Interim Prime Minister Najib Mikati, during the Council of Ministers held Monday. (Credit: Mohammad Yassine/OLJ)
Outlined in the 2023 draft budget law passed two weeks ago, is an article exempting residents in Lebanon from paying tax on foreign accounts and assets acquired before 2022. The tax exemption however, sits oddly with the state’s urgent need for resources and a way out of the ongoing economic crisis.
As was originally proposed by caretaker Minister of Finance Youssef Khalil, the initial draft of the 2023 budget law stressed the need to strengthen tax compliance. “Taxpayers who have not declared their income and paid the taxes due by the end of the current year may be referred to the prosecutor’s office for financial crimes of tax evasion,” stated the previous article, which made no distinction between income earned before or after 2022. “Failing to comply with tax obligations may also result in the seizure of assets and funds,” it continued.
The exemption, highlighted in article 26 of the draft law, sparked the outrage of legal and financial experts aligned with the Oct.17 protest movement.
“The cabinet’s decision constitutes a tax amnesty for those who, while residing in Lebanon, hold fortunes abroad,” stated rights organizations ALDIC, the Legal Agenda, Koullouna Irada, Transparency International-Lebanon and The Policy Initiative in a joint press release published recently.
“This decision has shielded them from the crime of tax evasion and prosecution, (...) under the anti-money laundering law of 2015, tax evasion constitutes a money laundering crime punishable by three to seven years in prison and confiscation of the perpetrator’s assets,” the statement continued.
“Exempting income tax before 2022 means that the state wants to divest itself of considerable tax revenues and public funds,” they added, noting that “the attempt to sneak this provision into the budget law intends to avoid negative reactions from citizens.”
Contacted by L’Orient-Le Jour, tax lawyer and ALDIC member Karim Daher said that under the income tax law of 1959, income from movable capital abroad is subject to a 10 percent tax. “This rule has virtually never been applied, in particular because the beneficiaries have availed themselves of banking secrecy, which has already been lifted by law no. 306 of 2022,” he explained.
“Although Lebanon is a signatory to international conventions stipulating the exchange of banking and tax information between the 168 member countries of the Global Forum on Transparency and Exchange of Information for Tax Purposes, of which it is a member, it does not itself ask these member states for information on accounts held by its tax residents [in these states],” Daher criticized.
Confusion
At the end of Monday evening’s cabinet meeting, a minister told L’Orient-Le Jour, on condition of anonymity, that a decision to revert to the original article was made. In other words, the decision to impose taxes on foreign income from movable capital, even before 2022, would be reinstated. However, he said the decision was not yet official, and that they had to “wait for the new wording of the article.”
Also contacted by our L’Orient-Le Jour, Finance Minister Khalil stated “the article will not be deleted for the time being,” but that “it can always be corrected.”
L’Orient-Le Jour was told that at Monday’s meeting, the MPs were handed copies of the draft law with the original version of the article on foreign income tax.
A ministerial source told L’Orient-Le Jour before the cabinet meeting that the exemption “will remain subject to debate as long as it has not been subjected to a parliament vote.”
Why then, was it adopted by the cabinet? The source said that during the discussions preceding the drafting of Article 26, the ministerial team mentioned the difficulties of applying taxes on years before 2022, because the tax system does not decree “a unified tax,” i.e. it does not allow losses to be deducted from gains.
Daher retorted this: “Why is the cabinet making this deduction for previous years, but not for 2022?” He pointed out that the risk arising from such a measure lies in the fact that “all those who have committed acts of corruption or reprehensible acts liable to prosecution for money laundering, in particular those who have contributed to the economic and financial collapse, will in this way be completely amnestied and not held to account, because the offense at source will no longer be established.”
“Since 2017, these people have had the opportunity to organize their affairs and remove all traces of accounts or financial interests in opaque structures,” Daher continued.
The ministerial source told L’Orient-Le Jour that during discussions on the draft law, the cabinet was in favor of applying the exemption, arguing they wanted to avoid double taxation. Such situations arise in the case of the absence of a tax treaty between Lebanon and a country. This is the case with the United States, where foreigners are subject to taxes on their income from movable property acquired on its territory.
“The real reason for the tax amnesty advocated by the cabinet is that it wants to protect politicians and bankers who transferred their funds after the Oct. 17, 2019 uprising,” said an economic expert who declined to be named.
This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.