JORDANIAN FINANCE MINISTER ADVOCATING FOR

C O N F I D E N T I A L AMMAN 000703

SIPDIS

STATE FOR NEA/ELA AND EEB

E.O. 12958: DECL: 03/17/2019
TAGS: EAID ECON EFIN JO PGOV
SUBJECT: JORDANIAN FINANCE MINISTER ADVOCATING FOR
SIGNIFICANT TAX REFORMS AS ALTERNATIVE TO PROPOSED STIMULUS
PACKAGE

REF: A. AMMAN 611

B. 08 AMMAN 1019

Classified By: Ambassador R. Stephen Beecroft for reasons 1.4 (b) and (
d)


1. (C) Summary: Newly appointed Minister of Finance Bassem
Salem plans to replace a proposed $280 million stimulus
package with a tax reform program advocated for by the
USAID-funded Fiscal Reform Project (ref A). The project
seeks to improve tax administration and to implement a
revised corporate and personal tax structure with potential
33 ) 60% tax cuts. The goal of the reduced tax rates is to
spur the economy through increased foreign investment and
reduced tax evasion. The associated, revised tax law must be
reviewed by the Legislative and Opinion Bureau (LOB) in the
Prime Ministry before it can be submitted to Cabinet and
Parliament for approval. King Abdullah has told the Minister
that he supports such a law and will recommend that
Parliament pass the law unchanged during this summer,s
extraordinary session. End Summary.


2. (C) USAID has met repeatedly with Salem over the last
several weeks to prepare the draft tax law and to develop an
implementation strategy. Prior to the Minister,s arrival,
Ministry of Finance staff had been working on a stimulus
package, last priced at $280 million, which would have
provided support to the troubled real estate and agricultural
sectors. Salem did not believe that the package, which had
been partially leaked to the press, would meet its economic
goals and an International Monetary Fund team visiting Jordan
the week of March 8 concurred. Salem is instead supporting a
radical change to the tax code to increase investment,
improve transparency and improve tax administration and
compliance.


3. (SBU) While the actual tax rates are still being
discussed, the current plan calls for a 10% tax rate for all
corporations except banks which would pay a 20% tax. These
rates are dramatically lower than the current structure which
has a 15% tax rate for the industrial sector; 25% for
services; 35% for banks/financial services; and 20% for other
sectors. Banks have historically paid higher taxes in Jordan
because interest income is forbidden in Islam and the high
tax rate is seen as a &sin tax.8 The personal income tax
rate would likely be set at the same rate as the corporate
tax, since the majority of businesses are family businesses
which can easily move income between corporate and personal
income. The fiscal reform project also includes significant
tax administration changes to reduce corporate and individual
tax evasion; to decrease the amount and ease of exemptions;
and to improve ministry audit practices.


4. (C) Salem told EmbOffs he intends to have Parliament
review the revised tax law during the extraordinary session
which will likely be scheduled for June or July. Prior to
that, the law must be reviewed by the LOB, a process which
can take at least four to six weeks for even priority bills,
and be approved by Cabinet. Salem seeks to accelerate the
process by providing LOB with dedicated Jordanian tax lawyers
who can provide technical assistance.


5. (C) Salem also indicated to USAID that he met this week
with King Abdullah to discuss the tax reform plan, and the
King agreed to recommend to Parliament that the tax law be
passed unchanged. In the past, Parliament has changed tax
laws adding loopholes and lowering tax rates for particular
groups which created significant tax distortions. The last
such editing of the tax law resulted in the revisions being
cancelled rather than implemented with Parliament,s changes.
The Minister does not believe that a tax law with
Parliamentary edits would meet the project,s goals of having
a transparent, fair and simple law.


6. (SBU) The philosophy behind the new, lower tax rates is
that such rates will work as a stimulus package by
encouraging international investment. This will in turn
create new businesses and eventually increase total tax


revenues. Salem acknowledges that the approach will result
in reduced revenue in the short-term but points to similar
tax reform successes in Egypt, Ireland and Slovakia. Jordan
has also seen internal success with its 5% flat tax in Aqaba
increasing tax revenues by dramatically increasing tax
compliance (ref B). The USAID Fiscal Reform project team
believes that the schedule for passing the law is aggressive
but possible.


Visit Amman's Classified Website at:
http://www.state.sgov.gov/p/nea/amman
Beecroft