Interview with Georges Corm

Former finance minister calls for targeted and intelligent tax reform

Now that the government has approved the 2017 budget, the question remains as to what new taxes or tax increases might be imposed. As Executive goes to print, the indication is that there will be some introduced, but it is not clear which, and Parliament will have to debate the budget before it is ratified into law. There appears to be zero studies by the government (or, at least, none that are public, and officials decline to provide details) of expected revenues, their social impacts or the effects to the economy that new taxes might imply (see cover story). Georges Corm, Lebanon’s minister of finance at the turn of last century, describes to Executive the government and Parliament’s approach to financing public spending as convoluted and misleading. “[It’s] like somebody stumbling through a room without lights,” he says.

E   How do you view the government’s proposal of new taxes or tax increases as a new source of revenue to the state?

The tax system is unfortunately not based on any strategic view of what the needs of the Lebanese economy are. What I’ve said repeatedly is that our tax system is putting a burden on people that are in the productive sector. As soon as you are productive and receive an income from your productive activity you are liable for the income tax. But if you live from your rent revenues, except for the 5 percent tax on interest income from banking deposits, you have no income tax to pay. So this is an unfair system and a system that punishes the productive sectors (industry, trade and services) and encourages Lebanese to go more into rent-type activities that are untapped by the government. When I was minister of finance, I wanted to introduce a general income tax, as our income tax system is fragmented with different tax rates according to different categories of revenues. In addition, taxpayers have to file separate income tax returns for each kind of taxable income so that income from various sources are not accumulated and assessed to be subject to a general income tax according to the same progressive rate of taxation of the overall income. This not only causes the treasury to lose a substantial amount of income tax, but it is also a headache for the taxpayers, as they must presently file many different income tax returns it have revenues from different sources. Therefore, a unified income tax system would make life easier for all taxpayers as many Lebanese have several sources of income that are not taxed together. So having several sources of income that are assessed separately by the tax department is a big headache both for the taxpayers and the tax authority.

E   One local bank said in early March that tax evasion amounted to $4.2 billion. Is this figure anywhere near accurate?

These are guesses, we [don’t have reliable] statistics in Lebanon. What is extremely important is to close the many loopholes in tax legislation that allow revenues to legally escape income tax. Looking at petty trade activities, it is a loss of time for an income tax department to try to tax them, while what is important is to check that tax collection is properly followed by tax authorities as compared to tax assessments. In addition, there are a lot of tax breaks, especially for new investments, but it is not transparent and you do not really know who is getting the tax exemption.

E   In late March the government issued $3 billion in treasury bills which were snapped up by local banks.

The government has no problem in raising the amounts needed to refinance its maturing debt obligations, as a large part of the quite substantial yearly banking profits is due to subscribing and trading T-bills (treasury bills) and Eurobonds issued by the state. This is why I would advise the central bank, the Ministry of Finance and the private banking sector to agree to decrease the average interest rate paid by the state on its public debt by around 1 percent on any new issues. Such a decline in the cost of servicing public debt to the state would save the treasury a yearly amount of $700 million in a few years time.

One should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world

E   Some of the newly issued debt does replace old debt that was at a higher interest rate. But for Lebanon to get to a more attractive interest rate would that not require a higher sovereign credit rating?

Not necessarily because Lebanon’s public debt is mostly owed domestically, even in respect to dollar denominated debt. This would affect the profit of the banks only a little bit. They have had such huge and continuously increasing annual profits since the nineties, whatever the economic situation of Lebanon, that a reduction in interest rates paid by the state can be bearable without endangering their profitability. Whether there is a 1 percent or an 8 percent growth of the economy, bank profits are unaffected by the variation in economic activity because they have this huge portfolio of treasury bills that secure a steady and increasing flow of banking revenues.

E   The banks always argue that because they are the most transparent sector, they are penalized and targeted to pay more taxes.

I don’t see how they’re penalized, and I don’t think the banking sector drives the economy. Yes, Lebanese banks are very good at serving their affluent clientele both inside or outside Lebanon. This is why this contributes partially to attract the big flow of remittances that are sent from our emigrants, remittances being the biggest source of financing of our huge trade deficit. But, one should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world, which might be the most important drive for the flow of remittances. This is why I believe that they can decrease them a little bit, instead of these endless discussions on how to tax more the banking system.

E   What effect might the proposed 2 percent tax increase on the interest of deposits (a capital gains tax) mean for the banking sector and for the economy?

I am personally not enthusiastic about raising the tax on the interest of banking deposits. But raising this tax from 5 to 7 percent will probably not produce a decline in the amount of deposits in the banking system. If adopted, this measure should not be repeated. In fact, I believe that a reduction in the average rate of interest paid on public debt would save more money for the treasury than what the increase in the tax would yield as an additional revenue. All these kinds of measures should be studied carefully.

E   Would an increase on the corporate tax from 15 to 17 percent discourage Lebanese banks’ appetite to buy locally issued debt?

Certainly not. But again, I prefer the decline in the average interest rate on the public debt. We have almost 4 or 5 or 6 percent differences according to the maturity of the bonds and treasury bills that the state is issuing. If Lebanese today, because they are the subscribers directly or indirectly want to go to foreign banks abroad to place deposits, they will get what? One percent, maybe 1.5? So you still have quite a margin to have a reasonable decrease. Let’s bring the premium paid on large deposits in Lebanon to 3 or 3.5 percent above average interest rates paid outside Lebanon by international banks on their deposits. Currently, on average, we’re around 6 to 6.5 percent paid on Lebanese pound deposits and 4 to 4.5 percent (or sometimes more) on dollar deposits. For what the state is paying on its debt, if you take out 0.5 or 1 percent it will not be a catastrophe for the banking sector nor for attracting capital from abroad. A decline in interest rates in Lebanon will also be positive for productive activities and new investments as it will also reduce the cost of financing in the economy for the private sector.

What might be the effect when taxing consumer behavior by raising the Value Added Tax (VAT)?

Nothing has been studied carefully. For VAT you can have two rates, although I do not like that. You can have a 15 percent tax rate on luxury goods for instance, and keep other goods at 10 percent. There should be a study of the different alternatives to see what  the yield will be to the treasury, but you have a government which did not detail how the proposed 22 new taxes or increases in existing taxes are going to be implemented. Such a proposal in one shot is unreasonable, especially since most of the proposed taxes are fees and excises. For instance, when the government says it is going to double the fees for public notaries, this will affect all the Lebanese population and will constitute quite a burden on the large poor segment of the Lebanese population. The government says they’re going to, and this is a very old issue, tax the resorts along the coast that are not legal, estimating that it will yield 400 billion Lebanese Lira, but how did they arrive at this figure? And what about raising the very low basis for calculating the rent paid to the state on using legally public domain along the sea or the river coasts? Why did the basis of assessment of this tax not change since the early 1990s?

A decline in interest rates in Lebanon will also be positive for productive activities and new investments

E   Are these figures pulled from thin air, or how has the government arrived at its estimates of revenues for these proposed taxes?

You can do it but you need the statistics, but if you don’t have data how can you have an opinion? The minister of finance says this will bring us a certain number of billions of LBP, but I don’t see how the ministry determined its estimate of the additional income that would accrue to the treasury.

E   What effect do you think new or increased taxes might have on consumer behavior?

You have to distinguish between Lebanon’s two separate economies. The economy that is very prosperous – the nice areas of Beirut with the restaurants and hotels and some summer resorts in Mount Lebanon, and where you see luxurious cars and the very affluent part of the population. I don’t know what percent of Lebanese families are affluent, but my guess is that it can’t be more than 6 or 7 percent. Then you have the other economy that is a deprived one, where people are on the level of poverty, sometimes extreme poverty, and these are not the people that should support additional taxes on consumption or on legal documents they need in their daily life. This is why we have to stop going to indirect taxes, and to simplify the tax code through a unified income tax, canceling old dated excise taxes or fees (like the stamp duties). In addition, the government can take some additional income tax measures, so that ultra-luxurious villas or apartments are taxed in accordance with the luxury and quality of the residence. In addition, real estate companies can buy and sell real estate assets just through buying or selling shares, thus escaping the 6.5 percent registration fee. I tried to introduce a 6 percent tax on the selling or buying of shares of real estate companies so that it is the same as the tax burden that is paid by individuals buying a property. This is a legal loophole.

E   So you are in support of some new taxes?

I am not in favor of imposing 22 new tax measures in a haphazard way just to increase treasury revenues. There should be an intelligent and adapted tax policy that will rebalance the sources of tax revenues between productive and non-productive activities on one hand, and between income tax revenues and consumption taxes or excises and fees on the other hand.

E   If the government imposes any of the proposed taxes should projections for economic growth downgrade?

No, because I go back to what I said earlier: we have two economies. A very affluent economy that could support a reasonable increase in the tax burden on income or on luxurious consumption without any problem; and the other which is stagnant where the level of poverty is continuously and dangerously increasing. Of course, a 1 percent increase in VAT for this category of people might affect them. In any case, it is urgent that we have enough studies and statistics to study the impact of additional taxation measures. Today, the staff at the Ministry of Finance is in a black room, pitch black – they act like anybody would in such a case, i.e. behave erratically.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.