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August 2016

(*) Tax exchange information: opportunity or a curse for Lebanon Emigrant!!

(*) original text edited in Arabic

 

The issue of tax exchange information, which was universally adopted by the Organization for Economic Co-operation and Development (OECD), could cause harm to the Lebanese diaspora, if Lebanon joined the "automatic exchange of financial information agreement" without taking the necessary measures that makes Lebanon immune. 

We will briefly explain in this article this issue with a look on the needed legislative amendments that must be incorporated or canceled!

Regardless of distortions in the education and employment markets, Lebanese immigrants constitute in the beginning an important component of the social and economic structure of the Lebanese economy.

We rarely find a family in Lebanon out of the one million families who constitute the Lebanese social fabric, that does not have at least one immigrant or expatriate who works abroad, which entail remittances to their resident families, or facilitate the immigration or travel of other family members or even family relatives, and finally, these immigrants and expats return periodically to Lebanon for tourism purpose or to buy a piece of land or to build a house in native village or to own an apartment in civilian neighborhoods, where parents and relatives reside! In the end, everyone comes to the country for hospitalization or for marriage and so forth of social or religious occasions for the Lebanese of different sects.

In order to explain the subject of the automatic exchange of tax information, it should be recalled that the Group of Twenty nations G20, and in compliance with the US legislation known as FATCA, have developed these standards over five years (2009-2014) until it was approved in its final version by the heads of member states during the G20 Conference in Brisbane in the month of November 2014.

The aim of this international convention was to prevent tax evasion by non-residents on the money they own abroad or in countries they are not actually residing in. The tax exchange information is considered as the entrance to prevent tax evasion at this level.

Regardless of the tax exchange mechanisms that have not yet been clarified and, regarding the Lebanese, Lebanon's accession to this international treaty will entail, on one hand, that Lebanon should disclose to other countries the amounts and income and revenue investments by non-resident nationals, this could maybe mean lifting banking secrecy through the Special Investigation Commission, and it could also lead to providing information on non-resident deposits at banks in Lebanon and in any currency amounts and interests. In return, other countries will provide the Lebanese authorities all the information about the deposits, investments and returns done abroad by the Lebanese residing in Lebanon, to enable the Lebanese government to collect taxes on these sources.

Apparently, there is no problem in the automatic exchange of tax information, but in reality this will pose a set of detrimental problems to Lebanon, and so on four fronts.

- The first problem, for example, is the lifting of the banking secrecy on the expatriates’ deposits in Lebanon and passing this information to the Lebanese diaspora countries from Canada to Australia and from Africa to Europe and to Latin America. This measure would lead to the prosecution of the Lebanese expats working and residing in these states and could also lead to their imprisonment for the crime of tax evasion for non-full financial disclosure to the authorities of these states.

- The second problem for us is that the Lebanese diaspora may decide to withdraw their money from Lebanon under the pretext of lack of enjoyment of banking secrecy, which was the main attraction. The interest of deposit in Lebanon could be rendered useless since their savings could be again subjected to taxes in the countries they live or are working in. The truth is that most of the transferred funds to Lebanon have already been subjected to income and corporate profit taxes in their residing countries. Why should we subject them to taxes a second time?

- Third, countries providing information to the authorities in Lebanon on financial assets and income of Lebanese residing in Lebanon may, perhaps, lead to a large political and financial blackmail in a country that lacks the minimum safety and respect of the state authority.

- Fourth and last, these savings that are invested abroad may be exposed to fraud and piracy hacking operations, if this information given to Lebanon was leaked. The information will include, based on the exchange adopted criteria, in addition to the amounts and return, the full names of their respective owners, including the full birth date and numbers of accounts and account balances, making it easier for the global piracy networks to penetrate and manipulate these accounts. What applies to the financial assets of individuals also applies to the accounts and assets of Lebanese companies operating abroad.

Against this risk, how Lebanon can deal with this required treaty so that Lebanon will not be included in the list of non-cooperating and non-signatory countries!? ... We believe, we can work on three levels.

The foremost of the needed measures is Lebanon’s accession to this treaty because it is inevitable.

The deadline to join ends on September 26, 2016, according to the Global Forum Calendar, which manages the information exchange within the Organization for Economic Co-operation and Development (OECD). To our knowledge, the Minister of Finance has already addressed the Cabinet of this issue.

However, even if approved by the government, the accession to the international treaty still needs to be ratified by parliament, and should include radical amendments to the law of the exchange of tax information No. 43, which was adopted in November of the year 2015, and which the international organization (OECD) found inappropriate.

It is useful to note that the Central Bank of Lebanon took the initiative to issue a Basic Circular No. 138, on August 5, 2016. This circular requires banks to take all measures to provide the Special Investigation Commission with information that may be requested by foreign authorities within the framework of this international treaty. Thus, the Central Bank has placed the first brick of the commitment of the banking sector in Lebanon.

The second level in dealing with this important issue is that the parliament must approve the legislation either within the required amendments to the law 43 or by separate / independent law. The primary importance is to have legislation that explicitly provides for the exemption of tax income of Lebanese abroad. And this can be done through the abolition of Article 69 of Legislative Decree No. 144/1959 (Income Tax Law) knowing that according to this article, the capital revenues collected abroad are subject to tax once it returns to a resident in Lebanon.

The rationale behind the demand to abolish Article 69 is the essence and the spirit and philosophy of the tax law in Lebanon which subjects residents and non-residents for tax on their income earned on the Lebanese territory, ie regardless of their place of residence.

The Territorialité of tax is the basis, and not of citizenship or residency. The abolishment of article 69 of law 144/1959 is the return to the sound foundations of our tax system in Lebanon. This was stated in the reading by the legal adviser to the Association dated 29/07/2016 and forwarded to the Minister of Finance.

And the third level is to deal with the subject of the automatic exchange of tax information to provide maximum protection to this information.

It is our belief that the Organization for Economic Co-operation and Development (OECD) has not yet fully or convincingly responded to the issue of protection of information. It may be useful to think of some aspects of the protection we have, by settling the exchange Center (website) at the Central Bank of Lebanon, where banks, in the early nineties of the last century, centralized the exchange of financial information point through the global SWIFT network - SAP (Swift Access Point), which means making Central Bank of Lebanon with the consent of the Ministry of Finance responsible to manage the exchange process.

The other level of protection may be available by adopting the Swiss model to join the Convention which ensures, on the one hand, to share information only with countries that have signed bilateral agreements with Switzerland. This way we can achieve greater protection of information and will also ensure, on the other hand, not revealing such information on the Lebanese citizens to foreign countries.

In summary, the Association of Banks in Lebanon hopes that the Lebanese community, particularly the Council of Ministers and the House of Representatives, to give this strategic issue the necessary importance and attention.

If we accomplish this, then we can convert the issue of tax exchange from a curse to an opportunity which is richly deserved by the Lebanese immigrants who are spread around the globe. We will not put the savings of Lebanese expats and immigrants in jeopardy through the adoption of some amendments or some simple legislation, which, in addition to the repeal of Article 69 of the tax Law referred to above, the expansion of the concept of economic residence in Lebanon through the ratification of the project which is currently in the parliamentary committees in order to allow the Lebanese spread abroad to choose economic residence in Lebanon.

Indicators of such residence are many, from home ownership to the children’s education in schools and universities in Lebanon and the ownership of institutions or businesses in Lebanon and elsewhere. Thus, we give expatriates again motivation to go back home through the protection of their savings and not expose them to risks.

 

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Last Updated on September 22, 2016
 
 
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