May 14, 2018


Center for Strategic Studies University of Jordan

In cooperation with

Amman Chamber of Commerce


Present


Executive Summary



Income Tax Law:

Assessment of the Reality and Probable Alternates 



Introduction

The Jordanian economy faced many economic and financial problems and crises, including the significant increase in the government debt and the increasing deficits in the government budget. 

The government tried to improve its efficiency by controlling expenses and improving revenues in the recent years. The Jordanian economy was affected by the ramifications of the global financial crisis, in addition to the deteriorated political situations in the area, and their additional negative effects on the Jordanian economy which forced Jordan to adopt correction programs in cooperation with the International Monetary Fund. These programs focused on tax reforms, in particular the sales tax. The government recently introduced new draft law amending the present Income Tax Law to expand the taxpayers subject to tax and to limit the tax evasion. This amendment is expected to save revenues of Jordanian Dinar 300 Million a year to the government, of which Jordanian Dinar 150 Million as a result of improving tax management and the rest as a result of reducing the exemption limit. The most important proposed amendments to the present law include: 

1. To cut down the exemptions from 24 thousand to 16 thousand for families, and from Jordanian Dinar 12 Thousand to Jordanian Dinar 8 Thousand for individuals, and cancelled the additional exemptions granted to the family for treatment and education invoices and housing loans interests. 
2. To divide the incomes of the taxpayers into five segments; Jordanian Dinar 5 Thousand each segment at a tax ratio of 5% to 25% of the realized income. 
3. To increase the income tax of the corporate body by 30% per Jordanian Dinar for the raw materials mining companies; 40% per Jordanian Dinar for banks, financial institutions, insurance and re-insurance companies, and corporate bodies who practice finance leasing activities; 24% per Jordanian Dinar for communications companies, electricity distribution and generating companies, and financial brokerage companies; 20% per Jordanian Dinar for any other corporate body. 

Proceeding from the Center's care to contribute to the enrichment of the national knowledge and discussion about the important issues, this paper contributes to the expansion of government options in the national dialogue about the tax law reform/ the methodology used in this study includes a review of the present applicable law and proposed amendments, study the reality and challenges of tax management, analysis of tax volume in Jordan in terms of measuring the macro tax burden and make projections to the financial revenues resulted from the government proposal and other scenarios.

This study includes a number of important results and recommendations that may contribute in finding proper harmonic tax law, help to minimize the procedures complication, and increase the taxpayers' tax awareness and compliance in case of implementation. The most concluded results include: 

Results and Recommendations
Results: 
This study includes many important results and recommendations that may contribute in finding proper harmonic tax law, help to minimize the procedures complication, and increase the taxpayers' tax awareness and compliance in case of implementation. The most concluded results include:
Results about tax burden and tax capacity indicators
1. The indirect taxes increased significantly where its materiality reached 69% in 2017 to become the main source of the government revenues against the low rate of the direct taxes.
2. The income tax levels in Jordan are lower than the international levels while the tax burden is higher than the international level and lower that the Euro area.
3. Jordan is close to the higher limits of tax capacity where the tax burden reached about 15.5% in 2017. If the procedures taken by the government since the beginning of 2018, in particular the sales tax and oil taxes in addition to the proposed law, this means that Jordan will enter the over taxation limit (tax strain).  
4. The tax capacity accounted for 16-16.8% of the gross domestic product. Therefore, the government must consider not exceeding these limits to avoid the over taxation in Jordan. 
5. Data indicate that Gini coefficient increased in 2013 compared to 2010 which means bad distribution of income in Jordan which indicates that the present tax system did not help in re-distribution of income in Jordan. 
6. The government aims from amending the income tax to achieve tax justice, increase the income tax contribution to the local revenues without explaining the meaning of tax justice and how to apply it, and without conducting any study to the effect of this amendment on the purchase power of the citizens or their income. 
7. It is noticed that the new income tax draft law targets the middle class and affect its low class mainly as the poor class will not be included in the amendments while the rich class will have legal loophole to evade the tax.
8. There is a possible contradiction in some articles of the present draft law related to the tax ratios increase and decreasing exemptions for the taxpayers and different economic sectors with the economic development motivation plan currently implemented by the government. 
9. The results of the financial revenues expectations on the proposed law indicate that they exceeded the expectations of the government. 
10. The different scenarios to achieve the income desired by the government indicated that there are alternates other than what the government submitted without affecting the lower class of the middle class.  

Results on the tax management 
1. Due to the important relation between the citizen or the taxpayer and the tax management, it is important to define the rights and obligations of each party to this relation. This includes updating the methods of developing and simplifying legal provisions, making them easy to understand, and improve them by aligning them with the reality. 
2. Lack of clear mechanism as regards the deduction at source and the lump-sum tax which leads to different discretions in dealing with some sectors such as contracting, housing, public transportation and professional classes which increase the tax evasion.  
3. The citizens still consider the tax management entrusted with the implementation of the tax law as it imposes its determination on their behavior by the tax power and takes their money forcibly. In return, the tax management thinks that it practices legal right stipulated by the tax provisions and sees the taxpayer wants to evade paying the tax. Therefore, the hostile relation between the tax management and the taxpayer requires enforcing the tax law and involve the taxpayer in the tax issue.
4. As the relation between the taxpayer and the tax management is constitutional before being legal, and the constitution imposes the citizenship principles on the taxpayer and the management at the same time, the legal provisions must keep abreast with the economic and social development of the state. Keeping abreast with the development means imposition of tax where it should be imposed and improve the collection control system to respect the tax law and ensure the implementation of the constitutional provisions, and adoption of all new mechanisms that enable establishment of good communication between the tax management and taxpayer. 
5. The current tax system is still resisted by some taxpayers in form of tax evasion, cheating, and avoidance, in particular some procedures related to reporting that prejudice the right to defend or the procedures related to the tax committees related to specializations as they must by enabled to consider what is legal and not only what is real. 
6. Involve the taxpayers in developing tax laws as they are the basis in the tax equation and they suffer the tax burdens. Therefore, they must play role in developing tax provisions. Without this approach, the efficiency of the tax management collection will remain inefficient and ineffective. Participation in this field is the most effective mechanism as it represents a democratic curve in managing the tax issue and improves the relation between the tax management and taxpayer, in particular, it makes the taxpayer feels that he is an essential element and effective at the tax level, and the biggest contributor to the development process. 
7. Lack of direct dialogue and weak communication with the taxpayers. This is clear in the weak tax awareness and culture.
8. The relation between the taxpayers and tax management is unequal with the lack of dialogue and communication bridges. 
9. The negative effects of the recurrent amendments to the tax law could be mitigated by granting grace period, in particular for foreign investors, where the taxpayer is granted grace period (for example five years) to rectify his tax situation in light of the (then) new amendment to the income tax law during which the law continues to apply before the amendment and the amendment shall not apply before the expiry of the grace period or with the consent of the taxpayer. 
10. Educate the taxpayers with the mechanisms of implementing the tax law by establishing specialized section or division at the Tax Department to give tax advice to the taxpayers and act accordingly, and educate the taxpayers to the necessity and importance of paying the tax, the problem of the tax evasion and its negative impact on the taxpayers and the tax revenues. 

Results of the chambers of industry and trade trends towards the income tax law
1. 85% of the respondents expressed their dissatisfaction with the current applicable income tax law in Jordan. The reasons behind this dissatisfaction is that the current law is unfair and injustice, the tax rates are high and cause the citizens to evade the tax due on them. 
2. 91% of the respondents believe that there is tax evasion in Jordan. The main reason behind this tax evasion is the high tax rates, preferential treatment and favoritism in the tax estimates, and citizens' distrust in the tax collector, and the citizens' greed. 
3. 94% of the respondents believe that justice in tax collections encourage the taxpayer to pay the tax, and 91% believe that decreasing the tax rates increases the industrial sector competitiveness, while 82% believe that linking the tax exemptions with the employment of the Jordanian workforce has significant effects on the Jordanian economy. 
4. Half respondents (about 52%) believe that the weak accounting competences of the Income Tax Department staff facilitates the tax evasion, while 54% believe that unifying the tax exemptions between the foreigners and locals achieve justice.
5. 87% of the respondents believe that it is necessary to increase the tax awareness of the Jordanian citizen to help prevent the tax evasion of the taxpayers in Jordan, and that it is important to decrease the tax rates for the citizens and individuals to help prevent the tax evasion of the taxpayers in Jordan.  
6. 80% believe that facilitating the collection of the tax by simplifying the tax procedures help prevent the tax evasion of the taxpayers in Jordan. 
7. Two third of the respondents believe that the repeated practices which are considered of the tax evasion include the following:
- The taxpayer submits incorrect return either by omitting, decreasing, or deleting any income.
- The taxpayer prepares or keeps bogus or false books or accounts.
- The taxpayer resorts to fraud or tricks to evade or decrease the tax.
- The taxpayer submits false statement or bogus or incorrect entry in a statement or list to the Tax Department. 
8. 71% believe that the citizens and companies evading the tax are reported, and 55% believe that there is bribe in the tax transactions and estimates among the employees.
9. 44% believe that the tax rate imposed on the present income categories (Jordanian Dinar 12000 for individuals and Jordanian Dinar 24000 for families) are reasonable, while 56% believe they are unreasonable.
10. In case of taking decision to expand the tax base, 75% believe that the families with an annual income of Jordanian Dinar 20000 and above must be included within the taxable income categories, while 9% believe that the individuals with an annual income of Jordanian Dinar 18000 and above must be included within the taxable income categories. 
11. The respondents believe that the following issues related to the tax management may contribute in having modern tax law:
- Involve the economic activities in the development of the income tax law (85%).
- The management must adhere to certain instructions and systems for not less than two years (84%).
- The taxpayer must know the available exemptions and their rates (81%).
- To benefit from the experiments of the developed countries in the tax laws (80%).

Recommendations:
Based on the study results in its different dimensions, the study recommends to take the following aspects into consideration in amending the present tax law: 

1. Although the amendment of the income tax law is economically justified, the whole tax system must be taken into consideration to avoid entering the over taxation stage. So, increasing the tax on the high income categories must be corresponded by a decrease in the sales tax as a parallel and strategic trend.
2. To conduct dialogue with the concerned from the private sector to reach a national agreement on the law.
3. Conduct the probable impact of amending the law on the economic development and the unequal income. 
4. Select one of the alternates or scenarios provided by the study which mitigate the financial return which the government desires to achieve without affecting the lower classes of the middle class.  
5. Grant tax pardon to the late, cheaters and evaders within a certain period of time and to include exemptions from fines and interest on delay and not on the original amounts due to the income tax without legal prosecution which encourages the individuals to submit the tax returns, expands the tax base and increases the government revenues. 
6. Increase the tax awareness of the citizens and the importance of paying the tax as this will benefit them.
7. Define the powers and authorities of the income and sales tax auditors in a more accurate and substantive way.
8. Reducing the periods during which the Tax Department can make assessment for previous years.
9. Not granting the Council of Ministers authorities to grant exemptions in special cases which leads to probable tax discrimination. It is preferable to approve the exemptions categories by regulation or law, or cancel them in full.
10. Educate the taxpayers with the mechanisms of implementing the tax law by establishing specialized section or division at the Tax Department to give tax advice to the taxpayers and act accordingly.
11. Mitigate the negative effects of the proposed tax amendment by granting grace period, in particular for foreign investors, where the taxpayer is granted grace period (for example five years) to the to rectify his tax situation in light of the (then) new amendment to the income tax law during which the law continues to apply before the amendment and the amendment shall not apply before the expiry of the grace period or with the consent of the taxpayer. 
12. Keep the agriculture sector exemption as in the current law in force. 
13. Buildings and lands tax falls under the types of taxes imposed in the Kingdom. The logic is to offset the taxes from each other. Therefore, we recommend to keep the provision of the current law which provides for offsetting the buildings and lands tax from the income tax.
14. Reconsider the provision related to obtaining financial or bank information and limit them to public prosecutor request in case the tax evasion is established, and each case to be separate. 
15. Reconsider imposing fines on evasion and adopt the principle of graduation at rates commensurate with the committed crime. 

Work team: 
# Name
1 Dr. Mousa Shteiwi Team leader
2 Dr. Lina Shabib Member
3 Dr. Ahmad al-Majali Member
4. Dr. Walid al-Khatib Member
5. Dr. Metri Mdanat Member
6. Dr. Adel al-Qatawneh Member
7. Mr. Ali al-Assaf Member