JORDAN'S TAX REFORM: A PROTRACTED TURN IN THE

UNCLAS SECTION 01 OF 03 AMMAN 009954

SIPDIS

E.O. 12958: N/A
TAGS: EFIN KMPI KTDB ECON JO
SUBJECT: JORDAN'S TAX REFORM: A PROTRACTED TURN IN THE
RIGHT DIRECTION


1. (SBU) SUMMARY: On November 19, Jordan's government
enacted a temporary law - effective January 1 - that makes
fundamental changes to the tax code. The changes are based
primarily on two years of work by Jordan's Income and Sales
Tax Department (ISTD) and its USAID contracted advisor.
While not all of the advisor's final recommendations have
been implemented in the new law, three basic pillars of the
tax reform package remain: simplifying tax rates, broadening
the tax base, and lowering tax revenue leakage by eliminating
narrowly-defined tax exemptions that favor certain tax
payers. Some cabinet ministers favor new exemptions for
certain business sectors under the new law. The ISTD has the
full support of the new Minister of Finance to stand its
ground on the tax reform agenda.


2. (SBU) Some Embassy contacts are concerned over the law's
legitimacy. Enacted days before the last cabinet left
office, the tax amendment was made law in the absence of
Parliament under an emergency provision. Subsequently, the
Chamber of Deputies rejected the law as unconstitutional, and
sent its ruling to the Senate for review. Weak public
support for the personal income tax (PIT) part of the
amendment is an additional concern. There is some risk of
the law being overturned, though few government leaders feel
the Senate would do so. The Ministry of Finance and ISTD
will develop a communication plan to educate the public and
Parliament on the effectiveness of the new tax law. END
SUMMARY.

Income & Sales Tax Changes: The Highlights
--------------


3. (U) According to the Income and Sales Tax Department
(ISTD),the PIT changes limit exemptions and make them
available to all individuals. Additionally, tax brackets
have been lowered from four to two: ten and fifteen percent,
depending on income level. For businesses, the tax rate will
be fifteen percent in all industries except banking and
finance, which will continue to be taxed at thirty-five
percent.


4. (U) In the sales tax arena, the law broadens the tax base
with more companies now required to pay and collect the
General Sales Tax (GST). Additional regulatory changes (in
progress) will be required to insure the GST exemption for a
large number of products is removed, and sales tax
administration and compliance is made easier.

Streamlining/Unifying Exemptions
--------------


5. (U) A key pillar of the Income Tax amendment is the
"unification" of exemptions. Exemptions (with no limit on
claim amounts) previously used mostly by high-income earners
for education, rent, interest on housing loans, and medical
treatment have been eliminated. Additionally, exemptions on
fifty percent of taxable income for public-sector employees
and twenty-five to fifty percent for private-sector employees
have also been eliminated. NOTE: Under the old law,
self-employed taxpayers (mostly low-income) received no
exemptions on their taxable income. END NOTE. In the place
of these exemptions, the standard exemption has been raised
from 1000 Jordanian Dinars (JD) to 5000 JD for all PIT
payers. Exemptions for dependents are capped at 3000 JD.
This includes an additional 1000 JD allotted for a spouse and
500 JD per child. As a result, the full standard deduction
of up to 8000 JD, applicable to all PIT payers, will be
applied evenly and prevent tax revenue leakage from high
exemption claimants. The only exemptions outside of standard
deductions are income contributions made to the Social
Security Corporation, company-sponsored retirement fund,
nonrefundable life insurance, and health care insurance
premiums.

Tax Rates for Individuals
--------------


6. (U) Under the amended law, two tax brackets are targeted
at two different income levels: lower/middle and high. The
first 6000 JD earned by a household, after all exemptions, is
taxed at ten percent. Further income is taxed at twenty
percent, with a provision to lower it to fifteen percent
(falling by one percent each year until 2011),down from the
current twenty-five percent. Lowering the tax brackets from
four to two simplifies the tax code and, combined with the
higher standard deduction (which excludes most low-income
earners from having to pay taxes),shifts the tax burden to
those with a higher ability to pay.

Tax Rates for Businesses
--------------


7. (U) Under the amended law, two tax brackets are
delineated: thirty-five percent for banks and financial
institutions, and fifteen percent for all other companies.
The only change from previous policy is for companies
involved in providing services whose tax burden falls from
twenty-five to fifteen percent by 2015 (dropping one percent
each year). According to the USAID contracted advisor, the
push to bring the tax rate for service-based businesses in
line with industrial-based businesses is "a small step
forward," but the ten-year timeline to do so "is
disappointing." The exceptionally high tax rate for
banking/financial companies contradicts the USAID advisor,s
recommendation that all companies be treated equally,
regardless of which business sector they are in. While
bringing parity to the tax rate for the banking and finance
sector was considered, the previous Minister of Finance noted
that there was "too much opposition by National Agenda
Committee members."

Changes in General Services Tax (GST) Not Yet Finalized
-------------- --------------


8. (U) On the sales tax side, changes in the law are less
pronounced, though promised changes in regulation should have
an impact when approved. The USAID advisor recommended
moving all products to the sixteen percent single general
sales tax (GST) rate and broadening the tax base, i.e.,
lowering the sales threshold for business entities required
to pay and collect GST from customers. The tax amendment
broadens the tax base by requiring retail, wholesale, and
manufacturing businesses that conduct sales amount volume of
50,000 JD or more to pay and collect GST. The previous
threshold for these companies was between 60,000 and 100,000
JD depending on business sector. The law leaves special
manufacturing and service-oriented businesses that conduct
less than 10,000 and 30,000 JD in sales volume, respectively,
exempt from GST.


9. (U) When asked why the government did not consolidate the
five categories of goods that have a zero-rate GST, the
twenty-seven categories that are exempt from tax, and the
ninety-two groupings that receive a preferential four percent
reduced rate, under the single, actual sixteen percent GST,
ISTD Director Qudah replied that these changes "are
regulatory and do not require changes in the law." Changes
to move these products to the sixteen percent GST rate were
drafted with the new law, but could not be submitted in time
for the previous cabinet to approve. Qudah conveyed his
plans to have the new cabinet approve the regulatory changes
when the budget is discussed in early 2006. COMMENT: Until
that change is made, tax administration and compliance in
this area will remain a challenge to administer. END
COMMENT.


10. (U) NOTE: While Jordan,s Parliament has previously
legislated the GST tax rate of 16 percent, it does not
legislate which products receive a preferential tax rate.
Removing the tax subsidies that so many products receive is a
regulatory decision for the cabinet to make, not a
legislative one for Parliament. END NOTE.

Treading Cautiously
--------------


11. (SBU) Concern in the press over the change in the tax law
is growing. Criticisms of the revisions include accusations
that the end result will be a heavier tax burden on the poor,
and that bypassing Parliament means the government has
instituted "taxation without representation." NOTE: Even
though the Chamber of Deputies has voted to repeal the
temporary law, and some members contest its
constitutionality, it remains in effect unless the Senate
joins the lower house in voting it down. If the Senate votes
in support of the temporary law, the issue returns to the
Chamber of Deputies for action. At that point, if the lower
house again votes down the law, the two houses combine to
vote and a simple majority of the joint session decides the
issue. In the interim, the temporary law stands. END NOTE.


12. (SBU) In a December 15 meeting new Finance Minister Ziad
Fariz held with his team, a communication plan was proposed
to educate Parliament and the public on the positive impact
of the new tax law. When Fariz requested ISTD Director Iyad
Al-Qudah's feedback on this plan in the meeting, Qudah
expressed concern over a lack of a budget for communications,
e.g., newspaper ads, TV campaign, etc., and over the
possibility the Senate would overturn the amended tax law.
While Fariz shared Qudah's concern about the law,s standing,
he expressed confidence that the Senate would not reject the
law, and asked the group move forward on a communications
plan.


13. (SBU) In a follow-up December 18 meeting with Qudah,
EconOff asked Qudah about any other variables that might
derail the new tax law. Qudah expressed concern about
Minister of Industry and Trade Sharif Zubi's submission of a
draft investment law that would allow tax exemptions for
certain business sectors such as industrial zones and the
garment sector under the new tax law. Asked if he planned to
take any action, Qudah was quick to clarify that his
responsibilities at the ISTD were limited to income and sales
tax law design, and that he did not have control over laws
that other ministers submitted. Subsequently, Finance
Minister Fariz said he opposed the draft investment law that
gave some private-sector companies favorable tax relief, and
requested that Qudah and ISTD draft his arguments against it.


14. (SBU) To date, neither the ISTD nor Ministry of Finance
leadership has yet to respond to near unanimous opposition in
newspaper op-ed pieces that call for the rejection of the tax
law changes. COMMENT: ISTD Director Qudah's actions
demonstrate both his appreciation for his chain of command,
and his cautious approach in taking political risk to defend
tax reform. The Finance Minister's strong support for the
tax law amendment is important for moving ahead the tax
reform agenda, but without a public endorsement of the
amendment, he increases the risk of the Senate not passing
the changes.


15. (SBU) COMMENT CONT.'D: While changes in PIT and GST
demonstrate a commitment to reform, more follow-through is
needed. Qudah, having made what he considers major changes
to the tax code and sales tax regulation, prefers no further
changes in the short-term. His current challenge now is to
educate the public on the income tax changes and help
shepherd the promised regulatory changes in sales tax through
Parliament.
Hale