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Tax evasion in Lebanon close to $5B: Bank Audi.

Summary: Bank Audi said Wednesday that the Lebanese authorities can close the country's fiscal gap if they combat tax evasion, which the bank estimated at $5 billion.

BEIRUT: Bank Audi said Wednesday that the Lebanese authorities can close the country's fiscal gap if they combat tax evasion, which the bank estimated at $5 billion. "While it is increasingly difficult to raise taxes in a slowing down real sector environment, the reinforcement of resource mobilization should come from fighting tax evasion, which is a prerequisite for any fiscal soft-landing scenario for Lebanon. ... We estimate Lebanon's fiscal evasion gap at circa $5 billion in 2017, the equivalent of 10 percent of GDP," Audi said in its second-quarter report on Lebanon for 2018.

There is no official estimate yet on the size of tax evasion in Lebanon, although officials admit that many sectors do not pay taxes to the government.

Tax evasion is one of the most serious issues governments have faced since the Taif Accord. The previous government applied a wide series of taxes in 2017 to finance the salary scale for public sector employees and public school teachers.

Banks, merchants and businesses have complained that additional taxes put more burdens on their operations, especially amid an economic slowdown.

"With fiscal adjustment increasingly considered to be a prerequisite for the resilience of the Lebanese economy and markets in the medium to long term, there are rising questions on where the major fiscal effort has to come from in an economy that has the third-highest debt ratio in the world and that has a public finance deficit that falls within the top decile of deficit ratios worldwide," the report said.

Audi stressed that the government needs to mobilize its resources and overcome difficulties to improve tax collection, which would reduce the budget deficit.

"There is no doubt that Lebanon's resource mobilization (actual public revenues to GDP ratio) of circa 20 percent over the past year is low relative to international norms (36 percent for advanced economies and 26 percent for emerging market and developing economies). This is partly because Lebanon has relatively lower tax rates but more importantly this is tied to the large fiscal evasion gap that Lebanon suffers from," the report said.

It added that this gap is almost equivalent to Lebanon's budget deficit and it mainly comes from a number of taxes, namely income tax, VAT, custom duties, EDL revenues and property taxes.

"The largest source of tax evasion is tied to income taxes, estimated at circa $2 billion, the equivalent of 3.9 percent of GDP. It mainly emanates from fiscal evasion in taxes on salaries and profits. The former's estimate is based on a total of salaries accounting for 35 percent of GDP with an average tax rate of 10 percent, yielding to potential taxes on salaries of $1.5 billion, while actual collection stands at $0.6 billion, leaving $0.9 billion of evasion," the report added.

Some economists and financial analysts have urged the government to increase the number of tax collectors at the Finance Ministry and to crack down on public employees who turn a blind eye to those who do not pay their taxes regularly.

"As to taxes on profits that account for 30 percent of GDP, tax evasion is estimated at $1 billion, after adjusting the actual profit tax figures from the tax paid by banks on financial engineering operations and that is estimated at $775 million. The second source of fiscal evasion is that related to VAT, estimated at circa 3 percent of GDP, the equivalent of $1.5 billion. The VAT gap analysis undertaken by the IMF points to significant VAT erosion over time," Bank Audi said.

It added that the IMF believes that if the government improves VAT collection, this would reflect positively on the annual budget deficit.

"The IMF analysis measures the overall gap between actual VAT receipts and receipts under a perfectly enforced VAT levied on consumption. In particular, the VAT compliance gap estimates the impact of imperfect compliance within the current tax system.

"As the structure of the Lebanese economy is oriented toward private consumption and high share of imports, the potential gains from well-mobilizing VAT revenues are significant," the report said.

It added that the third source of tax evasion is customs.

"On the basis of a 13 percent average customs on the import bill of $20 billion, potential custom duties should amount to $2 billion, while actual duties levied amount to $1.5 billion, leaving a fiscal evasion gap of $0.5 billion, the equivalent of 1 percent of GDP," Bank Audi said.

It added that the fourth source of fiscal evasion is unpaid electricity bills and theft through illegal connections. "The gap here is estimated at $0.7 billion, which accounts for almost 40 percent of potential electricity revenues that should be collected by EDL. Fiscal evasion here represents circa 54 percent of the Treasury transfers to EDL last year, which is estimated at $1.3 billion for full-year 2017," the report said.

The fifth source of fiscal evasion is property taxes, which is tied to property undervaluation in real estate registration.

"It is estimated that properties are registered at an average of 20 percent below their true value. As such, property tax evasion is estimated at $0.2 billion, the equivalent of 0.4 percent of GDP," the Bank Audi report said.

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Publication:The Daily Star (Beirut, Lebanon)
Geographic Code:7LEBA
Date:Aug 9, 2018
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