Jordan's Tax Revenues Increase in 2009, But 2010

UNCLAS AMMAN 002572

SENSITIVE
SIPDIS

STATE FOR NEA/ELA AND EEB

E.O. 12958: N/A
TAGS: ECON EFIN PGOV EAID JO
SUBJECT: Jordan's Tax Revenues Increase in 2009, But 2010
Projections Look Grim

Refs: A. Amman 2408

B. Amman 2253

C. Amman 1804

D. Amman 1646

E. 08 Amman 1392


1. (SBU) Summary: Jordan's Tax Department announced recently that
tax collections through October 2009 are 7.2% higher than the
corresponding 2008 levels. Better collection efficiency and good
business performance in 2008 have led to higher tax revenue income
in 2009. Tax reform efforts in 2009 have included an increased
focus on curbing tax evasion and increasing collection of back
taxes. The Government of Jordan (GOJ) is also making more efficient
use of its resources by increasing collection efforts on individuals
with higher incomes. Projections for 2010 tax revenues, however,
are grim. End Summary.

Increased 2009 Tax Revenues
--------------


2. (SBU) In a bit of good news following months of bad budgetary
news, revenues from tax collection between January and the end of
October 2009 reached $2.97 billion, a 7.2% increase compared to the
same period in 2008 when they stood at $2.77 billion (refs A and D).
Tax collection for the month of October 2009 reached $254 million
compared to $213 million in October 2008. According to Musa
Mawazreh, Director General of the Income Tax Department of the
Ministry of Finance, his department has been working diligently on
increasing its efficiency with a priority focus on collecting
outstanding debts and curbing tax evasion. Currently, about $1.4
billion is registered in the department's books as outstanding
amounts dating back for as long as 25 years.

Targeting Scofflaws Yields Higher Collections
--------------


3. (SBU) Mawazreh explained to EconOffs that collections are
increasingly being secured through out-of-court settlements, which
have led to an 80% increase in the Department's success rate in
collecting overdue taxes. The Tax Department is also seizing assets
-- cash, stocks, or real estate -- more quickly, going to the courts
earlier, as opposed to waiting for months and years before taking
cases to court. For older debts, the Tax Department is now waiving
some of the penalties and even a portion of the debt, depending on
its age, just to be able to clear its books. Tax Department
officials are also implementing a public awareness campaign that
encourages taxpayers to come forward to settle their outstanding
debts with the Tax Department to avoid court proceedings. This
policy has proven successful as 3,000 taxpayers approached the
department recently to satisfy their obligations and benefit from
penalty waivers that the Council of Ministers offered earlier in

2009. Additionally, outstanding cases are being resolved within
three to four months instead of years, which had been the previous
practice. The Tax Department has also shifted focus to those in
higher tax brackets. In 2009, 57% of the personal estimates from
taxpayers, mostly those with lower tax burdens, were accepted
without being audited. This allowed the Tax Department to
concentrate its resources and tax collection efforts on the larger
tax-paying entities such as individuals and businesses with higher
tax burdens so as to better use the Tax Department's resources.

Efforts to Curb Evasion Hampered by Existing Law
-------------- ---


4. (SBU) As part of the GOJ's efforts to increase tax revenues, a
special directorate was established in 2008 within the Tax
Department to curb tax evasion, focusing on the industrial,
commercial, and service sectors and their business income and
profitability. The new directorate is carrying out sector studies
to determine the profit margins of each sector. However, the
current Income Tax Law does not support the Tax Department's efforts
in this area, since it lacks the requirement that the Department
prove the amount of tax evasion. The critical issue under the
current law is whether there was an act of tax evasion, not the
amount of tax evasion. The law also states that the crime of tax
evasion requires a premeditated action. Passive neglect of the
statutes is insufficient to establish a violation. The penalty for
tax evasion in the current law is double the amount of tax evaded
with either a fine between $141 to $706, or imprisonment from one

week to one year, but not both. Judges rarely impose the
imprisonment sentence on tax evaders and the law does not allow the
adjustment of penalties for repeat offenders. Moreover, the current
Income Tax Law does not consider tax evasion to be a felony, which
carries a fine of more than $14,000 or a jail term of more than
three years.


5. (SBU) A new income tax law, a draft of which failed to pass after
being submitted by the GOJ to the parliament during its recent
extraordinary session during the summer of 2009, is currently in the
making (refs B and C). It is expected that the draft law would
propose setting more stringent penalties that would have greater
success in compelling individuals and businesses to declare and pay
their taxes and would define evasion as a crime against "honor and
trust," which would add a criminal citation to an individual's
identification records. The proposed draft would also authorize Tax
Department auditors to examine bank statements of taxpayers.


6. (SBU) Additionally, Mawazreh confirmed that the Tax Department is
working on establishing a database to monitor governmental
purchasing and tendering departments in order to have precise
information about business activities concerning government
contracts. The database will also link national identification
numbers for individuals with their activities involving the Amman
Stock Exchange, Social Security Corporation, Jordan Customs, and the
Land and Surveys Department to allow the Tax Department to better
assess indicators of net worth, including income and related
business activities. These efforts have benefited from USAID
support in modernizing the Tax Department's IT infrastructure and in
improving its auditing and collection functions. USAID is also
helping the Tax Department restructure, to help it operate more
efficiently.

A Grim Outlook for 2010
--------------


7. (SBU) According to Mawazreh, the outlook for tax collection in
2010 is not promising, in spite of the Tax Department's efforts. He
asserted to EconOffs that the positive rates of collection in 2009
were a reflection of the good performance of companies in 2008,
prior to the global recession hitting Jordan. This year's growth
and economic performance are significantly lower. As an example,
recent profit disclosures of companies trading at the Amman stock
exchange showed that profits in the banking sector in Jordan were
down 29% over the first six months of 2009 compared to the first six
months of 2008. Arab Bank, a market leader in its field and in
Amman's stock market, suffered a 72% drop in its profits during the
first half of 2009. Arab Bank's profits plummeted from $1.15
billion in the first half of 2008 to $320 million in the first six
months of 2009.


8. (U) Another important factor for the grim outlook for 2010 dates
back to November 2007, when international commodity prices
increased, and the GOJ eliminated sales taxes on 13 basic
commodities (ref E). These taxes used to generate about $140
million in revenues annually. Taxes on other goods were also
reduced. For example, the fluctuation in iron prices and the 2007
tax cuts have contributed to significant losses of tax income for
Jordan. Jordan imported an annual average of 842 million tons of
iron and steel between 2005 and 2008. The value of these imports
reached $532 million in 2007 and $787 million in 2008. The GOJ used
to tax iron and steel at 16%, generating $85 million in tax income
during 2007. This decreased in 2008 to $63 million at the 8% tax
rate instead of an estimated $126 million that would have been
generated if the tax rate had been at 16%. Such fluctuations in
international prices and the GOJ's responses to them have
contributed to losses in Jordan's tax income.


9. (SBU) Comment: The GOJ continues to face a dilemma in finding
ways to balance its budget and in finding new streams of revenue to
support its budget. In addition to significant cuts built into the
2010 budget, the GOJ will likely need to take other painful steps.
Reinstating or increasing sales taxes on some basic commodities are
options, but unpopular choices when unemployment remains high and
wages stagnant. Empowering tax auditors to do their job properly is
another important area requiring tough decisions that would require
capital expenditures in hardware and software to link the critical
tax and income-related government entities to the Tax Department (a
tough proposition during the 2010 budget process and its

across-the-board cuts) and amending the current Income Tax Law,
possibly as a provisional law following the dissolution of Jordan's
parliament on November 23. End comment.

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