Tax Evasion Crackdown

Jordan is tackling its budget deficit by going after tax dodgers as well as reducing the basket of goods covered by subsidies.

At the beginning of October, Prime Minister Hani al Mulki said new changes to the Kingdom’s tax code would focus on improving collection and preventing evasion without affecting exempted segments of society.

Among the measures flagged by the government to increase compliance will be stricter penalties for those found guilty of evasion, including imprisonment rather than the option of a fine for those convicted.

While the Prime Minister ruled out any change to the minimum earnings levels under which income tax would be applied—the upper limit for exemptions is JD12,000 per year for individuals and JD24,000 for families—non-compliance by those above these brackets will be more vigorously pursued.

The announcement came on the back of continued efforts by the government to fulfil the stipulations of the $723 million extended fund facility (EFF) agreement with the IMF, brokered in August 2016 and set to run for three years.

As part of the comprehensive fiscal and structural reform program, Jordan has committed to reforming the tax system—a move the IMF said is crucial to achieving fiscal viability.

In a July press release issued after the conclusion of its 2017 Article IV consultation with Jordan, the IMF commended the authorities for their efforts to preserve macroeconomic stability and reduce the fiscal deficit.

Jordan has made significant progress in this respect, narrowing the gap from 10.3 percent of GDP in 2014, to 3.2 percent in 2016 and an estimated 2 percent this year, according to IMF data, which predicts the debt-to-GDP ratio will fall from 96 percent at the end of 2017 to 77 percent by 2022, in line with continued fiscal reform.

In particular, the fund said it was encouraged by the authorities’ decision to remove some exemptions on the general sales tax (GST) and customs duties, with GST revenues projected to rise from JD2.88 billion last year to JD4.23 billion in five years’ time.

However, the government may need to pursue more widespread reforms to increase income tax revenues from JD945 million last year to JD1.26 billion by 2022, as per IMF projections, with the fund advocating for a widening of the income tax base in addition to tackling tax avoidance.

Currently, 5 percent or less of Jordan’s population is subject to income tax, due to the very high tax threshold: only those earning three times the GDP per capita of around $4,080 are subject to income tax, compared to the median for OECD countries of 0.3 percent of GDP per capita.

This leaves a very narrow base of taxpayers and relatively little tax revenue; equivalent to 0.4 percent of GDP last year, according to IMF data.

Of the small number of individuals required to pay income tax, many also manage to avoid doing so; the Income and Sales Tax Department estimated annual loss to tax avoidance at more than JD3 billion last year.

Current estimates put public debt at $37 billion. This could rise further if the government fails to increase domestic revenue and needs to borrow to cover further fiscal deficits.

However, not everyone is convinced the reforms will be sufficient to boost the economy in the medium-term.

In October, credit ratings agency Standard & Poor’s downgraded Jordan’s long-term foreign and local currency sovereign credit ratings from ‘BB-‘ to ‘B+’, although it kept the short-term rating at ‘B’.

Citing implementation pressures related to fiscal consolidation, higher external risks, easing economic growth, and a weakening debt profile, the ratings agency said the pace of IMF reforms could slow.

The agency said GDP is likely to expand by an average of 2.7 percent per year through to 2020, down from an average of 6.5 percent in 2000-09, in part due to fiscal pressures from the continued inflow of Syrian refugees.  “In our view, the government is likely to prioritize social stability and growth in the current domestic and external environment, with potential trade-offs as to the scope of fiscal reforms,” they said in a report announcing the ratings change.

This Jordan economic update was produced by Oxford Business Group.