Promoting investment, revising taxation

In line with the Constitutional Court’s decision that amendment of provisional laws implies issuing permanent laws only, the government had to present a new tax law in lieu of the current provisional tax law No. 28\2009.

The proposed new law is very much the same as the provisional one. There have been no changes on taxation imposed on individuals; tax exemptions have shrunk 25 per cent.

The proposed law imposes a flat 20 per cent tax rate on enterprises income. Financial institutions, mining, communication and electricity companies will be subject to a 20 per cent tax rate on the first JD100,000 and 25 per cent on profits bigger than that

Banks will be subject to 20 per cent on the first JD100,000 and 35 per cent on profits higher than JD100,000.

Agricultural entities enjoy tax exemptions on the first JD150,000 and not on the first JD100,000 as the provisional law stipulates.

The government anticipates that the proposed law will secure JD140 million per year, in addition to the JD3.3 billion it habitually collects under the current provisional law.

Jordan imposes a 16 per cent sales tax and countless charges and fees, including: stamp duties, university taxes, value-added taxes, customs and tariffs, departure tax and real-estate title-transfer fees.

At the same time, there has been an ongoing debate on a proposed investment law. The investment law was introduced in 2003, but the provisions regarding the exempt sectors from the expired law of 1995 have stayed the same.

Since 2003, the government has proposed and withdrawn at least seven investment law drafts. The latest merges the Jordan Investment Board, the Industrial Zones and Free Zones Corporations and the promotional part of the Jordan Enterprise Development Corporation into a single commission.

The new commission will be responsible for administrating and overseeing all investment activities in the country, excluding the investments in Aqaba and Petra, for which other regional commissions are responsible.

The proposed investment law equalises foreign and local investors, and offers wide tax exemptions for investment approved by the Cabinet through regulation that will be issued for that purpose.

Since the aforesaid laws will be in force for years to come, an extreme level of harmony must be introduced between the two. However, no qualitative or quantitative harmony exists between the two laws.

While the investment law offers a wide range of deductions and exemptions for investments, the tax law raises taxes and shrinks exemptions and deductions on enterprises.

The investment law does not spell out the types of exemptions it will offer, nor the mechanism to do so in view of the tax law.

The investment law must unequivocally stipulate the exemption it will be offering, as well as the beneficiaries, even in the broadest of terms.

It is not wise to leave this issue in the hands of a regulation that the Cabinet issues, amends and repeals at will.

Moreover, the investment law accords exemptions to investments in the development zones, excluding others. In other words, any investment outside the six development zones will be subject to taxation stated in the tax law, even if such investment is entitled to exemption under the investment law.

Consequently, the entire investment law is rendered meaningless. The same applies to tariffs on investment inputs and equipment.

On the other hand, the tax law imposes 2 per cent on imports, which impedes exports in an indirect way. No effective export-oriented industry is possible without smooth and affordable importation.

The law does not give the newly established investment commission the authority to exempt investments established according to the new law from such tax.

The new investment commission must have some powers to grant exemptions to new investments, provided that they have the potential to be successful.

If law and decision makers insist on raising taxes, the sales tax must be reduced to avoid economic recession.

Another flaw in the proposed income tax law is the fact that all companies, irrespective of their capital or form, are subject to the same tax rules and principles.

It is unfair to equalise large public shareholding companies to, let’s say, middle class family investments. 

Also, the law does not avoid double taxing investments as it should. Companies that collect dividends from Jordanian companies should not be double taxed as they will also be paying income tax.

There is some consensus that the Jordanian tax regime is skewed. Seventy seven per cent of tax revenues come from the largest 1,000 companies in the country and only 5 per cent of taxpayers pay their taxes.

The economic thinking must change to consider other economic sources as public sources of income instead of taxes and financial charges.

Experience shows that constant tax increases have taken Jordan nowhere. 

The country must invest in sectors in which it holds a competitive advantage, such as agriculture, services and various industrial sub-sectors.

Economic success is measured by the overall levels of economic stimulations and not by the figures the government succeed in collecting as taxes and financial charges.

Nor should officials constantly use taxation to compensate economic deficits.

Jordan cannot easily give up its tax resources, but these maintain the status quo and do not lead to an economic progress. To the contrary, such taxation negatively impacts investment.

For example, the 35 per cent tax rate on banks will force banks to raise their interest rates, which will, in turn, increase the cost of investment.

Jordan needs serious tax exemptions and deductions that encourage sectors that help employment, research and development, as well as export.

The government must also achieve better levels of transparency, fairness and integrity. Tax evasion will not be justified and taxpayers have to know how their money is spent.

The writer, [email protected], is a lawyer and law professor at University of Jordan’s Faculty of Law. He contributed this article to The Jordan Times.