Jordan outlines tax reforms as part of efforts to bridge budget gap

JordanTax

Economic News

21 Nov 2017
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Expected revisions to Jordan’s tax code seek to tackle avoidance and reduce the basket of goods covered by subsidies – measures aimed at cutting the budget deficit.

At the beginning of October Prime Minister Hani Al Mulki said the focus of changes to the kingdom’s tax code would be 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 ($16,900) per year for individuals and JD24,000 ($33,900) 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 $723m 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 programme, Jordan has committed to reforming the tax system – a move the IMF said is crucial to achieving fiscal viability.

Continuing efforts to reduce the deficit

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% of GDP in 2014, to 3.2% in 2016 and an estimated 2% this year, according to IMF data, which predicts the debt-to-GDP ratio will fall from 96% at end-2017 to 77% 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 JD2.88bn ($4.1bn) last year to JD4.23bn ($5.9bn) in five years’ time.

However, the government may need to pursue more widespread reform to increase income tax revenues from JD945m ($1.3bn) last year to JD1.26bn ($1.8bn) by 2022, as per IMF projections, with the fund advocating for a widening of the income tax base in addition to tackling tax avoidance.

Narrow tax base and low compliance threatens fiscal viability

Currently, 5% 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 $4080 are subject to income tax, compared to the median for OECD countries of 0.3% of GDP per capita.

This leaves a very narrow base of taxpayers and relatively little tax revenue: equivalent to 0.4% 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 JD3bn ($4.2bn) last year. 

Current estimates put public debt at $37bn. This could rise further if the government cannot increase domestic revenue and needs to borrow to cover further fiscal deficits. 

Downgraded long-term credit rating amid economic pressures

Not all are convinced the reforms will be sufficient to boost the economy in the medium term.

On October 20 credit ratings agency Standard & Poor’s (S&P) 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, S&P said the pace of IMF reforms could slow.

The agency said GDP is likely to expand by an average of 2.7% per year through to 2020, down from an average of 6.5% in 2000-09, in part due to fiscal pressures from the continued inflow of Syrian refugees. 

“In our view, the government is likely to prioritise 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.

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