Tax evasion in Jordan — causes, means and size

The phenomenon of tax evasion is global, experienced by developed and developing countries alike. Because tax evasion limits the ability of governments to provide revenue needed to finance economic development and at the same time puts additional burdens on taxpayers, nations seek to quell this phenomenon.

Tax evasion is caused by various reasons, like difficulty and complexity of laws and regulations that govern the tax system; burdensome tax collection procedures; deep conviction among people that there is excessive taxation in the country; the sense that tax revenue is not well spent on programmes that benefit the society.

In Jordan, tax evasion ultimately leads to the loss of revenue to the Treasury that could have been collected to contribute to the reduction of the fiscal deficit.

I recently led a team of experts to work on a study for the Economic and Social Council to identify the causes and means of tax evasion in the country, and estimate the losses to the economy as a result of tax evasion.

Jordan’s economy is suffering from limited resources and a chronic fiscal deficit, which makes the process of providing the necessary funding to meet the requirements of economic and social development process extremely difficult.

Government spending is mainly financed by heavy taxes and fees. In fact, the average tax burden in its broadest sense, as measured by tax revenues and non-tax and social insurance to GDP, has reached in the year 2011 about 25 per cent of GDP — a high rate if compared to neighbouring countries such as Syria or Egypt, where the percentage hovers around 17 per cent and 14 per cent, respectively, or even to some developed countries, such as Japan and the US, in which the average tax burden is 27 per cent of GDP.

Taxes can fall under two categories: direct and indirect. Direct taxes are incurred directly by taxpayers, such as income tax and taxes on profits, while indirect taxes are incurred upon spending or consumption, such as the general sales tax and the value-added tax on imports and production.

The percentage of indirect taxes in Jordan was approximately 61 per cent in 2009; it rose to approximately 67 per cent of total tax revenue in 2010 and continued to rise in 2012 to reach approximately 69 per cent of the total tax revenue.

In general, the per capita share of taxes in Jordan has risen four times compared to what it was in 1985 — the per capita taxes of about JD177 during the period 1985-1988 rose to about JD704 in the period 2009-2012 and that is because the taxation system started to rely heavily on indirect taxes. 

Tax evasion in Jordan

Tax evasion is the attempt by taxpayers to illegally avoid payment of taxes, in whole or in part, in violation of the laws.

Distinction must be made here between tax evasion and tax avoidance, by which taxpayers circumvent paying taxes by avoiding an activity that leads to the subjugation of the tax. This happens by taking advantage of legal loopholes in tax legislations.

Avoiding taxation is legal; those who practise it are not held accountable by the law. Tax evasion, on the other hand, is an economic crime subject to penalties.

There are fewer cases of tax evasion related to income tax than to the sales tax.

Sales tax evasion happens almost exclusively through the reduction of the value of the taxable income, or non-submitance of tax returns, while evasion of income tax on individuals and corporations is done through refraining from registering with the tax department, or non-disclosure, or giving false information on the size of economic activities.

Private entities evade sales tax by failing to register with the Department of Income and Sales Tax.

The law stipulates that the registration limit for sales tax for the commercial sector is JD75,000, JD50,000 for the industrial sector and JD30,000 for the services sector, for 12 consecutive months or any part thereof. 

The existence of the limits, however, encourages tax evasion. 

Furthermore, sales tax evasion can take place through non-issuance of an invoice for the value of sales and the devaluation of the bill in the event of payment in cash.

Size of tax evasion in Jordan

In spite of the large number of studies on the phenomenon of tax evasion, there is no one agreed-upon way to measure the size of tax evasion.

Methods used to measure the size of tax evasion vary. The simplest is to estimate the size of the informal economy.

In Jordan, studies on the phenomenon of tax evasion are few and confined mostly to analysing the causes of the phenomenon. Few studies specify a value for tax evasion.

Because of different methods of measurement, misunderstanding of what constitutes tax evasion and lack of statistical data, conflicting estimates of the size of the phenomenon of tax evasion were always made.

Our scientific study came up with an estimate for the size of tax evasion in Jordan in 2012. 

The study pointed to the fact that total tax wastage was around JD1.9 billion. Tax wastage includes tax evasion, tax deductions and tax arrears.

Tax deductions were around JD834 million, while tax arrears amounted to around JD370 million. This puts the size of tax evasion at approximately JD695 million, of which JD200 million were an evasion from income tax, while the tax evasion from general sales amounted to around JD495 million. 

Essential policy measures

Our study suggests that the tax evasion numbers that are officially announced are not accurate, and may be due to the fact that there is confusion among tax evasion, tax avoidance and tax arrears.

The study pointed out to four main reasons behind tax evasion: leniency when imposing penalties on tax evaders; inadequacy of official databases and information about the economic activities of wholesale and retail trade sector, manufacturing sector and construction sector, as well as of professionals including doctors, engineers and lawyers; 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; inadequate funding for training programmes to enhance human resources in ??tax administration.

In our study, eleven policy courses were recommended: toughening penalties for tax evaders and facilitating an accelerated litigation process; building adequate databases for all economically active individuals and entities in the country; lifting the minimum registration for the general sales tax for the commercial sector, the industrial sector and service sector of JD75,000, JD50,000 and JD30,000, respectively; enhancing the capacities of workers in the auditing and tax collection; limiting the introduction of amendments to the tax laws; assuring that legal texts are tight enough to reduce tax avoidance, which is considered to be the first step towards tax evasion; legislatively stripping all authorities of the right to intervene in granting tax discounts; reducing the accumulation of tax arrears by facilitating litigation and accelerating settlements; raising awareness among citizens and conviction of the importance of paying taxes on time, and the importance of tax revenues in financing public spending, which will benefit the whole society; establishing the principle of requesting formal bills when making purchases of goods and services; reviewing 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. 

The writer, [email protected], is a political economist. He contributed this article to The Jordan Times.