Lebanon faces mounting pressure to address tax evasion, a deep-rooted issue that has long plagued its economy and hindered government revenues. As the country grapples with economic turmoil, tackling this problem has become crucial for achieving transparency, uprooting corruption, and increasing state revenues — all of which are high on the government’s reform agenda.

Tax evasion and customs fraud in Lebanon are estimated to cost the state between $4 billion and $5 billion annually, according to a 2023 report from the International Monetary Fund (IMF) titled "Technical Assistance Report-Tax and Customs Administration: An Urgent Need for Intervention." The report attributed these losses to weak enforcement, political interference, the prevalence of a cash-based economy, and loopholes in the tax system. Some economists, however, place the figure closer to $2 billion, or about 3% of the country's GDP.

One key focus is curbing cash transactions, which make financial activities harder to track. Other measures include establishing a shared database between the Ministry of Finance, customs authorities, the Ministry of Economy, and Lebanon’s central bank. Ensuring judicial independence and effectively enforcing existing laws are also seen as critical components of any successful anti-evasion strategy.

Elie Abboud, head of Lebanon's Association of Certified Public Accountants, estimated that tax evasion related to customs duties and value-added tax (VAT) alone costs the state about $1 billion to $1.5 billion annually.

"Curbing this scourge requires measures we previously proposed to the government," Abboud told Nidaa Al Watan.

How It Happens: Methods of Tax Evasion

Lebanese tax evaders employ a variety of tactics to avoid compliance, with some of the most common including:

• Invoice Manipulation: Issuing fake or altered invoices with lower values than the actual goods or services provided, or failing to issue invoices altogether to conceal transactions.
• Revenue Concealment: Underreporting sales or profits to reduce taxable income.
• Abuse of Tax Exemptions: Registering businesses in areas or sectors with tax exemptions without conducting genuine activities there. Goods are also misclassified to fall into tax-free categories through falsified customs documents.
• Customs Evasion and Smuggling: Importing goods without proper declarations or making partial declarations to lower customs duties. Smuggling through illegal ports and land borders is particularly rampant in areas with limited oversight.

Why Does It Happen?

Tax evasion in Lebanon is driven by several factors:

• Lack of Trust in Government: Widespread corruption in public administration has eroded citizens' confidence in state institutions.
• Bribery and Corruption: The use of bribes to expedite bureaucratic processes or reduce tax obligations is commonplace.
• Complex Tax System: Many businesses exploit loopholes and ambiguities in the existing tax regime.
• Weak Enforcement: The absence of stringent penalties and oversight allows tax evasion to thrive.
• Lenient Penalties: Current fines are too low to deter offenders, especially in the aftermath of the economic crisis.

Proposed Solutions

The Ministry of Finance has been exploring ways to enhance tax compliance, with a focus on expanding audit programs, analyzing trade data, and implementing laws related to banking secrecy. Efforts are also underway to reform tax and customs legislation, which could improve public revenues and strengthen economic stability.

Abboud emphasized the need for robust enforcement of existing laws. One key proposal is introducing an electronic purchase order system through a dedicated digital platform, enabling real-time tracking of transactions. Such a system would link invoices directly to government agencies, curbing opportunities for fraud.

Abboud pointed to Greece as an example, where electronic invoicing significantly curbed tax evasion. He proposed that Lebanon establish a similar platform, housed within the Chamber of Commerce, connected to the Ministry of Finance and banks. This setup would ensure that every letter of credit or international transfer is automatically reported to the VAT department, making invoice manipulation nearly impossible.

Another pressing issue is "silent taxpayers" — unregistered businesses operating outside the formal economy. Abboud called for a nationwide survey to identify these businesses and incorporate them into the tax system.

The push for a unified income tax law has also gained traction. Unlike Lebanon's current system, which applies separate taxes to salaries, property, and corporate profits, a unified tax system would require individuals and companies to declare all income sources under a single framework, simplifying enforcement and enhancing transparency.

A Long Road Ahead

While tax reform is urgently needed, Abboud argued that implementing a unified tax law should not be the immediate priority. Instead, he advocated for focusing on electronic invoicing and import-export monitoring, which could boost revenues by $1 billion to $1.5 billion annually. Even a $15 million investment in digital infrastructure would pay dividends, he said.

The IMF has echoed these calls for reform, highlighting the need to combat the cash economy, create a shared database for trade transactions, ensure judicial independence, and rigorously enforce tax laws.