Tax Evasion Hurts Economy

Summary: Tax evasion has a serious impact on both the treasury and the economy and this pattern of behavior cannot be ignored, the director general of the Finance Ministry said over the weekend.”There is an immediate and direct cost of this tax evasion. I mean the money you are not getting. This also has a huge cost on the economy which is better. 
BEIRUT: Tax evasion has a serious impact on both the treasury and the economy and this pattern of behavior cannot be ignored, the director general of the Finance Ministry said over the weekend.”There is an immediate and direct cost of this tax evasion. I mean the money you are not getting. This also has a huge cost on the economy which is better known as moral hazard,” Alain Bifani told The Daily Star in an exclusive interview.

He added that if the Finance Ministry was unable to collect taxes properly then it “would be introducing a bias between companies and tax payers”

“It just happened that the good companies with good governance pay their taxes while the others don’t,” Bifani said.

He did not disclose the percentage of tax evaders in Lebanon but he said he believed that the number is quite high.

Lebanon, like most countries around the world, counts on different types of taxes such as the Value-Added Tax (VAT), tariffs, income tax and non tax revenues such as telecoms and electricity bills as well as services.

According to the fiscal performance of the treasury up to November 2009, the Finance Ministry generated revenue of LL11.005 trillion, LL3.130 trillion of which is customs, LL2.736 trillion VAT and rest is divided between income tax and non-tax revenues.

Bibani explained that some companies use different tactics to dodge taxes.

“Let’s take the example of VAT. Basically the tax payer or consumer has paid the VAT but the company which is supposed to channel these funds to the treasury is in fact stealing the money from the tax payers and keeping them in their books,” Bifani said.

He added that the consumer pays the VAT when he buys a product from a shop or a supermarket and assumes that the money will go to the government immediately.

“If the shop owner takes that VAT and does not pay the treasury, he is not only stealing from the state but from the citizen as well,” Bifani said.

Bifani estimated the number of companies, institutions and shops currently registered in the VAT department at more than 26,000.

“If the government does not take proper measure to avoid such a situation then what will they be doing. They will be encouraging the problem to become bigger,” Bifani said.

Bifani stressed that those who stole the money would be given a major refund on the money they stole, whereas tax payers in fact benefit from amnesty because they actually paid their dues.

“Even if we eliminate penalties, you are basically telling the Lebanese community that state did not get the money on time and that state pays interest on the public debt. Who will pay this interest on the debt? It is the community,” Bifani said.

He warned that such practices could lead to higher taxes and higher inflation.

“The more you encourage such practices then the more you expect to have inefficient companies, thieves being encouraged to keep doing what they are doing and of course an economy which is not really productive,” Bifani said.

He added that if the tax collection system is streamlined and more auditors are recruited for the VAT department then the treasury would surely boost revenues to acceptable levels.

Some economists say that large banks and corporations pay the bulk of the total taxes to the government while small to medium institutions pay the rest.

The ministry official underlined the need for compliance in tax collection.

“If I forget about compliance and focus on auditing then I will only increase the revenues only on the audited firms in Lebanon,” he said.

Bifabi suggested that there are currently still many registered companies and institutions that are not fully complying with the procedures of the tax and VAT departments.

The Finance Ministry has carried out many reforms over the past few years to modernize the tax department, recruit more staff from the civil department and sign several cooperation agreements with the European Union, World Bank and International Monetary Fund to help the government in its reforms.

At present, the Finance Ministry has close to 700 trained staff in different tax departments but Bifani said that more is needed to complete the job.

“We are now in a situation where lots of things are moving. We changed the administration, we have a completely different approach to collect and audit taxes and we are on the way to implementing a global income tax,” he said.

Bifani believes that the number of staff at tax departments should be doubled “but there is no need to do it right now.”

The Daily Star’s 18 January 2010