An IMF report emphasized the "urgent need" to reform customs and tax services in Lebanon following years of mismanagement and the country's crisis since 2019. This has resulted in a significant drop in public treasury revenues, decreasing from 21% of the GDP in 2019 to 6.3% in 2022.
In response to a Capacity Development (CD) assistance request from the Caretaker Minister of Finance, Youssef El Khalil, a mission from the International Monetary Fund's (IMF) Fiscal Affairs Department (FAD) visited Beirut from September 25 to October 6. The mission aimed to initiate a collaborative CD project with the IMF's Middle East Technical Assistance Center (METAC), specifically focusing on tax administration in Lebanon. It sought to establish reform priorities and capacity-building strategies for the upcoming 36 months.
The mission underscored the crucial need to initiate a series of urgent and progressive initiatives, backed by financial support, to bring about the desired change. This financial backing is anticipated from international economic and financial institutions, including the World Bank, the European Union, the United Nations Development Programme (UNDP), and the IMF. These institutions have expressed their willingness to provide financial assistance, contingent upon a genuine internal commitment to change. The report highlighted a significant deterioration in tax collection capacities, with the percentage of tax revenues to Gross Domestic Product (GDP) dropping from 21% in 2018 to 6.3% in 2022.
Staff Shortage
The mission's report emphasizes the critical state of tax and customs services in Lebanon, particularly in terms of staffing. Owing to the political and economic situation, a freeze on hiring has been instituted, and a substantial number of employees have resigned due to the significant devaluation of their salaries.
In the domain of human resources, the situation is exceptionally critical within the Information Technology (IT) department. At present, there is a single employee within the Lebanese Customs Administration, and no personnel are allocated to other tax departments.
Three Categories of Reforms
The IMF mission has elaborated on priority reforms, taking into consideration the anticipated outcomes and the technical complexities required for implementation. The IMF has divided these reforms into three groups to achieve quick gains through relatively straightforward initiatives that will contribute to generating momentum for transitioning to the core actions, which constitute the essence of the reform program. Additional measures require further study before implementation.
Concerning the tax service, the report highlights three quick gains: the imperative to exchange data with the customs service, combat tax leaks from major contributors, and carry out analysis statistics to enhance tax collection.
The core initiatives involve addressing the issue of employee resignations and recruiting new staff, with a particular focus on IT, audit, and recovery services. Ensuring that salaries align with the prevailing market dollar rate, enhancing working conditions, and restructuring the current organizational framework should be prioritized.
Supplementary measures are required to reinvigorate the Large Taxpayers Office and acknowledge that current standards have been eroded by inflation. This involves extending its mandate to also cover the value-added tax (VAT), establishing a reform management office to coordinate reforms across various departments, and consolidating compliance services between revenue and VAT departments.
The IMF mission further advocated for the elaboration of a crisis-specific compliance strategy, emphasizing the need to address the backlog in the submission mechanism for individual income tax, particularly focusing on recent years. It highlighted the importance of achieving stability in IT operations and resuming the international exchange of individual income taxes.
An Unoccupied Property with a Rental Fee of $340,000
Regarding customs administration, rapid gains focus on stabilizing the IT service by addressing staffing concerns and implementing the Automated Customs Data System (SYDONIA) effectively to combat fraud related to the customs value of goods.
The report indicates that securing the funds required for achieving stability in IT operations is feasible. It is noteworthy that the Supreme Customs Council is currently paying an annual rent of $340,000, while the newly established customs building in the port of Beirut remains vacant owing to the absence of furniture and an internet connection, which would cost no more than $30,000.
Addressing rampant illegal trafficking and customs evasion is imperative for the state, given the annual losses estimated at nearly 2 billion dollars for Lebanon.
"This shadow economy officially constituted 30% of the size of the Lebanese economy before the 2019 crisis," says Nassib Ghobril, Chief Economist at Byblos Bank. He emphasizes that tackling customs evasion is a political decision rather than a technical one: "If there is a political will to combat smuggling, the economy can become healthier, and consequently, the state's coffers would replenish."
Lebanon's economy is heavily dependent on imports, totaling $10 billion in the first seven months of 2023. The Port of Beirut manages 70% of these imports, while the remaining 30% pass through the airport and land borders.
Ghobril explains that estimating tariff evasion is simple by scrutinizing the data and statistical records of imports to Lebanon. The declared export number to Lebanon is compared with the officially recorded imports in Lebanon's customs services. For instance, if the Chinese report that exports to Lebanon amount to $5 billion, it becomes evident that in Lebanon, this number is considerably reduced, sometimes even by half. And all this occurs with complete impunity!
On the Syrian-Lebanese border, the situation is hardly better. With a porous border of 360 kilometers, including nearly 150 illegal crossing points, the mountainous terrain poses challenges for effective control. Additionally, the Syrian war has led to an increase in smuggling activities.
It is imperative for the Lebanese state to tackle this issue through structural reforms. In fact, the main factor contributing to the proliferation of smuggling and the growth of the informal economy is the absence of effective legal institutions to punish such activities.
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