The controversial circulars released by the Ministry of Finance in late November 2022 are additional implementation notes for the long-overdue 2022 budget. One of the main criticisms of the budget was that it was a patchy and poorly calculated attempt to increase government revenues without addressing the exchange rate and banking crises. The exchange rate crisis is the primary source of the current decline in living standards in Lebanon, and is primarily a crisis of confidence in the government and its currency, given the ongoing lack of a macro-economic stabilisation framework.
The budget contained a large and questionably calculated deficit (of at least 11 trillion LBP) which will require funding by printing more Lira and worsening inflation. These circulars –which are meant as implementation decrees for changes to certain taxes in the budget – are thus attempts by the government to increase revenues by increasing taxes on businesses and individuals. They primarily apply to calculations to payroll taxes and VAT.
The circulars are also trying to align the operation of a multiple exchange rate regime with increased revenue targets. The multiple exchange rate regime is being kept in place to protect banks from declaring bankruptcy and to dilute the value of US dollar losses in the system. One circular (687) also seems to allow banks and asset holders an opportunity to re-evaluate the worth of their assets – which could be used to dilute the value of losses on their balance sheets.
The 2022 budget still faces appeals regarding its legality, and is currently under appeal. The circulars have faced strong public criticism, particularly from the private sector and may also be subject to appeal. The current protests regarding the circulars from MPs and the private sector has led to the suspension – pending further review – of at least two circulars (686 & 687) at the time of writing. This means there are likely to be more changes to Lebanon’s tax structure in the coming months.
The circulars and the budget itself are overshadowed by legal concerns related to the mandate of a caretaker government to make such fundamental changes to tax structures and exchange rate policies, the discrimination between citizens based on the currency of their salaries – as well as the method of receiving those salaries – and the ability for the government to enact retroactive tax adjustments of such a significant magnitude.
The overall picture of the government’s measures in the budget, the Ministry of Finance circulars, and BDL announcements to shift the exchange rate to 15,000 shows that the government is trying to increase revenues while denying the reality of the banking sector losses and avoiding a comprehensive resolution to the financial crisis.
II. Analysis of MoF Circulars
The Ministry of Finance’s budget-amending circulars have rightly caused confusion and protest over the unexpected retroactive tax adjustments and exchange rate changes which impact both businesses and individuals.
For businesses the most concerning elements are the retroactive calculation of payroll taxes with multiple exchange rates, retroactive re-calculations of VAT dating to 2020, and the still-unpublished list of items attracting an extra 3% in customs taxes. This latter item is not mentioned in the circulars released to date but is expected at some point. These elements will require companies to undergo settlements over outstanding tax bills, in some cases requiring recalculation of taxes dating back to 2020. This could significantly disrupt the balance sheets of businesses who have been operating in a highly stressed market context since 2020 and will force businesses to cut costs, through wage or staff cuts, or through raising prices. The severe disruption to businesses posed by these measures has raised questions regarding the legality of imposing these taxes retroactively, and the impact of these procedures on the actual business environment in Lebanon.
For individuals the main concern is the application of different exchange rate calculations based on which currencies salaries are paid in and how those salaries are paid (circular 687). The significant difference in exchange rates is likely to encourage people to request their salaries in cash and drive individuals further away from the banking system (which also imposes further fees on fresh dollar accounts). This will worsen Lebanon’s challenges with labour informality and tax evasion.
The issue of exchange rates applied to tax and budget calculations is also becoming less and less clear. Despite announcements from BDL and the MoF that the official exchange rate is to shift to 15,000 (now supposedly in February 2023), the circulars apply an official rate on bank transfers of 8000 (in accordance with the latest update the BDL circular 151). This would imply that BDL will update circular 151 in February 2023 to make the rate 15,000, however it is unknown why this has not been done already, when taxes for 2022 are due.
Circular 678 raises concerns that the government is attempting to allow banks to re-value their assets to lower the value of the losses on their balance sheets. Unless such revaluations are done by an external independent auditor there is a high risk of manipulation of this measure. The circular at present contains only vague wording about revaluation being done by “an official expert.”
Lebanon’s outdated Code of Money and Credit (CMC) has also created legal uncertainty about the power of the Minister of Finance to determine the exchange rate. Article 229 of the CMC has a provision for the Minister to set a ‘transitional’ exchange rate for a period of six months, however the scope of the exchange rate changes (multiple rates applied without explanation or justification to different taxes) appears to be out of the scope of this power.
The law implemented by decree number 6105 dated 5/11/1973 stipulates that “until the application of Article 2 of the Code of Money and Credit, the government is given a period of six months from the date of publishing this law to determine the transitional legal rate for the LBP after consulting the BDL…” this indicates that Article 229 is not active by itself but rather needs a law to articulate its activity, it is not a permanent mandate for the Minister of Finance. There are also strong arguments that the scope of the changes to exchange rates and tax structures in the budget are beyond the jurisdiction of a caretaker government.
The second major legal concern is discrimination between citizens’ tax rates based on the currency of their income, and the method in which they receive that income. As mentioned above, the circulars apply different non-official exchange rates (currently 8000 and the Sayrafa rate) for the calculation of taxes for those who receive foreign currency salaries. Further these rates are applied differently based on how the individual receives their income, with bank transfer salaries attracting the 8000 rate and cash salaries attracting the Sayrafa rate. Such differentiation is not set out by any law and contravenes Article 82 of the Constitution, which states that “No tax may be amended or abolished except by law”. Administrative law also requires laws to be passed in a parallel form, meaning the only way to institute new taxes is through a law that is parallel in form to the one that initially stated how taxes are collected. This does not appear to have been followed for these new multiple-exchange rate taxes.
The below section summarises the recent circulars, with the most important being circulars 686/1 (circular 6), 7-687/1 (circular 7), and 704/1 (circular 8), which specifically deal with payroll taxes, and VAT.
III. Summary of MoF Circulars
Circular 686 (suspended)
- Employers (who pay salaries in USD or any other foreign currency) must start paying their due taxes based on the rate and value determined by the decision issued by the Ministry of Finance and BDL (mentioned in Circular 687).
- Employers must make a tax settlement for the fourth quarter of the year 2022 according to the following:
- In order to determine the salaries due or paid in dollars or any other foreign currency: They must rely/depend on the “actual value” of the salaries (mentioned in circ. 687) for the first three quarters of the year 2022, and until 14/11/2022 of the fourth quarter, and add the specified value of those salaries in accordance with Article 35 of the Budget Law.
- To calculate the taxes due for the fourth quarter (of 2022): Add the salaries of the fourth quarter to the previous salaries (of the 1st, 2nd and 3rd quarters) that were subjected to taxes.
- Apply the deductions in accordance to article 27 (family deduction).
- Apply the amended tax in accordance to article 33 to the net taxable amounts.
- In case the total amount of deductible taxes of the four quarters exceeded the due tax. for these quarters, the employer has the right to apply for a refund.
Circular 687 (suspended)
Determines of the “real value” of salaries earned in USD or any other foreign currency as of the date of publishing the budget:
- If the above-mentioned salaries are paid in cash: Sayrafa rate applies
- If the above-mentioned salaries are paid in checks or bank transfers locally: rate of Circular 151 applies (8,000 LL currently)
- If the above-mentioned salaries are paid in any other foreign currency: it will be converted to USD and the above applies (depending if it is paid in cash or in checks)
Determines the period of application of article 21 in the budget law (Settlement of unpaid costs related to payroll taxes and VAT).
- The settlement includes the unpaid additional and basic costs related to the end of year 2020 and up to 1/1/2021.
- The value of the settlement is determined on disputed or outstanding taxes is as follows:
– 50% of those unpaid taxes will be paid on 1500 LL while the other 50% will be paid on Sayrafa rate ONLY if paid before 15/2/2023 (see Article 3).
– If the taxpayer paid (according to the settlement provisions) a value greater than what was required of him, he/she is eligible for a refund.
Determines the period of application of Article 30 in the budget law related to the re-evaluation of fixed assets and real estate
- Legal persons and banks working in Lebanon, are entitled for one time only (before 31/12/2022), to carry an exceptional re-evaluation of all or some of the physical and financial fixed assets.
- The extraordinary reassessment process is conducted by an official expert.
- Positive differences resulting from the exceptional revaluation process are subject to a new proportional tax rate of 3% of the value of those differences and must be paid in cash.
Determines procedures for appraising the value of all movable and immovable rights and funds that devolve to third parties – with the exception of the state – through inheritance
- The value of money and rights transferred that occurred after the date of publication of the 2022 budget is determined by adopting 50% of the estimated value in USD or any other foreign currency on the basis of prices that were applicable before 18/11/2019, and multiplied by Sayrafa rate on the preceding day.
- The value of money and rights transferred that occurred before the publication of the 2022 budget is determined on the official exchange rate 1507,5.
- The deductions and divisions stipulated in the budget shall be applied to the events occurring as of the publication of that budget. As for the events that took place before the budget was published, the deductions and divisions in force before the amendment of the budget shall be applied.
Determines the procedure for valuing in Lebanese pounds the assessments made by the financial units concerned with the built property tax:
- From 1/1/2022 until 31/12/2022: A value equivalent to 50% of the value estimated or specified in USD or any other foreign currency on the basis of prices that were applicable before 18/11/2019 and multiplied by Sayrafa rate before the publication of the budget.
- For approved estimates of units occupied by non-tenants up to 31/12/2021: The estimated rental values are increased threefold as of 1/1/2022 after cancelling the 20% reduction stipulated in Resolution 616 (2019).
- Sayrafa rate applies to calculate the value of lease contracts from 1/1/2022 until the publication of the budget.
- No real estate registration fees resulting from the rental values issued as of 1/1/2022 until the publication of the 2022 budget.
IV. Recommended Amendments and Actions
The patchy and legally questionable nature of the budget and its corresponding circulars means a thorough study of the document’s violations would likely reveal stronger cases for appealing them before the Shura Council.
To annul the administrative decisions issued by the Ministry of Finance, a review of annulment can be submitted before the State Shura Council within a period of two months from the date of publication in the official gazette.
The conditions (both present in this case) for submitting the review are:
- To review an active and harmful administrative decision.
- The litigant must fulfill character and interest in annulling such decisions.
This review does not definitively seize the implementation of the decisions. However, it is possible to request a suspension of the implementation due to their effect until the review is decided due to the damage that may result from keeping the decision enforced. The court has the final decision in deciding whether to accept or suspend the request.
After a preliminary study of the decisions, we recommend to appeal based on the following:
– to usurp power, the decision is issued by a resigned minister (or caretaker government),
– the lack of temporal jurisdiction that involves the general principle of non-retroactivity of administrative decisions,
– the lack of objective jurisdiction to enforce these decisions can also be studied.
- For the defect of violating the law (withinthe context of violating the money and credit law, the constitution, and any violation of public finance law).
- The defect of deviation in the use of power for a goal alien to the public benefit or to achieve an interest that is neither private nor public.