Lebanon: Technical Assistance Report on Putting Tax Policy Back on Track

LEBANON IMFCountryReportNo.23/8 January2023 TECHNICALASSISTANCEREPORTONPUTTINGTAXPOLICYBACKONTRACK ThistechnicalassistancereportonLebanonwaspreparedbyastaffteamoftheInternationalMonetaryFund.ItisbasedontheinformationavailableatthetimeitwascompletedinNovember2022. Copiesofthisreportareavailabletothepublicfrom InternationalMonetaryFundPublicationServicesPOBox92780Washington,D.C.20090Telephone:(202)623-7430Fax:(202)623-7201 E-mail:publications@imf.orgWeb:http://www.imf.orgPrice:$18.00perprintedcopy InternationalMonetaryFundWashington,D.C. ©2023InternationalMonetaryFund FISCALAFFAIRSDEPARTMENT Lebanon PuttingTaxPolicyBackonTrack ShafikHebous,SvetlanaCerovic,MichaelKeen,LydiaSofrona,NateVernon,andChristopheWaerzeggers TechnicalReportNovember2022 ThecontentsofthisreportconstitutetechnicaladviceprovidedbythestaffoftheInternationalMonetaryFund(IMF)totheauthoritiesofLebanon(the"TArecipient")inresponsetotheirrequestfortechnicalassistance.Thisreport(inwholeorinpart)orsummariesthereofmaybedisclosedbytheIMFtoIMFExecutiveDirectorsandmembersoftheirstaff,aswellastootheragenciesorinstrumentalitiesoftheTArecipient,andupontheirrequest,toWorldBankstaffandothertechnicalassistanceprovidersanddonorswithlegitimateinterest,unlesstheTArecipientspecificallyobjectstosuchdisclosure(seeOperationalGuidelinesfortheDisseminationofTechnicalAssistanceInformation—http://www.imf.org/external/np/pp/eng/2013/061013.pdf). Disclosureofthisreport(inwholeorinpart)orsummariesthereoftopartiesoutsidetheIMFotherthanagenciesorinstrumentalitiesoftheTArecipient,WorldBankstaff,othertechnicalassistanceprovidersanddonorswithlegitimateinterestshallrequiretheexplicitconsentoftheTArecipientandtheIMF’sFiscalAffairsDepartment. CONTENTS GLOSSARY5 PREFACE6EXECUTIVESUMMARY11 I.INTRODUCTION16 II.LEBANON’SCRISISANDTAXATION18 A.FramingtheProblemofMis-ValuationattheBorder18 B.FramingtheProblemofHighInflation19 C.CorrectionofMis-ValuationandforHighInflation19 III.VAT22 A.CurrentSituation22 B.ImprovingtheVAT25 C.TheVATThresholdandInflation32 IV.EXCISES35 A.CurrentSituation35 B.DealingwithInflation35 C.PetroleumProducts37 D.Tobaccoproducts40 V.INCOMETAXES43 A.KeyfeaturesoftheIncomeTaxSystem43 B.ANewBetterIncomeTaxLawisNeeded44 C.ImprovingEmploymentIncomeTaxation45 D.ImprovingCapitalIncomeTaxationattheIndividualLevel47 E.TaxationofBusinessIncome(otherthanundertheCIT)48 F.CorporateIncomeTaxation52 G.ProtectingagainstErosionoftheIncomeTaxBase59 H.TheGlobalMinimumTax61 VI.PROPERTYTAXES64REFERENCES76 BOXES 1.Lebanon’sClimateCommitmentsandPolicies40 2.DistortionsandInequitiesundertheLumpSumRegime44 3.ImprovingTaxTransparencyofIncentives58 FIGURES 1.TaxRevenueandStructureinLebanon17 2.RevenueImpactofMis-Valuation21 3.VATRevenue23 4.VATStandardRatesandC-Efficiency24 5.ImportandTotalVAT,2013-202127 6.VATRegistrationThreshold32 7.ExciseRevenue(%ofGDP)35 8.FuelImportsandPrices38 9.RevenueRaisedby,andImpactonPricesof,aDieselExcise39 10.RevenuefromEmploymentIncome46 11.CITRateandRevenuetoGDP,SelectedCountries52 12.RevenuesfromTelecomSurpluses68 TABLES 1.RevenueForegoneDuetoMis-ValuationoftheTaxBaseofImports(%ofGDP)19 2.VATbyRangeofTurnover,2020/2133 3.TheErosionoftheExcises36 4.Lump-sumRegime−NetProfitDeterminationRatesforSelectSectors44 5.SelectedInternationalPresumptiveTaxRates51 6.EntitiesinLebanonIn-ScopeofPillar2—AnOverview63 APPENDICES 1.CalculationoftheRevenueImpactfromMis67 2.TelecommunicationsSector68 3.ExciseRatesbyProduct69 4.TaxRatesonEmploymentandBusiness70 5.KeyFeaturesoftheIncomeTax71 6.MainTaxIncentivesRegimes73 GLOSSARY AEOIAutomaticExchangeofInformation BDLBanqueduLiban CITCorporateIncomeTax CoCGCodeofConductGroup CoMCouncilofMinisters EDLÉlectricitéduLiban EFFExtendedFundFacility ESSNEmergencySocialSafetyNet ETREffectiveTaxRate EUEuropeanUnion FADFiscalAffairsDepartment(oftheIMF) GDPGrossDomesticProduct IDALInvestmentDevelopmentAuthorityofLebanonIPZInvestmentProjectbyZone IMFInternationalMonetaryFund IPZInvestmentProjectbyZone LBPLebanesePound(orLira,thecurrencyofLebanon);theofficialrateisUSD1=LBP1,510.ThemarketrateisaboutUSD1=LBP38,000asofSeptember2022. LEGLegalDepartment(oftheIMF) MoFMinistryofFinance MoEMinistryofEnergy OECDOrganisationforEconomicCooperationandDevelopmentPDCPackageDealContract PITPersonalIncomeTax QDMTTQualifiedDomesticMinimumTopupTaxR&DResearchandDevelopment TSEZTripoliSpecialEconomicZone(TSEZ) USDU.S.Dollar VATValue-AddedTax WHTWithholdingTax WTOWorldTradeOrganization PREFACE AttherequestoftheDeputyPrimeMinisterMr.SaadehAlShami,ateamfromtheIMFFiscalAffairsDepartmentandLegalDepartmentconductedamissioninBeirutduringSeptember12-23,2022,toassisttheauthoritiesinreviewingtaxpolicy.ThemissioncomprisedShafikHebous(missionhead),SvetlanaCerovic(MCD),MichaelKeen(FADexpert),LydiaSofrona(LEGexpert),ChristopheWaerzeggers(LEG),andNateVernon(FAD). ThemissionhelddiscussionswithDeputyPrimeMinisterMr.SaadehAlShamiandtheMinistryofFinance(MoF)ledbytheMinisterofFinanceMr.YoussefKhalil,includingMr.GeorgesMaarrawi(DirectorGeneral),andMr.LouayelHajjChehade(Commission