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Interview with Georges Corm

Former finance minister calls for targeted and intelligent tax reform

Targeting empty pockets, and cheese rats have no cheese left to nibble on

by 

Now that the government has approved the 2017 budget, the question remains as to what new taxes or tax increases might be imposed. As Executive goes to print, the indication is that there will be some introduced, but it is not clear which, and Parliament will have to debate the budget before it is ratified into law.

There appears to be zero studies by the government (or, at least, none that are public, and officials decline to provide details) of expected revenues, their social impacts or the effects to the economy that new taxes might imply (see cover story).

Georges Corm, Lebanon’s minister of finance at the turn of last century, describes to Executive the government and Parliament’s approach to financing public spending as convoluted and misleading. “[It’s] like somebody stumbling through a room without lights,” he says.

  How do you view the government’s proposal of new taxes or tax increases as a new source of revenue to the state?

The tax system is unfortunately not based on any strategic view of what the needs of the Lebanese economy are. What I’ve said repeatedly is that our tax system is putting a burden on people that are in the productive sector.

As soon as you are productive and receive an income from your productive activity you are liable for the income tax. But if you live from your rent revenues, except for the 5% tax on interest income from banking deposits, you have no income tax to pay.

So this is an unfair system and a system that punishes the productive sectors (industry, trade and services) and encourages Lebanese to go more into rent-type activities that are untapped by the government.

When I was minister of finance, I wanted to introduce a general income tax, as our income tax system is fragmented with different tax rates according to different categories of revenues.

In addition, taxpayers have to file separate income tax returns for each kind of taxable income so that income from various sources are not accumulated and assessed to be subject to a general income tax according to the same progressive rate of taxation of the overall income.

This not only causes the treasury to lose a substantial amount of income tax, but it is also a headache for the taxpayers, as they must presently file many different income tax returns it have revenues from different sources.

Therefore, a unified income tax system would make life easier for all taxpayers as many Lebanese have several sources of income that are not taxed together. So having several sources of income that are assessed separately by the tax department is a big headache both for the taxpayers and the tax authority.

  One local bank said in early March that tax evasion amounted to $4.2 billion. Is this figure anywhere near accurate?

These are guesses, we don’t have reliable statistics in Lebanon. What is extremely important is to close the many loopholes in tax legislation that allow revenues to legally escape income tax.

Looking at petty trade activities, it is a loss of time for an income tax department to try to tax them, while what is important is to check that tax collection is properly followed by tax authorities as compared to tax assessments.

In addition, there are a lot of tax breaks, especially for new investments, but it is not transparent and you do not really know who is getting the tax exemption. (The Elite comprador class?)

  In late March the government issued $3 billion in treasury bills which were snapped up by local banks.

The government has no problem in raising the amounts needed to refinance its maturing debt obligations, as a large part of the quite substantial yearly banking profits is due to subscribing and trading T-bills (treasury bills) and Euro-bonds issued by the state.

This is why I would advise the central bank, the Ministry of Finance and the private banking sector to agree to decrease the average interest rate paid by the state on its public debt by around 1% on any new issues.

Such a decline in the cost of servicing public debt to the state would save the treasury a yearly amount of $700 million in a few years time.

One should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world

  Some of the newly issued debt does replace old debt that was at a higher interest rate. But for Lebanon to get to a more attractive interest rate would that not require a higher sovereign credit rating?

Not necessarily because Lebanon’s public debt is mostly owed domestically, even in respect to dollar denominated debt.

This would affect the profit of the banks only a little bit. They have had such huge and continuously increasing annual profits since the nineties, whatever the economic situation of Lebanon, that a reduction in interest rates paid by the state can be bearable without endangering their profitability.

Whether there is a 1 or an 8%  growth of the economy, bank profits are unaffected by the variation in economic activity because they have this huge portfolio of treasury bills that secure a steady and increasing flow of banking revenues.

  The banks always argue that because they are the most transparent sector, they are penalized and targeted to pay more taxes.

I don’t see how they’re penalized, and I don’t think the banking sector drives the economy.

Yes, Lebanese banks are very good at serving their affluent clientele both inside or outside Lebanon. This is why this contributes partially to attract the big flow of remittances that are sent from our emigrants, remittances being the biggest source of financing of our huge trade deficit.

But, one should also mention that Lebanese banks are giving higher interest rates on deposits than anywhere else in the world, which might be the most important drive for the flow of remittances. This is why I believe that they can decrease them a little bit, instead of these endless discussions on how to tax more the banking system.

  What effect might the proposed 2% tax increase on the interest of deposits (a capital gains tax) mean for the banking sector and for the economy?

I am personally not enthusiastic about raising the tax on the interest of banking deposits. But raising this tax from 5 to 7 percent will probably not produce a decline in the amount of deposits in the banking system. If adopted, this measure should not be repeated.

In fact, I believe that a reduction in the average rate of interest paid on public debt would save more money for the treasury than what the increase in the tax would yield as an additional revenue. All these kinds of measures should be studied carefully.

  Would an increase on the corporate tax from 15 to 17 percent discourage Lebanese banks’ appetite to buy locally issued debt?

Certainly not. But again, I prefer the decline in the average interest rate on the public debt. We have almost 4 or 6% differences according to the maturity of the bonds and treasury bills that the state is issuing. If Lebanese today, because they are the subscribers directly or indirectly want to go to foreign banks abroad to place deposits, they will get what? One percent, maybe 1.5?

So you still have quite a margin to have a reasonable decrease. Let’s bring the premium paid on large deposits in Lebanon to 3 or 3.5 percent above average interest rates paid outside Lebanon by international banks on their deposits.

Currently, on average, we’re around 6 to 6.5% paid on Lebanese pound deposits and 4 to 4.5 percent (or sometimes more) on dollar deposits.

For what the state is paying on its debt, if you take out 0.5 or 1 percent it will not be a catastrophe for the banking sector nor for attracting capital from abroad. A decline in interest rates in Lebanon will also be positive for productive activities and new investments as it will also reduce the cost of financing in the economy for the private sector.

 What might be the effect when taxing consumer behavior by raising the Value Added Tax (VAT)?

Nothing has been studied carefully. For VAT you can have two rates, although I do not like that. You can have a 15 percent tax rate on luxury goods for instance, and keep other goods at 10 percent.

There should be a study of the different alternatives to see what  the yield will be to the treasury, but you have a government which did not detail how the proposed 22 new taxes or increases in existing taxes are going to be implemented.

Such a proposal in one shot is unreasonable, especially since most of the proposed taxes are fees and excises. For instance, when the government says it is going to double the fees for public notaries, this will affect all the Lebanese population and will constitute quite a burden on the large poor segment of the Lebanese population. T

he government says they’re going to, and this is a very old issue, tax the resorts along the coast that are not legal, estimating that it will yield 400 billion Lebanese Lira, but how did they arrive at this figure?

And what about raising the very low basis for calculating the rent paid to the state on using legally public domain along the sea or the river coasts? Why did the basis of assessment of this tax not change since the early 1990’s?

A decline in interest rates in Lebanon will also be positive for productive activities and new investments

  Are these figures pulled from thin air, or how has the government arrived at its estimates of revenues for these proposed taxes?

You can do it but you need the statistics, but if you don’t have data how can you have an opinion? The minister of finance says this will bring us a certain number of billions of LBP, but I don’t see how the ministry determined its estimate of the additional income that would accrue to the treasury.

  What effect do you think new or increased taxes might have on consumer behavior?

You have to distinguish between Lebanon’s two separate economies. The economy that is very prosperous – the nice areas of Beirut with the restaurants and hotels and some summer resorts in Mount Lebanon, and where you see luxurious cars and the very affluent part of the population.

I don’t know what percent of Lebanese families are affluent, but my guess is that it can’t be more than 6 or 7 percent. Then you have the other economy that is a deprived one, where people are on the level of poverty, sometimes extreme poverty, and these are not the people that should support additional taxes on consumption or on legal documents they need in their daily life.

This is why we have to stop going to indirect taxes, and to simplify the tax code through a unified income tax, canceling old dated excise taxes or fees (like the stamp duties). In addition, the government can take some additional income tax measures, so that ultra-luxurious villas or apartments are taxed in accordance with the luxury and quality of the residence.

In addition, real estate companies can buy and sell real estate assets just through buying or selling shares, thus escaping the 6.5% registration fee. I tried to introduce a 6 percent tax on the selling or buying of shares of real estate companies so that it is the same as the tax burden that is paid by individuals buying a property. This is a legal loophole.

  So you are in support of some new taxes?

I am not in favor of imposing 22 new tax measures in a haphazard way just to increase treasury revenues. There should be an intelligent and adapted tax policy that will re-balance the sources of tax revenues between productive and non-productive activities on one hand, and between income tax revenues and consumption taxes or excises and fees on the other hand.

  If the government imposes any of the proposed taxes should projections for economic growth downgrade?

No, because I go back to what I said earlier: we have two economies. A very affluent economy that could support a reasonable increase in the tax burden on income or on luxurious consumption without any problem; and the other which is stagnant where the level of poverty is continuously and dangerously increasing.

Of course, a 1% increase in VAT for this category of people might affect them. In any case, it is urgent that we have enough studies and statistics to study the impact of additional taxation measures.

Today, the staff at the Ministry of Finance is in a black room, pitch black – they act like anybody would in such a case, i.e. behave erratically.

Downtown Beirut: Memory erased…

A waiter surveys a row of empty tables beneath the Place D’Etoile clock tower seen on so many postcards of Beirut.
Once a gritty, bustling hub of the city, the square was sandblasted and transformed into a posh cafe district in the early 1990s after the ravages of the Lebanese war. Tonight, hundreds of glasses and plates are laid on fine place mats, but there is barely a single customer in sight.

Habib Battah published in the January issue of Al Jazeera Digital Magazine, available on iTunes.

“You will be lucky if your restaurant gets two tables per night,” says 26-year-old Rami. “If you get three or four, you are king of the street.”
He is among a dozen wait staff dressed in starched shirts and vests standing around, waiting for things to pick up. They’ve watched some 13 restaurants shut down over the last year and more closings are scheduled, leaving only a handful of establishments still lit up on the once crowded strip.
Beyond the clock tower circle, the slowdown is more grim. Entire surrounding blocks are empty, with hundreds of vacant, dusty glass storefronts lining the pristine cobble stone streets.
Fifty-one-year-old Lina manages one of the few boutiques still open, but with an average of one sale per day, she spends much of her time drinking coffee on the curbside.And yet rents in the redeveloped old city, rebranded after the civil war as Beirut Central District, are among the highest in the country.
Some establishments reportedly pay up to $150,000 per year in rent alone.
Downtown Beirut was bustling with hooka cafes before the conflict in Syria, catering mainly to wealthy tourists from the Arab Gulf countries. Now waitstaff stand around, fearing the loss of their jobs.
Before the Syrian war began, Beirut Central District– which spans about two square kilometers–had become a tourist magnet, attracting hordes of wealthy visitors from neighboring states such as Saudi Arabia during summer. But many of those countries have since imposed stiff travel bans on Lebanon, where there is intense hostility toward Gulf states for funding the war next door, particularly among the many pro-regime parties in the bitterly divided country.
“They think Lebanon is a terrorist country,” says waiter Rami. So now he is looking for jobs in other parts of the capital that are still thriving despite the conflict and subsequent fall in tourism. And that, perhaps, underscores a deeper problem with the redevelopment of downtown Beirut: the commonly held belief among locals that the once vibrant old city was reconstructed, not to be used by the Lebanese residents, but as a spectacle to attract foreigners.
“This area was built for Khaleejiyi,” Rami says, using the colloquial term for Gulf Arabs. “It’s not me and you. It won’t come back. Everything that goes away, doesn’t come back.”
An island for the rich
Lebanese economist and former finance minister Georges Corm is not surprised by the disparity between the performance of the central district, which occupies a surface area of less than one percent of the capital, and the rest of Beirut.
“I said from the beginning this project is going to create an island instead of the reconstitution of the social and architectural fabric,” he explained from his office overlooking the cranes at work near downtown.
This was a place where all the social classes of would mix. It was the biggest symbol of coexistence in Lebanon. Now it’s a kind of no man’s land for rich people.”
How old Beirut evolved into a luxury district few Lebanese could afford is rooted in an enormous real estate privatization process that began in the early 1990s spearheaded by the late prime minister Rafik Hariri.
Hariri, a billionaire developer, took office in 1992 after a power-sharing agreement to end the Lebanese civil war was signed in Saudi Arabia, where he had amassed much of his wealth in the construction industry and enjoyed close ties to the royal family.
Hariri had eyed the Beirut reconstruction process as early as the 1980s and had commissioned a private firm to develop plans to rebuild the city center well before coming to office. It has even been suggested his construction firm, Saudi Oger, undertook demolition works in the 1980s to lay the groundwork for the planned reconstruction.
Over a dozen restaurants have closed on the main strip in the central district this year and dozens more store fronts on side streets remain unoccupied.
In fact in 1990, two years before Hariri came to power, the head of Hariri’s Saudi Oger was appointed to lead Lebanon’s state reconstruction agency, the Council for Development and Reconstruction (CDR).
Once in office, Hariri established Solidere as the lead developer, a private firm traded on the Beirut stock market, in which he would become the largest shareholder. Meanwhile, through a decree signed by his government, the rights of thousands of Beirut tenants and landowners were ceded to Solidere, in exchange for shares, valued by government committees. The decree was signed by then finance minister Fouad Siniora who had previously headed banks owned by Hariri.
(Mind you the Jews who immigrated from Lebanon to Israel, many decades ago, got the full worth of their properties, not in shares but in cash…)
Attorney Mohammed Mugraby, who has represented some 50 property rights owners in suits against Solidere, says his clients were denied the right to challenge the company’s actions and claims judges were paid by Solidere through the CDR to issue share appraisals, which were exponentially undervalued.
“Solidere is an unprecedented violation of the Lebanese constitution and rule of law,” Mugraby says. “Legally it does not exist. Solidere is nothing but an arm of the Hariri establishment.”
Despite multiple requests for comment, Solidere’s press office and representatives could not be reached for an interview. The company has often argued that an expedited private management structure was the most feasible approach to the reconstruction process at the end of the war.
An image of rebirth
Marked by rows of gutted, bullet-riddled buildings, open sewers and vegetation growing through the streets, the old city center had become an eyesore that interfered with the image of rebirth Hariri had hoped to sell investors during his post-war reign.
The Lebanese economy and  institutions had been crippled by 15 years of savage shelling and the lure of multi-million dollar contracts and the promise of renewed business flowing into the capital was undoubtedly a powerful motivator for widespread acceptance of the sweeping changes proposed by the prime minister.
In the 1990s, Solidere told its story in the form of ubiquitous television commercials with time lapse footage of individual buildings slowly restored to their former glory by workers on scaffolding. It published coffee table books featuring large glossy artist impressions of what the city would look like, with vignettes on the offices and marina designs Solidere would borrow from places like Barcelona, Monte Carlo and New York City.
Excluded from this narrative was the razing of entire historic neighborhoods such as Zeitouni, Wadi Abou Jamil, Safi, the Souks and the whole of Martyr’s Square, save for its namesake statue.
There are more pigeons than customers on an average day in the city center. Critics say the scheme to rebuild old Beirut created a Disneyland effect, replacing the once gritty streets that drew a mix of social class with an island for the wealthy, divorced from the rest of the city.
Among the hundreds of destroyed buildings were “the last Ottoman and medieval remains in Beirut” wrote American University of Beirut professor Nabil Beyhum in the Journal The Beirut Review in 1992. Much of the damage had been done through unapproved demolitions in the 1980s and early 1990s, bringing down  “some of the capital’s most significant buildings and structures,” wrote UCLA professor Saree Makdisi in the journal, Critical Inquiry, in 1997.
To increase Solidere’s surface area, relatively undamaged buildings were collapsed through the use of excess dynamite, according to Makdisi.
Seventy-five-year-old Mugraby is also a rights owner himself and says four shops owned by his late father in the vaunted Souks of Beirut were demolished in mid-1983– not by militias but by bulldozers belonging to Hairi’s Saudi Oger.
Mugraby and others say they have been punished for opposing Solidere. He claims the company launched an illegal attempt to disbar him and was even jailed for three weeks following his allegations of corrupt payments to Lebanese judges. Mugraby says it has taken a decade to clear his name: “I became so busy defending myself, I had little time left to fight these guys.”
Company or country?
Fadi Al Khoury, the owner of  Beirut’s oldest and most storied hotel, says Solidere has consistently denied him the right to rebuild. Opened in 1929, the St. Georges had been featured in countless films, books and postcards of the city, famed for its water skiing matches, yachting club and James Bond-like guest list. But today Solidere has landfilled the hotel’s beach access to build its own marina and the St. Georges is now better known for the giant “Stop Solidere” canvas that covers its still bullet riddled facade.
Al Khoury says his refusal to sell the property to Solidere has resulted in him being repeated denied work permits over the last 19 years through the company’s vast influence on city officials.
“They are more powerful than the government,” he says from his home in the hills above the capital, which he admits to now rarely visiting. “Having one company bigger than the country can disrupt the rights of the people.”
With rows of empty buildings, it is unclear how many shops remain vacant in Beirut’s central district. Unable to afford the high cost of maintenance imposed by Solidere, most original tenants have been forced to surrender their properties in exchange for shares in the company
Solidere is by far Lebanon’s largest company. According to its website, the firm’s current real estate and financial assets are close to $10 billion, which is nearly one quarter of the country’s entire GDP.
Even for the few whose properties were spared by the bulldozers, Solidere has made the price of holding on very high.
The Ahliah School, one of the city’s oldest, had managed to stay open during the worst days of the civil war, but was still forced to pay Solidere some $350,000 to continue operating once the fighting ended, the chairman of the school’s board, Nadim Cortas, explains. Solidere had claimed the fee would cover “infrastructure costs” such as road and plumbing work in the Central District, and was calculated as a percentage of a property value.
Solidere would also claim rights over the schools “sky” space.
Before the war, Cortas said he had been granted a right to build several additional floors to expand the campus, which has been hosting students since 1875. But now even if the school needs to build an extra room, Cortas says that space must be purchased at market value from Solidere.
And because the neighborhood has been transformed into one of luxury towers at the costs of millions of dollars per apartment, the value of land has risen exponentially to thousands of dollars per square meter.
Meanwhile Cortas says Solidere also demolished the Ahliah school’s annex elementary building— which remained intact during the war and was recently renovated– to make way for a parking lot (thought it had promised to transform the space into a garden.) In exchange, Ahliah received shares in the company, which he says are worth hardly a fifth of the property’s current value.
Still the chairman of the board says he has “mended bridges” with the developer. He touts Ahliah, a non-profit institution, as one of the few schools in the Beirut to have maintained a non-sectarian curriculum with a mixed student body, including some 30 percent of students supported by financial aid.
He said the school had recently achieved the coveted New England certification and is keen to move beyond the challenges of the past.
Indeed many property owners are reluctant to speak critically about Solidere. The company maintains a say over all approvals and sets very strict building standards, often forcing owners to purchase high cost imported materials.
“Everything we need to fix requires permission,” said one property owner on the condition of anonymity. “If I need a new door, they will choose the most expensive paint. If we need to replace a window, they make us buy cedarwood because they say the original windows were cedarwood. So we have to import the windows from the USA.
“If you make a fuss, next time you ask for permission to renovate, they will keep your request in their drawers for 6 months.”
When a property owner fails to comply with Solidere’s strict building codes, the owner is forced to vacate and accept shares in the company. And because central Beirut had not been a luxury district, it would be hard to imagine most residents and small business owners could afford lavish furnishings, particularly after 15 years of harrowing conflict.
But, in other cases, more coercive means may have allegedly been deployed. Mugraby produces a court indictment in the case of 11 persons killed during a demolition in February 1996 because, he says, a family refused to move.
Had Solidere offered comment, one assumes they would have denied responsibility for much of the above. Of course accidents happen on construction sites and the notion that change will always be difficult for some parties to accept is a mantra of developers everywhere.
A ‘manicured’ city
“Any big organization undertaking a task this large is really going to upset people along the way,” says Karim Makarem, managing director of Ramco, a Beirut-based real estate consultancy.
Each night the tables are set and the televisions are turned on in the hopes of luring customers. Staff say they would be lucky to fill two to three tables per night.
Makarem blames the current slowdown in the central district on the lack of tourism and says added security measures have made the area difficult to access, even for locals. With the country’s parliament and the prime minister’s offices close to the Etoile square, streets are often cordoned off due to protests.
“It’s extremely uninviting,” he says. “The BCD [Beirut Central District] has suffered more than any other area because of the political situation, yet in my opinion, it has the best future.”
Despite the high rents, Makarem is confident that there exists a market of wealthy Lebanese living abroad, particularly in newly built Gulf cities like the Abu Dhabi and Dubai, to fill the gap.
“A lot of these people want the benefits of living in a manicured part of town. Once you’ve been living in that type of sanitary environment, it is very difficult to live in the mess that is the rest of Beirut.”
Because Solidere leveled much of the old city, it was able to install new cabling, sewers, power sub stations and sidewalks. Whereas in the rest of the capital–which is roughly 20 times larger than Solidere– much of this infrastructure had collapsed during the years of war. Power lines are haphazardly strung, street flooding is common and sidewalks are broken or missing.
“There are a lot of positives,” says Makerm of Solidere’s urban planning. “It’s the only place you can walk downtown. I’m very optimistic,” he adds. “The minute you get these tourists and expats in the country, I think they will appreciate what the BCD has to offer.”
Changing history
Yet critics also question what the Central District has offered the local population. In a country with an average monthly income of around $1,000, most Lebanese struggle to find somewhere to eat or shop within their price range.
For years, Solidere has promised to build parks, museums and cultural spaces. Much touted projects include an archaeological exhibit, dubbed The Garden of Forgiveness, a city museum to be built beneath Martyr’s Square and a lush central park–all announced to much fanfare over a decade ago.
Yet today these sites remain vacant, with little indication about completion dates and barely a mention on Solidere’s sleek, recently revamped website.
Despite the lack of business, cafe owners are faced with some of the highest rental prices in Beirut. If the lack of tourism continues, the few remaining outlets are expected to close.
Meanwhile, well over a dozen hotel, office and residential towers have gone up over the same period. And in 2007, Solidere had announced plans to create Solidere International, which would help develop multi-billion dollar residential projects in the United Arab Emirates and Saudi Arabia.
In an interview with Bloomberg earlier this year, Solidere’s general manager announced that the company had amassed over $700 million in cash, with an annual income of $50 million–this in addition to land and real estate assets worth over $8 billion.
“With all the profit that has been made, you don’t have one cultural project in a city that in the worst of times had theatres and performances,” says architect Mona Hallak.
Hallak is among several activists and academics who have long argued that any project to rebuild the city center should aim to bring original residents back in an effort to stimulate post-war reconciliation over a profit-making enterprise. But she has lowered expectations considerably.
“Just give me one building, that would have shut me up,” Hallak says, rolling off a list of promised cultural centers that never materialized.
Hallak has spearheaded the Beit Beirut museum, which will be housed in a shrapnel-pierced apartment block that had become the most-feared sniper’s nest on the line dividing East and West Beirut during the civil war. Hallak spent over a decade of her life fighting to save the arcaded 1930s-era building, which lies just outside of the Solidere area, and was four days away from demolition in the late 1990s, she says. But the slightly graying activist is exasperated by the battle for the BCD.
“I think we deserve Solidere. The people of Beirut don’t understand that it was the biggest rip-off–a real estate company taking over a downtown. I mean, it’s crazy. It changed the whole history and identity of the city. For me, Solidere is a question of erasing the memory of Beirut.”
Still visions of old Beirut live on.
At his wood-paneled law office in Hamra, a few miles from the city center, Attorney Mugraby leans back in his chair when asked about his final days in the old city. It was 1976.
The civil war had gone on for about a year but there was a lull in the fighting. The militias had withdrawn and the barricades were removed. Crowds of shopkeepers and residents had returned to check on their properties.
There was a large impromptu gathering at Martyrs square. Even strangers embraced, asking about friends and families. Mugraby pauses and turns away.
“It was touching, I tell you,” he says, voice cracking. A slight tremble runs over his lips and wrinkled face. For a brief moment, his eyes fog up.
“It’s difficult for me to discuss.”
Words and photos by Habib Battah

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