisis they accounted for 80-85 percent of total excise revenue, with 45-60 percent from petroleum alone. Revenue from tobacco has been dwindling; alcohol (and others) has long been less than one percent. ### The erosion of the real value of specific excises and estimated revenue shortfall - Specific excises specified as LBP amounts per unit have been massively eroded by inflation: for example, the excise on unleaded gasoline has fallen from 16.5 cents per liter to less than one cent; that on the cheapest category of used car from nearly USD 3,000 to less than USD 200. - The revenue loss from the reduction in the real value of excises is potentially in the order of 0.8 percent of GDP (shortfall of expected revenues in 2022 from those in 2019). ### Table 3 excerpt — specific excises and USD equivalents (as presented) - Fuel: - Gasoline, 95-98 octane, unleaded liters: Specific excise LBP 249.5; USD, official rate 0.165; USD, market rate 0.0091 - Gasoline, leaded liters: LBP 592.5; USD, official rate 0.392; USD, market rate 0.0022 - Kerosene liters: LBP 17; USD, official rate 0.11; USD, market rate 0.0006 - Diesel and fuel oils: NA (no specific entries provided) - Cars: - Cars, used: CIF value up to LBP 20 mln per car: Specific excise LBP 4.5 mln; USD, official rate 2,982; USD, market rate 164 - Cars, used: CIF value above LBP 20 mln: Ad valorem rate 45 - Cars, new: CIF value up to LBP 20 mln: Ad valorem rate 15 - Cars, new: CIF value above LBP 20 mln: Ad valorem rate 45 - Alcoholic beverages: - Beer made from malt liters: Specific excise LBP 180; USD, official rate 0.12; USD, market rate 0.01 - Wine, vermouth, spirits from grapes, and other fermented beverages liters: LBP 600; USD, official rate 0.40; USD, market rate 0.02 - Spirits, liqueurs, cordials liters: LBP 1,200; USD, official rate 0.80; USD, market rate 0.04 *Italic line: Source: IMF staff summary of the content in 1lbnea2023001 - 29. Specific base-broadening measures—including the elimination of non-standard measures—that would better serve the revenue and other objectives of the VAT* ### 43. There can be good policy reasons to use specific taxation. Ad valorem excises—ones ### 43. There can be good policy reasons to use specific taxation. Ad valorem excises—ones ### Specific versus ad valorem excises: rationale and implications - Ad valorem excises (specified as a proportion of the price) maintain their real value in times of inflation because the nominal amount of tax rises with the product price. - Specific excises do not automatically maintain real value in inflationary environments, but: - They are often appropriate when the purpose is to correct adverse health, environmental or other effects associated with consumption, by incentivizing firms and consumers to internalize those costs. - Example: damage to local air quality from fossil fuel consumption depends on the amount of fuel burnt, not on the price paid; thus corrective taxation should vary with quantity burnt (specific) rather than value (ad valorem). - Similar arguments apply to alcohol excises. - Policy objectives may be multiple: correcting adverse effects and raising revenue from goods with relatively inelastic demand, for which an ad valorem component may be appropriate. - It is important to maintain the real value of specific excises in the face of inflation. ### Restoring and indexing specific excises - Near-term remedy: - Restore specific excises to their intended real values. - Index specific excises automatically to inflation, perhaps with adjustment only when inflation exceeds some threshold level. - Recommendations (general): - Immediately: - Restore specific excises towards their real pre-crisis values. - Adopt automatic indexation of specific excises, including bracket ranges (above some threshold level of inflation). ### C. Petroleum Products — trends, costs, and policy priorities - Findings: - Fuel demand has increased significantly in the past five years, with health, economic, and balance of payment costs. - Annual air pollution costs from fuels are estimated to equal one to three percent of GDP in Lebanon, or roughly USD 0.24 and 0.04 per liter of diesel and gasoline respectively. - These costs arise from lost productivity, health care costs, and premature death caused by inhalation of particulates released when fuels are burned. - Gasoline and diesel have made up 8 to 25 percent of GDP over the past 10 years. - Increasing demand was partly driven by subsidies for diesel and gasoline (phased out between late 2021 and September 2022) and reliance on diesel-powered electricity generators due to limited EDL supply. - Policy priority: - Absence of any excise (or customs duty) on diesel is a major concern. - Excise taxes efficiently reduce pollution by internalizing societal costs, incentivizing energy efficiency, switching to non-polluting alternatives, and raising revenue. - Diesel excise should be an immediate priority; excises on propane and butane could be phased-in as they are polluting fuels and lack of excise leads to overconsumption. ### Diesel excise: design, revenue, and price impacts - Proposed path: - Introduce an excise on diesel that gradually increases from USD 0.10 in 2023 to USD 0.25 per liter in 2025. - Estimated revenue: raise 1.5 to 3 percent of GDP (assuming imports are half of the 2013-2019 annual average to account for reductions in economic activity). - Price impacts: - Combination of excise and VAT would increase diesel prices 15 percent above current levels for households and by 1-5 percent for firms (registered firms can recover input VAT). - Prices of products using diesel as an input, such as electricity, may increase but at lower rates than diesel for firms (1-5 percent) because diesel is only a portion of production cost. - Phasing and legislation: - Diesel excise could be phased-in over 3 to 4 years to allow adjustment; price increase will be much lower than recent subsidy removal. - Legislation should provide automatic increases until the target USD 0.25 per liter is reached, without requiring annual parliamentary approval for each increase. ### Restoring and indexing gasoline and kerosene excises - Recommendation: - Restore gasoline and kerosene excises to their pre-crisis levels in USD terms. - Index all fuel excises to inflation going forward, perhaps with adjustment only when inflation exceeds some threshold level. - Pre-crisis levels: - Gasoline excise on unleaded octane (grade 95-98) was USD per liter 0.165 prior to the exchange rate devaluation. - Kerosene was USD per liter 0.011 prior to the exchange rate devaluation. - Near-term recommendations (fuel-specific): - Immediately: - Restore excises on gasoline and kerosene to pre-crisis levels in USD terms. - Adopt automatic indexation of the fuel excises (above some trigger level). - In the near-term: - Introduce an excise on diesel and fuel oil of USD 0.25 per liter. - The tax could be phased-in over three years, with legislation providing automatic increases until it reaches USD 0.25 per liter without requiring parliamentary approval for each subsequent increase. ### Distributional considerations and targeted support - Households: - Top 25 percent by income consume 55 percent of fuels and 38 percent of electricity; poorest 25 percent consume 6 percent of fuels and 16.5 percent of electricity (MoE, UNDP 2015a). - Energy subsidies are not well-targeted to the poor; targeted cash transfers or in-kind transfers of essentials are more effective. - Investment in public transportation is particularly needed to provide cheaper and more efficient alternatives. - Firms: - Electricity is a significant cost for energy-intensive industries; strong dependence on diesel generation for power. - Excise would marginally increase electricity costs; temporary support could be warranted for most vulnerable firms. - Any support should: - Target firms with liquidity and solvency issues caused by the excise increase. - Be time-limited. - Follow a transparent and non-discriminatory selection process. - Be clearly accounted for in the budget. ### Climate commitments - Fuel excises would be a significant step towards meeting Lebanon’s UNFCCC commitments: - Committed to reducing GHG emissions by 20 percent below business-as-usual levels by 2030, or by 31 percent if adequate international resources are provided. - Commitment to increase renewable energy use for heating and electricity generation to 16.5 and 30 percent, respectively. - Regulatory improvements to the electricity system and taxes on fossil fuels are positive steps; reform of EDL tariffs to cost-reflective levels is crucial. ### D. Tobacco products — structure, implicit taxation, and policy review - Current taxation structure: - No excise on domestic tobacco products per se; taxed through a 48 percent tax on imported raw tobacco (5 percent customs duty and 43 percent excise). - Imported cigarettes: 5 percent customs duty and an ad valorem tax (equivalent to a tariff) of 108 percent, effectively protecting domestic production. - There are ad valorem excises of 30 percent on water pipe tobacco and of 35 percent on cigars, cheroots and cigarillos. - Regie Libanaise des tabacs et tombacs: - Production and pricing of domestic tobacco products are under the sole control of the Regie, which transfers its revenue (net of operating costs) to the government. - Government receipts from domestic production comprise VAT and charges on imported cigarettes and raw tobacco plus Regie profits. - Regie profits were around USD 180 million in 2019 and accounted for about 75 percent of the total government take from tobacco since around 2011. - The Regie is not subject to corporate income tax. - Policy issues: - Labelling part of the price as “tax” vs implicit markup does not change total revenue from the sector. - Implicit tax rates (mark-ups) are currently set with unclear objectives—possibly revenue, affordability, and smuggling concerns—with health considerations seemingly not significant. - Observers from a health perspective considered tobacco prices—and hence implicit excises—too low prior to the crisis. - Heavy taxes on tobacco can be justified by externalities and internalities; Lebanon has been criticized from the health perspective. - Significant inward smuggling constrains how high implicit taxes can be set; control of borders by customs is key. - Market changes (e.g., emergence of e-cigarettes) raise new revenue and health considerations. - Recommendation (medium term): - Review the implicit tax treatment of tobacco products in the light of both revenue and health objectives. ### V. Income taxes — key features (introductory) - Lebanon’s income tax system has features of a dual income tax system: - Employment income taxed using a progressive rate structure with a top marginal rate of 25 percent. - Capital income generally subject to a flat tax rate depending on income source. - Interest income tax rate currently 10 percent (temporarily raised from 7 percent for three years from August 2019, later extended to the end of 2022). - Realized capital gains generally taxed at 15 percent. - Standard CIT rate is 17 percent. - Dividends taxed at 10 percent but are exempt if distributed by ‘holding companies’ or ‘offshore companies’ (preferential CIT regimes). - Business income of the self-employed subject to a progressive rate structure slightly different from employment income scale. - Rental income taxed under a separate schedule under the ‘built property tax’. - Three regimes for taxation of business profits: - Real (actual) regime: tax on actual profits; compulsory for specified categories (joint stock companies, partnerships, banks, industrial undertakings, importers, retail traders with > four persons); elective for most others. - Lump sum regime (bénéfice net forfaitaire): applies to certain commercial activities and professions; taxable income calculated by applying tax rate to a percentage of turnover (set by Minister of Finance Decision); mandatory for specified sectors and optional for non-corporates with fewer than five employees. - Estimated profits regime (bénéfice estimé): estimated profits fixed for 3-year period by a committee of Ministries and private sector representatives. - Box on lump-sum regime distortions: - Assumed net profit margins applied across sectors vary between 1 and 50 percent. - Example effective tax rates (ETR) for select activities under various realized profit margins: - Lawyer: assumed net profit margin 50; ETRs under realized profit margins 5 / 25 / 50 are 170.0 / 34.0 / 17.0. - Accounting and tax consultancy: assumed 35; ETRs 119.0 / 23.8 / 11.9. - Medical practice activities: assumed 50; ETRs 170.0 / 34.0 / 17.0. - Engineering: assumed 30; ETRs 102.0 / 20.4 / 10.2. - Life insurance: assumed 5; ETRs 17.0 / 3.4 / 1.7. - Public works, operation of power stations: assumed 15; ETRs 51.0 / 10.2 / 5.1. - Air transportation: assumed 10; ETRs 34.0 / 6.8 / 3.4. - Maritime and road transportation: assumed 15; ETRs 51.0 / 10.2 / 5.1. - Oil refining: assumed 15; ETRs 51.0 / 10.2 / 5.1. - Private generators: assumed 30; ETRs 102.0 / 20.4 / 10.2. - Trade in cars, wholesale of phones: assumed 15; ETRs 51.0 / 10.2 / 5.1. - Secured transaction activities: assumed 1; ETRs 3.4 / 0.7 / 0.3. - The lump-sum regime creates distortions, revenue leakage, compliance incentives to misreport sector or underreport turnover, and governance concerns in net profit rate determination. - Transition note: - A new, better income tax law is needed (further discussion follows in the source). *IMF staff summary of source content.* ### 60. The current income tax law (ITL) is outdated and should be fully replaced by a ### 1lbnea2023001 - 60. The current income tax law (ITL) is outdated and should be fully replaced by a ### Obsolescence of the ITL and need for comprehensive reform - The ITL was written in 1959 and has been subject to a series of amendments through various subsidiary legal instruments with different legal standing, leading to inconsistencies and complexities. - The ITL lacks basic definitions and concepts, such as the concepts of residence and permanent establishment, and capital income items, leading to ambiguity, arbitrary interpretation, and difficulty in obtaining advance rulings. - The logic behind the criteria for the application of the three business tax regimes is not based on the (in)ability to produce accurate books but is rather based on the nature of the business, creating incoherence across categories and leaving room for abuse. - There are no up-to-date anti-tax avoidance rules; fully addressing structural issues would require a completely new draft of a modern ITL guided by clear tax policy objectives. - The medium-term income tax measures proposed in the report could be introduced in the new ITL. ### Immediate to near-term objectives within the existing ITL - Aim to reduce non-neutralities in treatment across different sources of income and taxpayers to close loopholes, strengthen progressivity, simplify income taxation, and enhance revenue. - Given administrative challenges, maintain features of a dual income tax system: a progressive rate on employment income and an appropriately set uniform flat tax rate on all capital incomes combined with measures to tackle business taxation loopholes. ### Improving employment income taxation — findings and immediate actions Findings: - Revenue from employment income rose to 1.1 percent of GDP in 2019, but in 2021 revenue dropped to 0.5 percent of GDP (the lowest level since 2004). - Even at its peak, revenue from individual taxation (excluding the tax on interest) was lower than in comparators. - Prior to 2019, there were 6 brackets with tax rates ranging from 2 to 20 percent. Article 23 of the Budget Law 2019 added a seventh income tax bracket with a top rate of 25 percent on income exceeding LBP 225 million. - Survey results suggest less than 1 percent of employees could have fallen into the old top income bracket that initially started at LBP 60 million; less than 8 percent reportedly earned more than LBP 2.25 million a month. Survey results tend to underestimate top earnings. - The new top annual income bracket starting at LBP 225 million corresponded to about USD 150,000 prior to the crisis, but now is less than USD 6,000. - The first zero-tax bracket for income not exceeding LBP 6 million has de facto disappeared (standing now at less than USD 160 of annual income). - Mis-valuation and high inflation adversely affected horizontal and vertical equity and produced bracket creep or ‘cold progression’. Immediate recommendations: - Appropriately reset the income brackets, to be automatically indexed for inflation to support revenue and equity. - Consider resetting brackets to increase (decrease) revenues from salaries earned in USD (LBP). Near- and medium-term guidance: - As the economy recovers, reconsider tax brackets and rates. - Unify the existing two progressive tax schedules (employment income and business income). - Calibrate the tax scale to fulfill revenue needs while balancing equity and efficiency. ### Improving capital income taxation at the individual level — main issues and reforms Main pitfalls: - Blunt exemptions and pervasive arbitrage opportunities create real estate transfer loopholes and neutrality violations. Immediate expansions of taxable capital income: - Capital gains from the sale of shares in joint stock companies: abolish the exemption under ITL Art. 73 for individuals (sales of shares in joint-stock companies by individuals are not included in the taxable base). - Rationale: equity, tax neutrality, and closing a loophole enabling circumvention of the 15 percent capital gains tax on real estate sales by structuring sales as share transfers. - Dividends distributed by holding and offshore companies to individuals: eliminate the WHT exemption on dividend distributions to individuals from these companies. - Limit the exemption from capital gains from the sale of real property by individuals to one primary residence (current ITL Art. 45.2.b. allows exemption for up to two primary residences). - Rental income: repeal the exemption that excludes rental income from immovable property if the property is not part of the business assets of the individual; in principle all sources of capital income should be taxed. Consider this medium-term reform in conjunction with reform of the built property tax (Section VI). Information and compliance: - Tax authorities should be able to access relevant banking information; lifting bank secrecy is needed for inshore information for tax purposes. - For offshore capital income of Lebanese residents, begin receiving information from abroad through full implementation of automatic exchange of information (AEOI) standards. - Lebanon is committed to the Global Forum and AEOI and has adopted Decree No.6327 of May 4, 2020, ratifying the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information (CRS/MCAA), but in practice is only sending and not receiving cross-border information due to technical IT issues. ### Taxation of business income (other than under the CIT) — professionals and small businesses Treatment of professionals: - Current lump-sum regime applies by default to most free professionals (lawyers, doctors, architects), creating perceived unfairness and evasion opportunities by those capable of proper bookkeeping. Medium-term reforms proposed for self-employed/business income: - Taxpayers manifestly capable of adequate bookkeeping should be subject to the real profits’ regime (e.g., free professionals and a significant range of traders). - Complement transition to the real profits’ regime with a WHT on payments to professionals for services rendered to companies and public entities; this WHT should be creditable against final tax liability and applied when the payor is a business or public sector entity. - Rates schedules for wages and business activity of individuals should be unified as part of broader ITL reform, and comprehensive rules for deduction of business expenses should be designed. Improving taxation of small and micro businesses: Findings: - Most revenue from businesses is collected from relatively large companies; VAT payments are concentrated at the top of the turnover distribution, with 67 percent paid by the largest four percent of companies. - Income tax collection from very small businesses is currently very low. - Absence of a simplified regime below the VAT registration threshold encourages informality and increases administrative and compliance costs. Recommended simplified regime (turnover tax): - Replace income tax with a turnover tax with a uniform rate for businesses with annual turnover below the VAT threshold. - Threshold: align the simplified regime threshold with the VAT threshold (update VAT threshold to reflect inflation erosion) so that around 75 percent of businesses would fall under the simplified turnover regime. - If VAT threshold not updated, a small business registration threshold of around USD 75,000 (linked to inflation) could be used (inferior to aligning with VAT threshold). - Rate: a moderate uniform presumptive tax rate, e.g., 2 to 3 percent, in line with international best practices. - Uniform rate: avoid multiple rates to keep the regime simple and reduce avoidance opportunities; avoid a low tax in the simplified regime to encourage firm growth. - Setting the rate: deemed cost deductions are functionally equivalent to lower rates on turnover (example: 5 percent on turnover after 50 percent deduction equals 2.5 percent on total turnover). - Many countries apply rates between 1.5 and 5 percent with thresholds between USD 50,000 and 120,000. - Sectors included: apply SME regime to all sectors subject to income tax based on turnover, excluding clearly defined activities (e.g., professional services and corporate entities) to maintain simplicity and avoid loopholes. - Exclusions: legal persons and professionals should not be in presumptive regime even if below threshold; corporates should always be in standard regime even with startup low revenues. - Exclusion of microbusinesses: microbusinesses below a low threshold (e.g., around USD 5,000) could face a moderate flat registration fee, threshold denominated in LBP and indexed to inflation. - Opt-in: those below VAT threshold may voluntarily elect to pay VAT and real income tax subject to bookkeeping conditions and limited switching; the opportunity to rebut or opt into the real regime should be tightly prescribed. Selected international presumptive tax examples (from Table 5): - Algeria: Sales threshold USD 255,000; presumptive tax rate 5%; CIT rate 19% - Armenia: Sales threshold USD 274,922; presumptive tax rate 5 (trading), 3.5 (production); CIT rate 18% - Azerbaijan: Sales threshold USD 346,000; presumptive tax rate 4 (in Baku), 2 (outside Baku); CIT rate 20% - Belarus: Sales threshold USD 584,246; presumptive tax rate 5%; CIT rate 18% - Latvia: Sales threshold USD 45,600; presumptive tax rate 15 (includes payroll tax); CIT rate 20% - Mauritania: Sales threshold USD 810,000; presumptive tax rate 3%; CIT rate 25% - Rwanda: Sales threshold USD 55,000; presumptive tax rate 3%; CIT rate 30% - Seychelles: Sales threshold USD 74,000; presumptive tax rate 1.5%; CIT rate 25% - Uzbekistan: Sales threshold USD 120,000; presumptive tax rate 4%; CIT rate 15% ### Corporate income taxation — current situation and key statistics Findings: - CIT revenue is below comparators largely because the CIT base is eroded by widespread tax incentives, loopholes, and lack of modern anti-tax avoidance rules. - Revenue collected prior to the crisis was below two percent of GDP (compared to an average of around three percent for comparator countries) and collapsed to 0.8 percent of GDP in 2020. - Part of this decline is attributed to decreasing profitability of banks, which contributed about 50 percent of total CIT from 2010 to 2020. - The statutory CIT rate is 17 percent, below the average of comparators. - Corporate capital gains are taxed at 15 percent. - The CIT offers minimum and maximum capital allowances between 8 and 25 percent for most cost categories; investors’ choice within this range must be notified to the tax administration. - Tax incentives are pervasive while the existing anti-tax avoidance framework is rudimentary. ### Summary of policy recommendations (grouped by timing) Immediately: - Adjust the income tax brackets for inflation automatically. - Enable the tax administration to access banking information. - Start receiving and acting upon information on offshore holdings on Lebanese residents for tax purposes through the Global Forum framework. - Include capital gains from the sale of shares in joint stock companies by individuals in the taxable base. - Abolish the WHT exemption for dividend distributions to individuals from holding and offshore companies. - Limit the exemption from capital gains from the sale of real property by individuals to one primary residence. In the near term: - Subject professionals who are manifestly capable of adequate bookkeeping to the real profits regime. - Complement the transition to the real profits regime with a WHT on payments to professionals for services rendered to companies and public entities. In the medium term: - Subject rental income of individuals to income tax. - Introduce a simplified regime for businesses below the VAT threshold; the real profits regime should be compulsory for all businesses with turnover in excess of the VAT threshold, and for all who register voluntarily for the VAT. - Unify the rates schedules for wages and business activity of individuals. - Draft and enact a completely new modern ITL guided by clear tax policy objectives to address structural issues and introduce medium-term income tax measures proposed in the report. *Source: 1lbnea2023001 - 60.* ### 74. Corporate capital gains should be included in the CIT base and hence taxed at the ### 1lbnea2023001 - 74. Corporate capital gains should be included in the CIT base and hence taxed at the ### Corporate capital gains - Corporate capital gains should be included in the CIT base and hence taxed at the standard CIT rate, eliminating a minor but potentially costly distortion. ### Inflation, depreciation, and interest deductibility: effects on investment and financing - Through the CIT, inflation tends to: - Raise the cost of acquiring investment goods because inflation erodes the real value of depreciation allowances when these are based on historic cost. - Encourage debt finance because interest deductions allow deduction of the portion of interest that compensates for inflation. - The two effects act in opposite directions on investment; where firms are strongly constrained in their ability to borrow (as appears likely in Lebanon for some time), the first—adverse—effect seems likely to dominate. - Illustration (text example): in the extreme case where the real interest rate is zero, lenders require nominal interest equal to inflation; at any positive inflation rate the nominal interest deduction becomes positive even though the real interest cost is zero. ### Measures to limit inflation-related distortions - Allow companies to choose any depreciation in the current range without explicit notification. - For the medium-term, consider temporarily allowing largely tax-free revaluation of assets (as was done in 1994). - Adopt some form of interest limitation rule that applies generally, not only to loans between related parties. Such rules are discussed further below as an anti-avoidance device. ### Strengthening the CIT base: reforming tax incentives (overview) - Tax incentives are provided through the ITL, the Investment Law, and several special laws, targeting company forms (holding companies, offshore companies), sectors (transportation, manufacturing, agriculture, tourism, IT, communication, agro-industry), and regions. - Incentives also provided for exports (reduced CIT rate) and to new investment financed by retained earnings. ### Offshore and holding regimes: scale and impact - As of 2019: - Over 3,000 holding and 6,000 offshore companies were active in Lebanon with only 1,961 and 8,538 employees, respectively. - This corresponds to roughly one employee per active entity, indicating they generally operate as financial conduits. - In 2019, holding companies earned USD 190 million and held USD 3.2 billion in fixed assets. - In 2019, offshore companies earned USD 1.5 billion with USD 1.9 billion in fixed assets. - Applying the CIT and WHT on dividends to these profits would raise USD 430 million in revenue (or one percent of GDP), assuming profits would remain in these entities or others in Lebanon if taxes were applied. - Both offshore and holding company regimes operate as aggressive tax shelters and should be abolished. - Under these frameworks, companies are exempt from CIT and WHT on dividends and enjoy several other tax incentives, allowing channeling of domestic or cross-border income effectively tax-free. - Examples of abuse include diverting profits to holding companies via management fees, royalties, or related-party arrangements; absence of interest limitation and proper transfer pricing rules exacerbates this. - Holding companies’ exemption on interest for long term loans creates an important loophole. - Offshore companies can channel domestic-source income abroad and escape inheritance taxes because offshore company shares are exempt from transfer and inheritance taxes and all related fees. - International alignment and precedents: - Both regimes provide for a very low lump sum annual tax and qualifying companies are expressly excluded from several substance requirements of the BEPS project and the EU Code of Conduct Group (CoCG). - Example: The French Supreme Court recently ruled that a Lebanese offshore company exempted from CIT but subject to a lump sum tax is not regarded as a resident of Lebanon for the purpose of the France—Lebanon tax treaty and must be denied treaty benefits. - Example: Morocco’s offshore companies regime was identified as a harmful tax regime and closed to new entrants as of 1 January 2019. - Recommended approach: - Abolish the offshore company regime (with grandfathering of existing structures) in conjunction with the introduction of substance requirements for holding companies. - In the medium term, a new income tax law should include a participation exemption regime (for related parties) and the holding company regime should be eliminated. - No new companies should be permitted to enter the offshore and holding company regimes. The status of existing companies should be phased out (over a few years), so future profits/dividends of these companies would only be taxed under the standard CIT regime after the end of the phase-out/transition period. ### ITL and Investment Law incentives: use and shortcomings - Investment Law (No. 360 of 2001) provides generous tax holidays; ITL provides reduced CIT rates for retained profits (Art 5/2) and for industrial exports (Law 248 of 2014). - IDAL reports: - Provided incentives to 82 projects under the Investment Law, investing USD 1.7 billion since 2003. - Investment distribution: tourism USD 1.1 billion, industry USD 0.4 billion, agriculture USD 0.2 billion. - IDAL estimates annual revenue forgone averaged around USD 24 million over 2003-09. - Existing tax incentives are characterized as: - Ineffective: poor tool to target R&D and investment; reduced CIT rewards only success and biases toward short-term, low upfront cost, ‘footloose’ projects; not connected to level of investment. - Inefficient: result in greater foregone revenue since tax benefits persist after recovery of capital costs. - Distortionary: discriminate across sectors and factors of production. - WTO and international considerations: - Preferential tax treatment for exports should be removed; 50 (or 75) percent reduction in CIT for industrial exports (Law 248 of 2014) discriminates and is most likely incompatible with WTO rules, jeopardizing Lebanon’s aspirations to join the WTO. - For multinationals, non-tax factors and new global minimum tax considerations affect attractiveness of tax holidays. ### Governance and transparency of tax incentives - Problems identified: - Tax incentives are not consolidated in tax legislation; found in ITL, Investment Law, and special laws (offshore/holding regimes, Tripoli SEZ, industrial export incentives). - Several incentives are not administered by the MoF; Investment Law incentives are administered by IDAL with approvals by Council of Ministers or Prime Minister depending on regime chosen; offshore and holding companies registered in the Commercial Register. - Wide discretion in granting and administering incentives; Investment Law allows discretionary awarding and quantum determination; “mixed” projects can apply on a “pro-rata” basis which is difficult to monitor; CoM Decree can determine other qualifying sectors. - No regular estimation and publication of revenue forgone from tax incentives; capacity in tax analytics at the Ministry of Finance should be built to conduct estimations, policy simulations, and cost-benefit analyses. - Specific discretionary income tax applications needing review in the new ITL include: - Depreciation rules where taxpayer may choose rates from a range (ITL Art 7(7)). - Determination of lump-sum profit and estimated profits regimes by Committees, including ad hoc estimated profits (ITL Art. 27). - Non-deduction of expenses based on a rule referring to customary practice (ITL Art. 7(12)). - Determination of tax base for capital gains on shares on the basis of auditors’ reports or, alternatively, general assembly or Board of Directors resolutions (ITL Art. 73). ### Recommendations (summary list) - Immediately: - Abolish preferential CIT tax treatment for exports. - Abolish reduced CIT rates for reinvested profits, and all tax holidays, while grandfathering existing ones. - Subject capital gains to regular CIT rate. - In the near term: - Eliminate the offshore and holding companies’ regimes, with existing taxpayers allowed to unwind their structures without tax. - Identify a small number of tax expenditures and prepare on an annual basis an estimate of the revenue foregone from the provision of such expenditures. - In the medium term: - Subject all CIT taxpayers to real profits regime. - Thoroughly review and reform Investment Law incentives, and replace by cost-based incentives, complementing with a cost-benefit analysis, as part of the ITL reform. - Start publishing annual tax expenditures reports. ### Box 3 — Improving tax transparency of incentives (key points) - Tax incentives should: - Be clearly prescribed in law and consolidated in the tax law to reduce conflicting or overlapping provisions and inter-agency jurisdictional conflicts. - Have clear and transparent eligibility criteria based on rules rather than discretion; criteria should be clear, simple, specific, objective, and apply automatically. - Be under the ultimate and sole authority of the MoF, where relevant based on input from other government stakeholders. - Be subject to effective and transparent administration and evaluation; fiscal costs should be reviewed annually as part of a tax-expenditure review made public; MoF should keep records of estimated and actual cost of all CIT concessions and publish these figures in a tax expenditure budget; cost-benefit analysis for new incentives is important. - Be based on clearly stated policy objectives and time-limited, renewable only if objectives are being met at reasonable cost. - Be monitored by the tax administration, including through compliance and enforcement action when conditions are not or no longer met. ### Solidarity charges - In exceptional crises, temporary additional levies (solidarity charges or excess profits taxes) can be used to fall on excess profits or income of the more affluent to support social cohesion. - Design notes: - Preferable designs fall on economic rent; surcharges on income are straightforward to implement and have precedents (e.g., 2011/12 Australia and Japan). - Example: In Japan, surcharge on the CIT was 10 percent applied for two years, while on individual income the surcharge rate was 2.1 percent, and it will apply until 2037. - Recommendation: - Consider temporary moderate-income surcharges. *Source: 1lbnea2023001 - 74. Corporate capital gains should be included in the CIT base and hence taxed at the (PDF chapter/section).* ### 88. It is critically important to protect the tax base against common base erosion ### 88. It is critically important to protect the tax base against common base erosion strategies by strengthening the legal framework consistent with current international norms. ### Areas of particular concern: legal and rule gaps - Residence and permanent establishment definitions - "There is no definition of ‘resident’ in the ITL." - Current residence definitions are included in Law 60 of 2016 and in the definitions section of the TPL, "although the two frameworks are inconsistent." - Current residence tests for individuals "do not adequately cover individuals who have significant and personal economic ties to Lebanon." - Company residence tests are "based on the registered seat principle" and are inadequate; most jurisdictions use "place of effective management" rules. - "Importantly, there are no provisions in the ITL that define permanent establishment (PE) or exit tax rules." - Strong source rules - "The ITL lacks a comprehensive set of rules for income and payments that are considered to be sourced in Lebanon." - These rules are especially necessary in a territorial system because "the exemption of foreign business activity from domestic taxation creates many opportunities for base erosion." - Need for comprehensive definitions of "interest, dividends, royalties, and service fees." - Interest limitation rules - "There are no interest limitation rules in the ITL." - ITL Art. 7(3) provides for unlimited interest deduction on loans contracted with third (related or unrelated) parties. - Authorities currently use a general non-deductibility rule relying on customary practice to deny interest deductions (ITL Art. 7(12)). - "Interest limitation rules in line with current international best practices to limit the deduction of excess interest should be introduced as a priority." - Interest limitation rules can counter "the inflation-induced incentive to debt finance." - Transfer pricing rules - The transfer pricing framework is "segmented and inconsistent." - ITL Art. 15 provides a basis for transfer pricing adjustments for cross-border transactions. - Arms’ length principle found in TPL Art. 10(2); related parties definition limited to direct control situations and does not specify holding percentages, indirect/common control, or degrees of kinship. - MoF Decision 368/2002 contains another definition of related parties for VAT purposes. - Existing transfer pricing rules do not seem to apply to: - transactions between non-residents and their PEs in Lebanon, - transactions between residents and their PEs outside Lebanon, - domestic transactions with entities in special zones or benefiting from a tax holiday. - CFC rules - "The ITL does not include CFC rules," despite base erosion risks from shifting income into foreign subsidiaries controlled by Lebanese resident taxpayers. - CFC rules are particularly important because "some items of foreign source capital income (dividends and interest) are subject to taxation on a worldwide basis." - Offshore indirect transfers rule - Offshore indirect transfers (transferring shares of foreign companies that hold domestic assets) can avoid tax on gains from disposal of assets in a jurisdiction. - "As part of the broader ITL reform, an offshore indirect transfer’s rule should be adopted, with consideration given to the types of assets that ought to be covered and structured to take account of Lebanon’s existing tax treaty network." - General Anti-Tax Avoidance Rule (GAAR) - "There is no GAAR in the ITL or the TPL." - GAAR would act as a "provision of 'last resort' against tax avoidance practices" not otherwise targeted by specific integrity rules. - When invoked, tax administration could cancel a tax benefit or assess a different tax liability where taxpayer actions are "so blatant, artificial or contrived that it is only explicable by the desire to obtain a relevant tax benefit." - Introducing a GAAR "requires careful consideration to ensure that it is designed and applied in a measured, even-handed and predictable way" because it is "less rules-based and more discretionary in its application." ### Recommendations (by timeframe) - In the near term: - Strengthen residence rules for individuals and corporations. - Introduce a PE definition and comprehensive related party definitions. - Introduce an interest limitation rule, "with limited grandfathering for existing loan arrangements." - In the medium term: - Introduce strong source rules. - Introduce CFC rules. - Introduce transfer pricing rules. - Introduce an offshore indirect transfer’s rule. - "Consider a GAAR as part of the ITL reform." ### H. The Global Minimum Tax — overview and implications - Context and scope - Major international change: October 2021 agreement by around 140 countries in the G20-OECD led 'Inclusive Framework' to follow a 'two pillar' approach. - Pillar 1: reallocate part of profits of the very largest and most profitable multinationals to countries of final sales. - Pillar 2: "aims to set a global minimum effective tax rate." - Pillar 2 may be imposed unilaterally by participating countries on affiliates operating abroad, affecting Lebanon "even if it remains outside the Inclusive Framework." - Key features relevant to Lebanon - Minimum tax intended to top up to 15 percent the tax paid on the 'excess profits' of in-scope entities; excess profits are financial profits exceeding a 'carve-out' (substance-based income exclusion) calculated as fixed fractions of turnover and tangible assets. - Application threshold: entities that are part of multinational groups with global annual turnover of over € 750 million. - "This threshold is low enough to likely include some hotel chains, oil companies and others now active in Lebanon—and the expectation is that the threshold will fall over time." - Table 6 suggests "there are at least 100 or so entities active in Lebanon that will be potentially subject to the minimum tax." - A nominal CIT of 17 percent "does not ensure that effective rates, which, for the purposes of Pillar 2 are calculated relative to financial profit, will exceed 15 percent." - "Any top up tax due may be collected unilaterally by the country in which the parent of the entity in Lebanon is resident" (through the 'Income Inclusion Rule'). - Evidence and illustrative figures (Country-by-Country Reports, Table 6) - Table 6 entries (exact figures preserved) - Denmark: No of entities 8; Profit before income tax 2,496,241; Income tax accrued, 2017/1 867,927; Effective tax rate 35% - France: No of entities 60; Profit before income tax 65,812,674; Income tax accrued, 2017/1 13,967,202; Effective tax rate 21% - Germany: No of entities 13; Profit before income tax 27,441,341; Income tax accrued, 2017/1 6,533,277; Effective tax rate 24% - India: No of entities 2; Profit before income tax 16,491,101; Income tax accrued, 2017/1 1,401; Effective tax rate 0 - Italy: No of entities 4; Profit before income tax 2,057,540; Income tax accrued, 2017/1 97,825; Effective tax rate 5% - Japan: No of entities 3; Profit before income tax 2,590,281; Income tax accrued, 2017/1 607,104; Effective tax rate 23% - Mexico: No of entities 1; Profit before income tax -; Income tax accrued, 2017/1 -; Effective tax rate - - South Africa: No of entities 1; Profit before income tax 961,635; Income tax accrued, 2017/1 166,931; Effective tax rate 17% - Switzerland: No of entities 9; Profit before income tax 20,149,336; Income tax accrued, 2017/1 3,922,596; Effective tax rate 19% - United States: No of entities -; Profit before income tax 68,809,296; Income tax accrued, 2017/1 7,455,632; Effective tax rate 11% - Observations: - "One puzzling feature is that, contrary to expectations, the effective tax rates in many cases exceed the statutory rate of 17 percent: the reason for this is unclear." - "The effective rate is less than the critical 15 percent for the single most profitable source of investment in Lebanon, the US, as well as on sizable profits from India, and from Italy." - "Topping these up to 15 percent, the additional tax payable would be around USD 5.5 million, which is a 17 percent increase in the total tax payable by all entities in the table." - Note: "These figures take no account of the carve out which would reduce the additional tax payable. If the top up were only to an effective rate of 13 percent, for instance, the revenue at stake falls to 11 percent of the current total." - Policy considerations and options - Risk: "Allowing effective rates on these companies in Lebanon to fall below 15 percent will simply result in other countries receding more tax revenue." - Options to pre-empt top up tax on Lebanese entities: - Increase the CIT rate to a level expected to raise effective rate to 15 percent in most cases. - Introduce a minimum effective rate of 15 percent of financial profit, for all companies or just those in scope. - Adopt a 'Qualified Domestic Minimum Top up Tax' (QDMTT) as allowed by model rules for Pillar 2 so source country can levy the top up tax itself. - Caveats: - Major changes require "close analysis" of economic impact (on investment) and legality (e.g., acceptance by others that Lebanon's measures bring tax up to the minimum where commitments like tax holidays exist). - It is not clear that other countries would accept a QDMTT if Lebanon is not a member of the Inclusive Framework; if they do not, "the top up tax would become an additional charge on the investor." - Implications for tax incentives: - "For in-scope companies, the advantage of a tax holiday would be largely eliminated." - Where commitments exist, renegotiation may be required; companies may accept renegotiation "if it is immaterial to their overall tax liability." - Timing and recommended first step - "It is intended that the minimum tax apply from some time in 2023 or 2024." - "There is thus some urgency to considering its implications for Lebanon, and the appropriate policy response." - First step: "take stock of precisely which entities in Lebanon will be in scope of the minimum tax, and of the effective tax rates they pay." ### VI. Property Taxes — key findings and immediate priority - Role and recent performance - "Property taxes represent an important share of tax revenue." - Revenues from property taxes "have averaged around 1.5 percent of GDP over the last ten years." - Since onset of 2019 crisis, real estate seen as safe haven, increasing property tax share to "14 percent of total tax revenues." - Components of property taxation 1. Property registration fee (transaction fee on transfer of ownership) - "It is the largest component of state revenues from property taxes and is imposed at a rate of 5 percent of the transaction value, with a reduced rate of 2 percent for commercial real estate." - Transfers of shares that derive their value primarily from real estate (shares in a real estate holding company) "are not subject to the registration fee that would have applied had the property been transferred directly—enabling tax planning." - "Property transaction contracts are mostly denominated in USD, while conversion to LBPs for tax purposes is done at the official exchange rate." - Additional transaction fees of around 0.8 percent include 0.3 percent in stamp duties, 0.25 percent in municipality fees, and 0.2 percent in other legal fees. 2. Built property tax (recurrent tax on estimated annual rental value) - Progressive rates "from 4 to 14 percent." - Exemption threshold is "LBP 20 million per property up to two properties per owner." - Additional municipal tax of "5 or 7 percent on the rental value" imposed on housing and non-residential properties respectively. - Vacant properties are currently exempt from built property tax. - "The rental value for tax or registration purposes is determined separately by the central government, municipalities, and the Directorate General of Land Registry and Cadastre," potentially leading to different tax values across jurisdictions. - "Valuation criteria are non-transparent and rental values are not regularly updated." 3. Inheritance and gift tax - Levied when property transferred by inheritance or gift. - Tax rates vary depending on value and relationship, "with tax rates ranging from 3 to 45 percent of the property value." - Immediate priority recommendation - "Removing the exemption for vacant properties from built property tax should be an immediate priority." - Rationale: - The exemption complicates the system, "burdens a weakened tax administration, incentivizes misreporting, and undermines revenue yield." - Recent study suggests "around 50 percent of reported vacant properties in Beirut Municipality are in fact occupied." - The exemption is regressive because unoccupied properties are likely second homes or investment properties, ownership concentrated at higher income levels. - Eliminating the exemption would mobilize additional revenue at municipal and central government levels, "with a rough estimated yield of around 0.3 percent of GDP." *Source: IMF country report content (chapter text provided).* ### 99. Other immediate measures should include expanding the built property tax base ### 1lbnea2023001 - 99. Other immediate measures should include expanding the built property tax base ### Property tax base and immediate measures - Expand the built property tax base and reduce tax avoidance through property holding structures. - Remove the preferential treatment for the second properties as it is more likely to benefit the wealthier segments of the population. - Make transfers of property subject to the same registration fee irrespective of whether the property is transferred directly (for instance by way of sale) or indirectly by transferring the shares in the entity that—directly or indirectly—owns the property. The latter tax planning technique through the use of property holding structures is also more likely to benefit the better off. - Remove the built property tax exemption for vacant properties and apply the tax to all but one principal residence property per owner. - Extend the registration fee to transfers of shares that derive their value primarily (50 percent or more) directly or indirectly from real property. ### Property valuation system — medium and near term - Improving the property valuation system over the medium term is key to a more efficient and equitable property tax framework. - Two most common approaches for assessing property value: - capital (or market) assessment, and - annual rental value assessment (currently used in Lebanon). - Capital value assessment is preferred in markets with frequent sales transactions that can be objectively observed. - Valuation criteria should be clear and transparent to avoid discretionary approaches by the valuers, ensure consistent treatment among taxpayers, and preserve the credibility of the valuation system. - Once a sound valuation system is in place, it is important to update it on a regular basis to reflect current market values of properties. Levying recurrent property tax on an outdated rental value reduces revenue yield and undermines fairness. - Building a robust property valuation system requires time, including to build a reliable database for property transactions. - Short-term measure: continue with the existing valuation while converting property transactions valued in USD for tax purposes using the market exchange rate (Section II). ### Centralization and streamlining of valuation - Centralize or unify the existing valuation system to streamline the property tax process; the current system with multiple valuation processes is complex and represents a significant administrative burden. - The valuation process should be streamlined to produce a single valuation for all tax purposes. - Options for the primary institution/agency responsible for property valuation: 1) national government, 2) dedicated national government agency, 3) local government, 4) combination of the above, or 5) a private agency. - In Lebanon, valuation at central government level seems preferable, given constrained capacities at local government level. ### Broadening recurrent property tax to unbuilt land (medium term) - The recurrent property tax currently applies to built property; land is only implicitly taxed insofar as its value is derived from a property built on it. - The value of unbuilt land remains untaxed, except when subject to a transaction (i.e., registration fee). - Consider broadening the recurrent property tax base to unbuilt property to reduce distortions and increase the potential tax base. ### Recommendations (as stated) - Immediately: - Use the market exchange rate for all transaction taxes on USD (or other foreign currency) denominated property transactions. - Remove the built property tax exemption for vacant properties and apply the tax to all but one principal residence property per owner. - Extend the registration fee to transfers of shares that derive their value primarily (50 percent or more) directly or indirectly from real property. - In the near term: - Streamline the property valuation system between the different levels of government and agencies involved to achieve a single property valuation. - In the medium term: - Improve the quality of the property valuation system and keep property values current. - Consider broadening the recurrent property tax base to unbuilt land. ### Appendix 1 — Calculation of the Revenue Impact from Mis-Valuating Imports (summary) - Data sources used: Customs values in USD and tax rates for customs, excises, and VAT (Lebanese Customs Administration website), exchange rates (official, Sayrafa, and market), GDP (Central Administration of Statistics for actuals, IMF for 2022–2024 estimates), and actual revenue collections up to 2021 (country authorities). - Key steps in estimation: - Imports for 2020–2022: imports as a share of GDP using the Sayrafa and market exchange rates were adjusted downward to remove the anticipation effect for 2020–2022, under the assumption that the anticipation effect was driven by mis-valuation. Imports-to-GDP prior to adjustment were 70-110 percent; adjusted to match 2017-2019 average of 38 percent. - Imports for 2023–2024: assume imports-to-GDP is below historical levels in 2023 and returns to historical levels in 2024; additional downward adjustment for vehicles because vehicle imports in 2022 are estimated to be around 400 percent of pre-crisis levels relative to GDP, compared to 250 percent for non-vehicle imports. - Revenue estimates: imports converted from USD to LBP using various exchange rates, and revenue estimated by applying tax rates to the customs values in LBP and quantities. - Note: Since the Sayrafa exchange rate was not available in 2020, it is assumed to be 80 percent of the market rate. ### Appendix 2 — Telecommunications sector (key points and figures) - The telecom sector contributed 12.4 percent of total revenues on average during the last decade. - It has been the second largest revenue-generating component in the budget, after VAT. - Transfers from telecom surpluses peaked in 2014 at 4 percent of GDP and have been declining since then. - Structure and operations: - Sector is state-owned and since May 2020 fully operated by the government with three providers: Ogero (state-owned landline operator), and Alfa and Touch (mobile operators). - In May 2020, the government took back control of Alfa and Touch; since then the Ministry of Telecommunications has been operating the service. - Revenues from landline and cellular services belong to the state; private companies receive annual management fees. - Mobile operators’ contracts used to require transferring collected revenues to the government in USD irrespective of collection currency. - Recent decline in telecom revenues driven by the economic crisis, fast depreciating national currency, increasing maintenance and operational costs, and reportedly poor regulation and auditing causing inefficiencies. ### Appendix 3 — Selected excise and specific rates (high-level) - Excise examples (as presented): - Beer made from malt: Liter 180; Rate (USD, official) 0.12; Rate (USD, market) 0.01. - Wine, vermouth, spirits from grape: Liter 600; Rate (USD, official) 0.40; Rate (USD, market) 0.02. - Sprits, liqueurs and cordials: Liter 1,200; Rate (USD, official) 0.80; Rate (USD, market) 0.04. - Fuels examples: - Gasoline > 98 octane, unleaded: Liter 241; Rate (USD, official) 0.16; Rate (USD, market) 0.009. - Gasoline, 95-98 octane, unleaded: Liter 249.5; Rate (USD, official) 0.17; Rate (USD, market) 0.009. - Kerosene: Liter 17; Rate (USD, official) 0.11; Rate (USD, market) 0.0006. - Vehicles: - Cars, used: CIF value up to LL 20 mln: Specific excise LL 4,500,000; Rate (USD, official) 2,982; Rate (USD, market) 164. - Cars, used: CIF value above LL 20 mln: Rate (%) on CIF 45. - Cars, new: CIF value up to LL 20 mln: Rate (%) on CIF 15. - Cars, new: CIF value above LL 20 mln: Rate (%) on CIF 45. - Electric and hybrid, new: Rate (%) on CIF 15. ### Appendix 4 — Tax rates on employment and business income of individuals (as presented) - Tax Rates on Business Income (Taxable income LBP million / Rate (%)): - Up to 9: 4 - 9 – 24: 7 - 24 – 54: 12 - 54 – 104: 16 - 104 – 225: 21 - Over 225: 25 - Tax Rates on Employment Income (Taxable income LBP million / Rate (%)): - Up to 6: 2 - 6 - 15: 4 - 15 - 30: 7 - 30 - 60: 11 - 60 - 120: 15 - 120 - 225: 20 - Over 225: 25 - Note: Family deductions maximum of LBP 12.5 million. For pension income, rates are halved as of 1 August 2019. Brackets and deductions were adjusted upwards in the 2022 budget law (passed after IMF mission). ### Appendix 5 — Key features of the income tax (selected items) - Wages and salaries income: 25% top marginal rate (art. 58). - Business income: 25% top marginal rate (art. 32). - Standard CIT rate: 17%. - Dividends: 10% final WHT, including foreign source dividends (art. 9 & 72 bis). - Interest: 10% final WHT (art. 69); some payments subject to 7% (increased to 10% until 1.8.2022 – subject to extension). - Capital gains: 15% (real estate CG phased out at a rate of 8%/year if sale of real estate is not business income). Gains from the sale of up to two primary residences are exempt (art. 45.2.b). ### Appendix 6 — Main tax incentive regimes (high-level) - Offshore companies (Legislative Decree No. 46 of 24 June 1983, amended by Law No. 19 of 5 September 2008): - CIT exemption; WHT on dividends exemption; annual LBP 1 million lump-sum tax. - Holding companies (Legislative Decree No. 45 of 24 June 1983, as amended by law No. 772 of 11 Nov 2006): - CIT exemption; WHT on dividends exemption; capital gains participation exemption if holdings > 10% and held for more than 2 years. - Package Deal Contract (PDC) Scheme (Investment Law (Law 360/2001)): - CIT exemption for up to 10 years; dividends exemption for up to 10 years; exemption from land registration fees (granted based on investment size, sector, and jobs created). - Investment Project By Zone (IPZ) Scheme (Investment Law (Law 360/2001)): - CIT and dividends exemptions up to 100 percent for periods up to 10 years (granted based on investment size, sector, and geographical zone). - Tripoli Special Economic Zone (TSEZ) (Law No 18 dated 5 September 2008): - CIT exemptions (subject to conditions); VAT, customs duties, and excise taxes exemptions for inputs within the TSEZ; income tax exemption for salaries of employees; exemption from land and property taxes for buildings inside the TSEZ. - Note: Authorities have informed that the TSEZ regime is not active yet. *Source: 1lbnea2023001 (IMF chapter excerpt).* ### REFERENCES ### REFERENCES ### Fiscal and tax policy studies - Amaglobeli, David, Emine Hanedar, Gee Hee Hong, and Céline Thévenot. 2022. Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices. IMF Note 2022/001, International Monetary Fund, Washington, DC. At: https://www.imf.org/en/Publications/IMF-Notes/Issues/2022/06/07/Fiscal-Policy-for-Mitigating-the-Social-Impact-of-High-Energy-and-Food-Prices-519013 - Bachas, Pierre, Lucie Gadenne, and Anders Jensen, 2020, Informality, Consumption Taxes and Redistribution, NBER Working Paper No. 27429. At: https://www.nber.org/papers/w27429 - Ebrill, Liam, Jean-Paul Bodin, Michael Keen, and Victoria Summers, 2001, The Modern VAT, IMF, Washington DC. - Hebous, Shafik, Dinar Prihardini, and Nate Vernon, 2022, Excess Profit Taxes: Historical Perspective and Contemporary Relevance, IMF Working Paper No. 2022/187. At https://www.imf.org/en/Publications/WP/Issues/2022/09/16/Excess-Profit-Taxes-Historical-Perspective-and-Contemporary-Relevance-523550 - Keen, Michael, 1998, The balance between specific and ad valorem taxation, Fiscal Studies, 19(1): 1-37. - OECD, 2017, International VAT/GST Guidelines. At: https://www.oecd.org/ctp/international-vat-gst-guidelines-9789264271401-en.htm - Platform for Collaboration on Tax, 2016a, Options for Low Income Countries' Effective and Efficient Use of Tax Incentives for Investment: A Report to the G-20 Development Working group by the IMF OECD< UN and World Bank. At https://www.tax-platform.org/sites/pct/files/publications/100756-Tax-incentives-Main-report-options-PUBLIC_0.pdf - Platform for Collaboration on Tax, 2016b, Options for Low Income Countries' Effective and Efficient Use of Tax Incentives for Investment: A Background Paper to the G-20 Development Working Group by the IMF, OECD, UN and World Bank. At https://www.tax-platform.org/sites/pct/files/publications/100757-Tax-Incentives-Background-paper-PUBLIC_0.pdf - Platform for Collaboration on Tax, 2020, The Taxation of Offshore Indirect Transfers – A Toolkit. At: https://www.oecd.org/tax/taxation-of-offshore-indirect-transfers.htm - Waerzeggers, Christophe and Cory Hillier, 2016, “Introducing a general anti-avoidance rule (GAAR)—Ensuring that a GAAR achieves its purpose,” Tax Law IMF Technical Note 2016/1, IMF Legal Department. At: https://www.imf.org/en/Publications/Tax-Law-Technical-Note/Issues/2016/12/31/Introducing-a-General-Anti-Avoidance-Rule-GAAR-Ensuring-That-a-GAAR-Achieves-Its-Purpose-43662 - Wei, Feng and Wen, Jean-François, 2019, The Optimal Turnover Threshold and Tax Rate for SMEs. IMF Working Paper. At: https://www.imf.org/en/Publications/WP/Issues/2019/05/07/The-Optimal-Turnover-Threshold-and-Tax-Rate-for-SMEs-46838 ### Lebanon-specific reports, assessments, and technical assistance - Assouad, Lydia, 2021, Rethinking the Lebanese Economic Miracle: The Extreme Concentration of Income and Wealth in Lebanon 2005-2014. Mimeo. - Beirut Urban Lab, 2020: Property Tax: No More Vacancy Exemptions: http://beiruturbanlab.com/en/Details/645/new-publication-property-tax-no-more-vacancy-exemptions - IMF, 2004, Lebanon: Reforming the Income Tax. Technical Assistance Report. - IMF, 2005, Lebanon: Notes on Policy Aspects of the Income Tax Reform. Technical Assistance Report. - IMF, 2010, Lebanon: Tax Policy Options. Technical Assistance Report. - IMF, 2012, Lebanon, Selected Tax Policy Issues and The Fiscal Regime for Oil and Gas. Technical Assistance Report. - IMF, 2016, Lebanon: Revenue Administration Gap Analysis Program—The value-added tax gap. Technical Assistance Report. - IMF, 2018, Lebanon: TADAT Performance Assessment Report. Technical Assistance report. - IMF, 2022b, Lebanon: Short-term and Medium-term Actions for Stabilizing Revenue Administration. Technical Assistance report. - IMF, 2022c, Press Release, IMF Staff Concludes Visit to Lebanon. At IMF Staff Concludes Visit to Lebanon - IRENA (2020), Renewable Energy Outlook: Lebanon. International Renewable Energy Agency, Abu Dhabi. At: https://irena.org/publications/2020/Jun/Renewable-Energy-Outlook-Lebanon - LFHLCS, 2019, Labour Force and Household Living Conditions Survey 2018-2019, ILO and CAS Lebanon. At: https://www.ilo.org/beirut/publications/WCMS_732567/lang--en/index.htm ### Energy, environment, and climate economics - Amaglobeli, David, Emine Hanedar, Gee Hee Hong, and Céline Thévenot. 2022. Fiscal Policy for Mitigating the Social Impact of High Energy and Food Prices. IMF Note 2022/001, International Monetary Fund, Washington, DC. At: https://www.imf.org/en/Publications/IMF-Notes/Issues/2022/06/07/Fiscal-Policy-for-Mitigating-the-Social-Impact-of-High-Energy-and-Food-Prices-519013 - IRENA (2020), Renewable Energy Outlook: Lebanon. International Renewable Energy Agency, Abu Dhabi. At: https://irena.org/publications/2020/Jun/Renewable-Energy-Outlook-Lebanon - MoE, UNDP, ECODIT, 2011, State and Trends of the Lebanese Environment. Beirut, Lebanon. At: https://www.undp.org/lebanon/publications/state-trends-lebanese-environment - MoE, UNDP, 2015a, Fossil Fuel Subsidies in Lebanon: Fiscal, Equity, Economic and Environmental Impacts. Beirut, Lebanon. At: https://climatechange.moe.gov.lb/viewfile.aspx?id=218 - MoE, UNDP, GEF, 2015b, Economic Costs to Lebanon from Climate Change: A First Look. Beirut, Lebanon. At: https://climatechange.moe.gov.lb/viewfile.aspx?id=228 - Parry, Ian, Simon Black, and Nate Vernon, 2021, Still Not Getting Energy Prices Right: A Global and Country Update of Fossil Fuel. IMF Working Papers, International Monetary Fund, Washington, DC. At: https://www.imf.org/en/Publications/WP/Issues/2021/09/23/Still-Not-Getting-Energy-Prices-Right-A-Global-and-Country-Update-of-Fossil-Fuel-Subsidies-466004 ### International tax reform and digitalization - IMF, 2022a, ‘Coordinating taxation across borders’, Chapter 2 in Fiscal Monitor: Fiscal Policy from Pandemic to War, April. At: https://www.imf.org/en/Publications/FM/Issues/2022/04/12/fiscal-monitor-april-2022 - OECD, 2021, Tax Challenges arising from the Digitalisation of the Economy – Global Anti-base Erosion Model Rules (Pillar Two) (Paris: OECD). At https://www.oecd.org/tax/beps/tax-challenges-arising-from-thedigitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two.htm - OECD, 2022, Tax Challenges arising from the Digitalisation of the Economy – Commentary to the Global Anti-base Erosion Model Rules (Pillar Two) (Paris: OECD). At: https://www.oecd.org/tax/beps/oecd-releases-detailed-technical--guidance-on-the-pillar-two-model-rules-for-15-percent-global-minimum-tax.htm - UNCTAD, 2022, The impact of a global minimum tax on FDI, Chapter 3 in World Investment Report 2022: International Tax Reform and Sustainable Investment. At: https://unctad.org/webflyer/world-investment-report-2022 ### Public health and tobacco taxation - Tobacconomics, 2022, Cigarette tax scorecard: Spotlight on the Eastern Mediterranean region. Policy Brief, June. At: https://tobacconomics.org/cigarette-tax-scorecard/ - World Health Organization, 2020, WHO Report on the Global Tobacco Epidemic, 2021. At: https://www.who.int/publications/i/item/9789240032095 ### Other technical notes and toolkits - Beirut Urban Lab, 2020: Property Tax: No More Vacancy Exemptions: http://beiruturbanlab.com/en/Details/645/new-publication-property-tax-no-more-vacancy-exemptions - Platform for Collaboration on Tax, 2020, The Taxation of Offshore Indirect Transfers – A Toolkit. At: https://www.oecd.org/tax/taxation-of-offshore-indirect-transfers.htm - Waerzeggers, Christophe and Cory Hillier, 2016, “Introducing a general anti-avoidance rule (GAAR)—Ensuring that a GAAR achieves its purpose,” Tax Law IMF Technical Note 2016/1, IMF Legal Department. At: https://www.imf.org/en/Publications/Tax-Law-Technical-Note/Issues/2016/12/31/Introducing-a-General-Anti-Avoidance-Rule-GAAR-Ensuring-That-a-GAAR-Achieves-Its-Purpose-43662 *Content derived from the "REFERENCES" section of 1lbnea2023001 - REFERENCES.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1lbnea2023001.pdf_