Monthly Editorial  
Economic Letter
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Janvier 2017


The proposed 2017 budget
A balanced discussion in the interest of the economy and citizens


(*) Published by Lebanon Opportunities



Media hype has diverted the 2017 draft budget discussion from the enormous quantity of tax amendments – more than 50 – that hits people in their businesses assets and incomes. This has led the discussion elsewhere – to the tax on banks and on interest earned by bank depositors – which is discussed further herein. The hype has been further inflated through the publishing of a memo from the Association of Banks (ABL) to the Minister of Finance, as well as the minutes of a meeting between the ABL and the Governor of the Central Bank (BDL), as if these two documents were heavenly secrets. These positions were advanced to alert fiscal and monetary authorities on the risks of the taxation trend contained in the budget draft and its impact on their reputation and that of the country. We will get back to that. But first, a discussion, is merited both on the taxation principles that have been wronged by the proposed amendments, and on the many new tax burdens on individuals, families, and companies, including banks.  

The 2017 draft budget contains a series of amendments that practically revoke sound and deep rooted tax principles that lawmakers have followed for more than 70 years, in order to protect taxpayers from the abuse of power. It is important to describe it in detail so that public opinion, ministers, and members of Parliament see what they are about to do.

The proposed texts in article 29 bypass the right of summons, restricting it to being published in two newspapers and the Official Gazette, which only a minority read. Tax refunds are also a natural right, as is post submittal of additional documents and information if it becomes available Articles 32-34 contravene these rights. Even more, as it clearly threatens those daring to exercise these rights to reopen the audit process, which practically lifts the time limitations on audits, which is four years in addition to that of the audit.

Articles 35 to 44 contradict the sound basis on which the tax on built-properties was set. The proposed amendments impose on buildings that are set for investment by companies a two percent tax (actually a fee) of its rental value. It is not deducted (as it logically should be) from realized profit. It is instead being deducted from gross profit. It surely is a new doctrine adopted by the tax authorities. Another LL2 million (around $1400) is added on every company branch, which is clearly a case of double taxation. The amendments on built-properties have done away with the principle of vacancy. It is proposing to define it as six months for old buildings and 18 months for new ones. This means that developers and owners of vacant buildings, and those living abroad, will be taxed as if these properties were occupied. It is well known how slow property sales are nowadays, as a results of the stagnant economy and market. Taxing vacant buildings is unfair, and may lead to the bankruptcy of many companies in that sector. These articles propose to raise fees on built-properties 150 to 300 percent, which is a also a heavy burden on the occupants of properties, most of whom belong to the middle classes, and to employees that have barely been able to secure mortgage-backed bank loans. It is as if these building owners were in need of the straw that will break their back.      

Articles 49-57 introduce amendments on offshore company bylaws in an astonishing way. The flat tax has been quintupled to LL5 million (article 47). If the tax auditor reveals a violation, no matter how minor, the company becomes taxed as if it is a regular company, instead of being fined for that particular infraction. It goes without saying that this measure opens the door for the subjective assessment of the tax auditor, and to a new channel of corruption.

Articles 49-57 introduced many changes on the fiscal stamp, which increases the fee on public payments to people from three to four per thousand (article 51). There is also the oddity of a fiscal fee of 1.5 percent of assessed value per square meter. The assessed value is estimated by a specialized committee in each governorate. This is another venue for subjectivity and corruption. Why not have central committees for the entire country whose members are selected amongst the experienced and well-reputed?

Another calamity is the one percent tax proposed in article 58, to be levied on all import and export operation. It can be deducted from annual profit tax. How will it be refunded if the company does not generate any profit? Article 60 stipulates a four percent tax on fuel oil (mazout) which will lead to an increase in manufacturing costs as well as individual consumption. Article 61 (point 4) amends the fee structure (annex of law 67/67) on the four automobile categories according to model year and engine power as follows:

>13 years        LL40,000-LL340,000 ($27- $227) up to 51 horsepower (hp)

5-12 years       LL855,000 ($570) 51+ hp

2-4 years         LL1.8 million ($1,200) 51+ hp

<2 years          LL3.72 million ($2,480) 51+ hp

Articles 62-63 propose increasing notary public fees by 20 percent of fees levied to the Treasury’s benefit. Article 64 proposes an increased corporate income tax from 15 to 17 percent. This is not an issue by itself. The problem resides in the inability of the tax authorities to implement it universally and equitably. Its discretionary or selective application has become a burden while in parallel, there is a large segment of companies that have dodged tax authorities, by not registering, and are therefore unknown to it. Activating tax collection first is the best approach, instead of further burdening those who abide by it. The same context applies to increases of taxes on fixed asset revaluation and reassignment, including real estate, which is being increased at a 50 percent rate from ten to 15 percent. It should be increased at the same gradual manner of VAT, which is ten to 11 percent. It is a pity that the sales turnover threshold for VAT declaration has not been lowered. That threshold is currently being used to dodge declarations. Would the tax authorities divulge how many companies declare VAT, out of the more than 370,000 operating companies?

Article 68 proposes to cancel the right of tax refunds on newspapers, hospitals, and education institutions, especially universities. This will lead to an increase in expenses and subsequently on the cost of healthcare and education. The proposed tax amendments would exhaust many ordinary people. It imposes (article 69) a LL6,000 ($4) fee on each ton of cement, or four percent of its value. It has quintupled (article 70) the fees on alcoholic beverages, which will impact commercial and touristic establishments, and will spur contraband in its ugliest forms. Articles 71-74 levies LL75,000 ($50) on outbound economy-class air travelers. This will impede the competitiveness of travel to Lebanon, which is already the most expensive in the world relative to distance traveled. It also imposes fees on containers: LL80,000 ($53) for 20 foot(ft.) containers and LL120,000 ($80) on those measuring 40 ft. Even lottery tickets paying out more than LL10,000 ($6) in prize money will become subject to a 20 percent tax (article 74). Last but not least, a new fee has been invented (article 75): Two percent upfront on property title transfer, and if the transaction is not registered in the Cadaster within one year, the refund becomes void, i.e. the registration cost becomes seven instead of five percent. The icing on the cake is in article 83, which reschedules the State’s payables to the National Social Security Fund (NSSF) over ten years, free of interest. This means that the principle value of this debt would be depreciated through inflation. That same article grants the Minister of Finance the authority to determine the value of each yearly installment. This is pensioners’ money. How will the General Confederation of Labor Unions abandon so simply and easily the pensioners’ funds, i.e. salaried workers? The board members of the NSSF will remember how it categorically rejected this recurrent proposition from previous cabinets.

Back to the issue of tax on interest earned by bank depositors (which article 67 stipulates would increase from five to seven percent), and to the novel way of calculating income tax on banks, the ABL’s position is the following:

1)   The new method to calculate bank taxes discriminates between them and other taxable companies. The average tax rate on banks will reach 34 percent versus 17 percent on the corporate sector.

2)    It also discriminates between banks themselves, whereby tax rates will range from 17 percent to 76 percent, depending on the bank size, and the structure of its placement portfolio, especially that taxation should not be imposed retroactively. Taxable instruments are Treasury Bills and Certificates of Deposit that banks carry in their portfolios for an average of seven years.

3)   Burdening bank profits with such additional tax obligations will render the banking sector unattractive for new investors at a time when banks require a large increase in its capital structures in order to comply with international banking standards, such as the Basel standards for solvency and liquidity, international financial reporting accounting standards (IFRS9), and others.

4)   These fiscal amendments will necessarily increase bank costs of funds, resources, and investments. This in turn will increase the financing cost of the economy, curtailing in the process economic growth for the coming period. The official policy of the State, as announced in the President’s oath and the government program, is a commitment to stimulate the economy, not to suppress or deter investment.        

Citizens are wondering why all these taxes and fees to whom are they directed? Increasing taxes in an economy whose growth has slowed down or even halted will deepen and prolong stagnation, long before regenerating economic activity. Citizens are left wondering why they and the economy are being burdened, in one gowith this large amount of taxes and fees, especially while the State is negligent in preventing tax evasion of a large segment of taxpayers, as well as being unable to collect taxes from several regions of the country. The flagrant organized corruption in public facilities and ports is scandalous. The bottom line is that multiplying taxes and fees exacerbates the problems of those entire sectors and regions that abide by the present tax laws. This discrimination weakens the sense of citizenship, which in turn leads to emigration, and thus the shrinking of the tax base. The negative impact of new and increased taxes and fees should therefore not be underestimated.

To those targeting the banking sector, on purpose or by ignorance: Banks need to strengthen their own equity and reserves and provisions through its profits and new investments to be able to keep on financing the State ($39 billion) and the economy ($55 billion), and to support the foreign currency reserves at BDL, ($ 50 billions) in order to maintain the exchange rate of the lira. The new international accounting rules (IFRS9), entering into effect in 2018, will rate the risks of the private sector, the Lebanese State, and the Central Bank at a high levels, which will require high capitalization.

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Last Updated on February 28, 2017
 
 
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