Torbey Law Firm provides insights into banking secrecy and tax enforcement in Lebanon.

Lebanon has long been known for its banking secrecy, and in a world that is becoming increasingly globalized, maintaining this secrecy is becoming increasingly difficult. Although Lebanon has begun to implement laws that would bring the country into compliance with the OECD's standards, called the Automatic Exchange of Information (AEOI), it is currently implementing the legislation in a way that avoids lifting banking secrecy and allows it to remain a key player in the international economic community. A key aspect of the AEOI framework affecting Lebanese residents is the revenue derived from passive income earned abroad by Lebanese residents that has gone unnoticed until recently, but with the new laws it will now be enforced. Additionally, the motivation behind this framework has been compliance with foreign tax authorities and transparency in reporting assets held in another jurisdiction. Operating under a common interest, governments must work with each other to promote economic growth, prosperity, and combat ailments common to the global economic system. Organizations with a common interest in the likes of the Organization for Economic Cooperation and Development (OECD), help states to enhance cooperation between their respective tax authorities.

The ultimate purpose of the AEOI is to increase detection of tax evasion, which benefits governments by allowing them to recover revenue lost to non-compliant taxpayers and increases voluntary disclosure by taxpayers of all of their taxable assets, allowing governments to monitor the flow of money, thus making it easier to expose money-laundering or terrorist financing. The AEOI requires financial institutions to report information on accounts held by non-resident individuals and entities to their tax administration. The tax administration then will securely transmit the information to the account holder's country of residence on an annual basis. The AEOI standard is comprehensive, accounting for every aspect of the process necessary for effective reporting for financial institutions and governments. It defines the types of financial institutions that must report and what information needs to be in that report. Then it lays out the procedures that should be applied in order to effectively report the necessary information.

This standard holds some similarities to FATCA, since it draws from existing extra-territorial anti-tax evasion, anti-money laundering laws, and a universal common reporting standard. All of these compliance provisions create a framework that safeguard a relatively simple process, which starts with financial institutions reporting key information to their respective jurisdiction's tax authority. The tax authority will then need to organize the information to go to its automatic exchange partners and then send it to their respective tax authorities. The information is then received by the taxpayer's country of residence and their taxes are assessed accordingly.
The standard also excludes some accounts from being reportable, such as retirement, pension, non-retirement tax-favored accounts, term life insurance, estate and escrow accounts, as well as other low risk accounts. When banks are reviewing their accounts, financial institutions will need to classify their reportable accounts as “New Accounts" and “Pre-existing Accounts" in order to determine the intended date to begin the exchange of information. New accounts cover those that are formed January 1, 2017 and will start to be reported in September 2018; while pre-existing accounts cover those formed before December 31, 2016 and will start to be reported in September 2019.

The beginning stages of compliance can be seen in recent laws adopted by the Lebanese government to combat tax evasion, such as Law No. 43 of November 24, 2015, which authorizes concluding bilateral and multilateral agreements to exchange information on tax evasion or fraud. As a result, this law will allow the exchange of information when it is requested in the context of tax evasion, if the requested information is protected under the Banking Secrecy Law of 1956, the request will be forwarded to the Special Investigation Commission (SIC) at the Central Bank with an opinion from the Ministry of Finance for review before it can be disclosed to the foreign tax authority based on an information exchange agreement.

The SIC was created under Law No. 318 of April 20, 2001 specifically to act as a safeguard of the banking secrecy and preserve clients banking identity. If the SIC should choose to lift the veil on the individual's identity, that individual must be allowed 15 days to appeal the decision before the State Council. The State Council has three months to determine whether the necessary conditions exist to warrant an exchange of information, once the deadline passes, the SIC will continue per its procedures. Although Lebanon's Law No. 43 at first glance seems to show that it has joined the fight against tax evasion and money laundering, and while it may have, it has not gone to the extent that the AEOI aims to affect. Currently, Lebanon is working on complying with the exchange of requested information agreements that will go into effect by September 2017.
The country must weigh how full compliance with a framework like the AEOI will affect its economic relations with other states versus the individuals who bank here for the banking secrecy. Lebanon has stated its desire to comply with laws like FATCA and it has voluntarily entered into agreements with other countries to exchange information. It seems we will see gradual progress toward implementing laws that would make disclosure automatic. But to come into full compliance with AEOI provisions, Lebanon will need to consider how to amend its existing laws or implement new directives to allow for the automatic flow of information from Lebanon to jurisdictions that are party to the OECD.

To do this, there are a few considerations that must be made that vary from the methods of transmitting and encrypting data to protect the information being exchanged, to implementing new laws and executing new bilateral or multilateral exchange of information agreements, to clarifying what the required information is and the process by which the information is reported and other compliance support.

The question remains how reluctant Lebanon will be. Banks and legal institutions are rooting for strict banking secrecy laws that are a cause of the stability of the banking sector and the base of the Lebanese economy. As a compromise to preserve the Banking Secrecy Law, Lebanese authorities have discussed that all information requested through automatic exchange of information agreements that is protected by the Banking Secrecy Law will be handled by the SIC of the Central Bank of Lebanon and the Ministry of Finance will not be party to this exchange. This will require additional laws to be passed, granting these entities full powers to access the requested information on tax evasion in compliance with the Lebanese Banking Secrecy Law and the relevant circulars to be implemented.

This poses a concern for Lebanese residents outside of Lebanon who are seeking an amnesty period to create an efficient tax structure or restructure their finances in a way that will enable them to disclose their assets without incurring unnecessary taxes and avoiding fines. In the meantime, residents' information is not disclosed to Lebanese tax authorities. This matter is further complicated by the unclear and conflicting definitions of what constitutes a Lebanese resident because the Section 3 provision hinges on this.
The banking sector in Lebanon is continuously aiding the fight against unlawful use of the worldwide banking network, and it is essential to do so in order to remain a powerful and a respected player in cross-border transactions. But to toe this fine line between national and international interests, Lebanon is slowly and methodically implementing the provisions necessary to be in compliance with the AEOI. The standards necessary to comply FATCA have been implemented; this means that even if there are complications with the government implementing the necessary AEOI standards, the CRS Standard is in place and can be implemented.

Unfortunately, due to the delays in implementing the local regulations to comply with the Standard, the Ministry of Finance has not sufficiently created awareness among Lebanese residents to make the necessary disclosures within the amnesty period that ends on December 31, 2016 for existing accounts. It is pivotal that Lebanese residents begin to find the most effective structures through which they can disclose their foreign-earned income, and it is hoped that the Lebanese government will extend the amnesty period in light of the tradition that Lebanese residents were never compelled to disclose their foreign income in the past.