Tackling obstacles: Ali Samara, Partner, EY Jordan, on real solutions for the kingdom’s revenue shortage

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Ali Samara, Partner, EY Jordan

The kingdom’s economy relies heavily on tax revenues and foreign aid to secure the funds required to provide public services. In order to increase tax revenues, and consequently reduce dependence on foreign aid, the government should allocate resources towards increasing the efficiency of the tax system, and encourage compliance at both the corporate and individual level. By doing so, Jordan will be able to strengthen its standing as a stable, competitive and sustainable economy that promotes progress and growth.

Over the last two decades, Jordan has made significant progress in developing and modernising its Income Tax Law in an effort to raise the revenue collected by the government. However, challenges include undeveloped capacity and the missing reciprocal link between taxes on the one hand and public and social expenditures on the other. The stubborn persistence, and social acceptance, of tax evasion combined with non-compliance represent some of the key obstacles that need to be overcome in the kingdom.

When examining the difficulties faced by Jordan it is important to emphasise that increasing revenue collection, though crucial, will not be sufficient by itself. The Jordanian government should also focus its efforts on designing a tax system that is effective in encouraging good governance, in alignment with society’s views on appropriate income inequalities, and developing social justice. The allocation and spending of revenue are equally important for growth. A report submitted to the G20 Development Working Group by the IMF, Organisation for Economic Cooperation and Development, UN and World Bank, which is titled “Supporting the Development of More Effective Tax Systems”, argues against “administering special tax treatments that serve little useful purpose, and that incentive structures – both within the revenue administration and the wider judicial and political system – discourage corruption at all levels. Political will is necessary over extended periods of time to reform tax systems and administrations, and to address these broader concerns.”

An additional challenge that continues to be faced is the development of an attractive tax regime at both the domestic and foreign investment level. With the Income Tax Law having changed five times in the last two decades, companies and organisations operating in Jordan are facing greater difficulty in long-term planning and budgeting due to the uncertainty surrounding the application of an ever-changing tax law. This inevitably reduces the incentives for businesses to continue investing in such an unpredictable environment, while in recent years neighbouring countries in the MENA region have been reducing income tax rates for companies and organisations. Most countries have seen a reduction in rates consistently over the last five years, making it even more difficult for the Jordanian economy to compete and secure foreign investment, especially with Jordan’s income tax rates on the rise. In conjunction with the above, the G20 Development Working Group report points out that “developing countries face challenges in designing and implementing effective transfer pricing and information exchange regimes and more generally in improving transparency. These issues are being addressed as the debate over transparency in the reporting of financial data by Multinational Enterprises intensifies and as developed and developing countries alike gear up to take ‘whole-of-government’ action to address illicit financial flows.” Given the increasing strain on government finances, the push for greater transparency is expected to grow even stronger in the coming years, with companies facing more comprehensive reporting and disclosure requirements, and higher administrative costs.

While the challenges Jordan faces are substantial, there are also grounds for optimism. Several specific actions could be taken to support the development of a more effective tax system, such as increased transparency and compliance, enhanced methods for measuring progress, monitoring and reporting revenue expenditure to reduce tax evasion, and encouraging tax compliance for both corporations and individuals.

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The Report: Jordan 2014

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