COM Considers Imposing a Tax on Profits Made from Redeeming USD Loans at 1,507.5 LBP

In its meeting on 1/11/2023, the Council of Ministers (COM) discussed enacting a law proposed by the Deputy Prime Minister that would tax the profits (in fresh USD) made by bank clients who redeemed their USD loans at the old official exchange rate of 1,507.5 per 1 USD, at a time when the market exchange rate was way higher than that. Since this loan redemption mirrors a depletion of USD deposits, the proceeds from this tax would go to the Deposit Recovery Fund that the Government intends on establishing as part of its law on restructuring the financial sector. As such, the tax would help depositors to redeem part of their blocked deposits.

Details of the law are still in the making. But preliminary details speculate that retail loans at less than $100,000 might be exempted, the tax rate might be set between 10% and 20%, and total tax returns might reach more than $ 1 billion. There are also other considerations that the law has to take into account, such as: loans were initially redeemed at 1,507.5 LBP but later on at higher multiples; the tax should fall on the profits made not the principal and should be a one-off; some loans were redeemed against USD deposits, though there were many instances when borrowers bought USD deposits at discounts to retire their loans; and politically connected borrowers should also be subject to the tax like everybody else.

All this goes to show that the law will have to be intricate, fair, and as comprehensive as possible, and as such its application will be fairy involved. It is interesting to note, that between August 2019 and August 2023 USD loans fell from $38.3 billion to $8.1 billion; and the tax would apply to them not on LBP loans.

Commercial Bank Loans: