Tax Evasion in Jordan: causes, means, and size


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Executive Summary

·   Since 1988, the government has been undertaking measures to reform its tax system in an attempt to achieve macroeconomic stability and strengthen its financial position

·   The system includes many loopholes facilitating tax avoidance as well as tax exemptions contradicting the standards of competency, efficiency,  justice and equality

·   Tax evasion ultimately leads to the loss of revenue to the Treasury that could have been collected to contribute to the reduction of the country’s fiscal deficit

Key Findings

·   Jordan’s economy is suffering from limited resources, mainly water and energy, and a chronic fiscal deficit, thus making the provision of necessary funding to meet the requirements of economic and social development extremely difficult

·   Government spending in Jordan is mainly financed by heavy taxes and fees.The average tax burden is considered high when compared to Syria or Egypt, and even to Japan and the US. In general, the per capita tax in Jordan has risen four times since 1985 as the taxation system started to rely heavily on indirect taxes. Sales taxes, a form of indirect tax, are increasingly becoming the main source of government revenue indicating that the goal of increasing revenue has shifted from being sourced from income tax and customs duties to general sales tax

·   In Jordan, there are fewer cases of tax evasion related to income tax than to sales tax with the existence of registration thresholds for sales tax in the commercial, industrial and services sectors encouraging tax evasion in the country

·   Overall, there are different means for evading income, sales and customs taxes in the country

·   Sales tax evasion is generally done through:

o   Failure to register with the Income and Sales Tax Department, done by private entities

o   Non-submission of tax returns

o   Non-issuance of an invoice for the value of sales

o   Devaluation of an invoice in the event of payment in cash

·   Income tax evasion for individuals and corporations is done through:

o   Refraining from registering with the tax department

o   Non-disclosure or giving false information on the size of economic activities

o   The reduction of the value of the taxable income of workers in some factories and companies

o   Non-payment of social security through claims of the “trial period”

·   Customs tax evasion is mostly done by:

o   Not providing accurate bills for the value of imports

o   Providing different and non-matching descriptions for imported goods

o   Importing using another person’s name whereby importers issue import cards and licenses generally in the name of illiterate or low-income people who end up not paying the taxes

o   Smuggling

·   The main reasons taxpayers in Jordan evade taxes include:

o   Complexity of the tax system and lack of stability due to frequent amendments made to the tax laws, which make it difficult to understand the legal provisions on tax and adhere to them

o   Leniency when imposing penalties on tax evaders

o   Inadequacy of official databases and information about the economic activities of wholesale and retail trade, manufacturing and construction sectors, as well as of professionals including doctors, engineers and lawyers

o   Inadequate funding for training programs to enhance human resources in tax administration

·   Based on the approach of estimating the size of the informal economy in Jordan and concluding the size of tax evasion by the size of tax burden of the informal activity, total tax evasionin 2012 is estimated for JD 1,126.4million. This method is based on the total tax revenues and does not take into account the size of tax exemptions

·   If a different approach is deployed using input-output tables, household income and expenditure survey, and data on income and sales tax,total tax loss in 2012 is estimated at JD1.9 billion whereby the breakdown is as follows:

o   Tax deductions: ~JD834 million

o   Tax arrears: ~JD370 million

o   Tax evasion: ~JD695 million with 29% evasion from income tax and 71% evasion from general sales tax

Recommended Actions and Initiatives

Key recommendations to limit the size of tax evasion include:

·   Toughen penalties for tax evaders and facilitate an accelerated litigation process

·   Build adequate databases for all active individuals and entities and their respective activities

·   Eliminate the minimum registration for the general sales tax for the commercial, industrial and service sectors

·   Enhance the capacities of workers in auditing and tax collection

·   Limit the amendments to tax laws in the country

·   Assure that legal texts are tight enough to reduce tax avoidance

·   Legislatively strip all authorities of the right to intervene in granting tax discounts

·   Reduce the accumulation of tax arrears by facilitating litigation and accelerating settlements

·   Raise awareness among citizens and conviction of the importance of paying taxes on time, and the importance of tax revenues in financing public spending

·   Establish the practice of requesting formal bills when making purchases of goods and services

·   Review tax laws to make sure that the tax burden is well distributed, justice is assured, and that taxes contribute to the stimulation of economic activity

 
 

Report Name

Date

Timeline

Tax Evasion in Jordan: causes, means, and size

2014

Not Available

Author

Supporting Donor

Jordan Economic & Social Council

Jordan Economic & Social Council

Sector

Lead Ministry

Fiscal Policy

Not Relevant

Key Topics

Customs Tax –Income Tax – Import license – Informal economy – Litigation process – Penalties –Registration threshold – Sales Tax –Tax Avoidance – Tax Collection – Tax Evasion – Tax Exemptions – Tax Loss

 


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