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Lebanon Urged To Drop Second VAT Rate Plans

by Lorys Charalambous,, Cyprus

04 August 2014

The International Monetary Fund (IMF) has advised Lebanon to refrain from introducing a second rate of value-added tax as part of the nation's efforts to broaden the tax base.

Lebanon levies value-added tax at a ten percent rate, but applies a zero percent rate to a relatively broad range of supplies of goods and services.

To boost the nation's finances, plans had been afoot to raise the headline VAT rate to 12 percent in 2015 and to 15 percent in 2017, but the Government backed out of the plans after it proved too politically difficult to hike the rate. Instead the Government said it would broaden the tax base and address tax loopholes.

The IMF, in its latest Article IV consultation report, called on Lebanon to begin removing tax breaks under the VAT system. It said that authorities must resist the pressure to introduce rates of VAT lower than the 10 percent rate on these supplies, warning that tax administration and compliance will become more complex. Meanwhile, it expressed disappointment at Lebanese authorities' decision to back out of removing the VAT exemption in place on gas oil, which would have been worth 0.5 percent of gross domestic product (GDP).

The report said that revenue measures approved by the Lebanese government will be insufficient to offset higher spending. These measures have included: an increase in the interest income tax rate from 5 to 7 percent; an increase in the corporate income tax rate from 15 to 17 percent; a new capital gain tax on real estate transactions; increases to excise duty on tobacco; and increases in various stamps and fees. These measures are thought to be worth about one percent of GDP in 2015.

The IMF pointed out that, in Lebanon, VAT has the potential to cover 90 percent of the domestic economy and therefore changes in VAT policy could have a dramatic impact on tax revenues.

Proposals are under discussion to raise the VAT rate to 11 percent, and a 15 percent VAT rate is being considered on certain luxury items.

TAGS: compliance | VAT rates | tax | value added tax (VAT) | interest | gross domestic product (GDP) | International Monetary Fund (IMF) | fees | excise duty | tax breaks | penalties | Lebanon | services | VAT goods & services classification

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