Tax reforms aim to bridge Jordan's budget deficit

Jordan has made significant progress in preserving macroeconomic stability and reducing the fiscal deficit in the past few years. However, on the back of continued efforts by the government to fulfil the stipulations of the $723m extended fund facility agreement with the IMF, the government may need to pursue more widespread reforms to increase income tax revenues and limit tax avoidance if it is to commit to achieving financial viability.

By the Numbers

The country has made progress in key areas. According to the IMF, Jordan managed to reduce its fiscal deficit from 10.3% of GDP in 2014, to 3.2% in 2016 and an estimated 2.5% in 2017. In line with continued fiscal reform, the debt-to-GDP ratio is expected to fall from 96% at end-2017 to 77% by 2022. 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) in 2016 to JD4.23bn ($5.9bn) in five years’ time. However, to significantly increase income tax revenues from JD945m ($1.3bn) in 2016 to JD1.26bn ($1.8bn) by 2022, as per IMF projections, will require growth in the income tax base in addition to tackling tax avoidance.

Income Tax

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 per capita GDP 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 in 2016, 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) in 2016. Current estimates put public debt at $37bn. This could rise further if the government cannot increase domestic revenue and instead borrows to cover further fiscal deficits.

Casting a Wider Net

Broad revisions to Jordan’s tax code are expected. In a meeting with board members of the Amman and Jordan Chambers of Commerce and other industry stakeholders in October 2017, 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. 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 will be more vigorously pursued.

Ratings

Not all are convinced the reforms will be sufficient to boost the economy in the medium term. On October 20, 2017 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 an report commenting on the ratings change, the IMF announced “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.”