Evaluating Tax Expenditures in Jordan – Final Report - Eng - Frp2.org

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Evaluating Tax Expenditures in Jordan – Final Report - Eng - Frp2.org

Evaluating Tax Expenditures in

Jordan

Final Report as of October 21, 2011

October 2011

This publication was produced by DAI for review by the United States Agency

for International Development.


EVALUATING TAX EXPENDITURES IN

JORDAN

Final Report as of October 21, 2011

Program Title: Jordan Fiscal Reform II Project

Sponsoring USAID Office: USAID/Jordan Economic Growth Office

Contract Number: EEM-I-00-07-00009-00

Order No. EEM-I-08-07-00009-00

Contractor: DAI

Date of Publication: October 2011

Author: Eunice Heredia-Ortiz

DISCALIMER

The authors’ views expressed in this publication do not necessarily reflect the views of the United

States Agency for International Development or the United States Government.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 i


CONTENTS

ACKNOWLEDGEMENTS .......................................................................... iii

ACRONYM LIST ........................................................................................ iv

EXECUTIVE SUMMARY ............................................................................ v

1. INTRODUCTION ................................................................................... 1

1.1. Background and Purpose of the Study ............................................ 1

1.2. What are Tax Expenditures? ........................................................... 2

2. IDENTIFYING TAX EXPENDITURES FROM THE TAX LAWS ............. 3

2.1. The Personal and Corporate Income Tax ........................................ 4

2.2. The General Sales Tax and the Special Sales Tax ........................ 10

2.3. Custom Duty .................................................................................. 14

2.4. Real Property Taxes: Annual Property Tax and Transfer Fee ........ 18

3. ESTIMATING THE SIZE OF TAX EXPENDITURES ........................... 20

3.1. The Personal and Corporate Income Tax ...................................... 24

3.2. General Sales Tax and Special Sales Tax ..................................... 28

3.3. Custom Duty .................................................................................. 29

3.4. Real Property Taxes: Annual Property Tax and Transfer Fee ........ 30

4. A PROPOSAL FOR STREAMLINING TAX EXPENDITURES ............. 32

REFERENCES ......................................................................................... 35

ANNEX 1. LIST OF TAX SCHEDULES .................................................... 36

ANNEX 2. DETAILED CALCULATIONS ................................................... 46

Evaluating Tax Expenditures in Jordan. Final Report October 2011 i


LIST OF TABLES AND FIGURES

Table 1. The Benchmark tax structure for the PIT and CIT

Table 2. List of Tax Expenditures from Income Taxes

Table 3. The Benchmark tax structure for the GST and SST

Table 4. List of Tax Expenditures from Generals Sales and Special Sales Taxes

Table 5. The Benchmark tax structure for Custom Duty

Table 6. List of Tax Expenditures from Custom Duties

Table 7. List of Tax Expenditures from Real Property Taxes

Table 8. Summary of Tax Expenditures in Jordan, by type of tax (2010)

Table 9. Tax Expenditure from the individual and family deduction of the PIT (FY 2010)

Table 10. Tax Expenditure from agricultural activity - Individuals (FY 2010)

Table 11. Tax Expenditure from agricultural activity-Companies (2010)

Table 12. Tax Expenditure from capital gains of corporate stocks (2010)

Table 13. Tax Expenditure from Investment Promotion (2010)

Table 14. Tax Expenditure Estimates: Custom Duty (2010)

Table 15. Tax Expenditure Estimates: Real Property Taxes (2010)

Figure 1. Tax Expenditures in Jordan, by type of tax (2010)

Figure 2. Summary of Recommendations for Streamlining Tax Expenditures in Jordan

Table A-1. GSTL, Schedule 1: Special Sales Tax Schedule

Table A-2. GSTL, Schedule 2: Goods and Services Subject to the General Tax at Zero-Rate

Table A3. GSTL, Schedule (3): Tax-Exempt Goods and Services

Table A-4. GSTL, Schedule (5): Goods Subject to the Reduced Rate of General Tax at 4 Percent

Table A-5. Bodies Exempted (2010)

Table A-6. Estimating Tax Expenditures from Income Tax: Other Exemptions and Deductions (2010)

Table A-7. Estimating Tax Expenditures GST: Zero-rating and Exemptions (2010)

Evaluating Tax Expenditures in Jordan. Final Report October 2011 ii


ACKNOWLEDGEMENTS

Preparing a tax expenditure study for Jordan covering the entire tax system is not an easy task,

and it would have been impossible to achieve without the help of those who assisted in providing

key data, documents, and guidance on Jordan’s complex tax incentive environment.

First and foremost, thanks to JFRP II’s COP Dr. Mark Gallagher and his team for entrusting this

challenging but exciting task. A special thanks to Mr. Mohammed Qurashi from the Tax

Revenue Mobilization Component (JFRP II) who patiently advocated for obtaining data from

ISTD, MOF, DLS and GAM. Additionally, Ms. Abeer Amerah, an analyst at SEPD (MOF), was

a key collaborator in the process of ‘scavenger-hunting’ the appropriate data and GoJ reports

needed for the calculations. There were many others involved in providing various sources of

information who are worth of mention, including:

1. Dr. Metri Mdanat, Former SEPD Director, MOF.

2. Mr. Najem Garaibeh, SEPD Analyst, MOF

3. Ms. Hanadi Rifai, SEPD Analyst, MOF

4. Dr. Khalid Al-Hmoud, MOF Policy Analysis Component Lead, JFRP II

5. Dr. Usama Al-Farhan, Public Finance Economist, JFRP II

6. Mr. Robert Wenzel, Tax Revenue Mobilization Component Lead, JFRP II

7. Mr. Atef Al-Momani, Tax Revenue Mobilization Component, JFRP II

8. Mr. Glenn Mackenzie-Frazer, Customs and Trade Facilitation Component Lead, JFRP II

9. Mr. Mohammed Al-Said, Customs and Trade Facilitation Component Advisor, JFRP II

10. Mr. Lutfi Abu-Hazeem, Assistant Secretary General, Ministry of Finance and Director of

UNDP Property Tax Project.

11. Mr. Jehad Attaar, Property Tax Division, MOF

12. Dr. Ibrahim Ayoub, Director of Assessment Department, GAM

13. Ms. Basma Adnan, GAM

14. Mr. Mouen Sayegh, Director of IT, DLS

15. Mr. Mazen Badwan, IT staff, DLS

Evaluating Tax Expenditures in Jordan. Final Report October 2011 iii


ACRONYM LIST

ARV Annual Rental Value

ASEZ Aqaba Special Economic Zone

ASEZA Aqaba Special Economic Zone Authority

ASE Amman Stock Exchange

BLTL Building and Lands Tax Law

CIT Corporate Income Tax

DLS Department of Land and Survey

DOS Department of Statistics

ETR Education Tax Regulation

FTA Free Trade Agreement

GOJ Government of Jordan

GAM Greater Amman Municipality

GST General Sales Tax

GSTL General Sales Tax Law

ITL Income Tax Law

IPL Investment Promotion Law

ISTD Income and Sales Tax Department

MOF Ministry of Finance

PIT Personal Income Tax

PSL Public Sewerage Law

SEPD Studies and Economic Policy Department

SST Special Sales Tax

Evaluating Tax Expenditures in Jordan. Final Report October 2011 iv


EXECUTIVE SUMMARY

Inadequate treatment of tax expenditures is a concern for fiscal accountability and government

transparency. Tax expenditures in Jordan take a number of forms: exclusions, exemptions,

allowance, deductions, credits, preferential tax rates, and tax deferrals. Making the budget

process more complete and transparent requires the government to estimate the revenue cost of

tax expenditures, including publishing tax expenditure accounts and including these estimates in

the budget process.

In Jordan there is no process in place to review or periodically re-evaluate tax expenditures once

they are passed and placed in the law. This report becomes the first attempt to comprehensively

capture such revenue cost due to tax concessions from all major taxes, including the income tax

(personal and business), the general sales tax, custom duty, and real property tax (transfer fee and

annual property tax).

This study develops a tax expenditure framework—establishing a normal tax structure to help

identify tax expenditures as tax provisions that deviate from this benchmark tax system—

identifying a list of some 72 tax provisions as tax expenditures originating from the four major

tax laws (the Income Tax Law of 2009, the General Sales Tax Law of 2009, the Customs Law of

1998, and the Building and Lands Tax Law of 1998). There are at least another 22 laws

containing tax incentives or provisions, which are not reviewed in this study. The most

significant tax expenditures can be categorized broadly as: (1) investment incentives; (2)

assistance to low-income and disadvantaged persons; (3) free zones; (4) financial instruments;

and (4) agricultural sector support.

Tax expenditures in Jordan are estimated to be at least 14.5 percent of GDP in 2010, while tax

revenue collections in the same year reached 15.3 percent of GDP. Low compliance, high levels

of tax evasion and the cost of tax expenditures all contribute to the low levels of revenue

productivity in Jordan which pose a threat to the consolidation of Jordan’s public finances. The

high cost of tax expenditures and the near equivalence to tax revenue collections in the same year

emphasize the need for the GoJ to address the loopholes and flaws in the current Jordanian tax

structure, including the complex multi-channeled, ad hoc investment incentive scheme which has

proven to be inefficient and ineffective in attracting large-scale long-term capital investments.

With approximately 94 percent of the tax base exempted from personal income taxation as a

result of the change in the tax-free threshold, the personal income tax produces the largest single

tax expenditure estimated at a cost of 6.1 percent of GDP. The second major source of tax

expenditure, at 4.3 percent of GDP, originates from exemptions and zero rating of numerous

products under the General Sales Tax Law. Tax Expenditures from custom duty is third at 1.3

percent of GDP, while revenue forgone from real property taxation is estimated at 1 percent of

GDP.

Anticipating further future tax reforms leading to a more efficient, equitable and productive tax

system, the following summarizes recommendations to streamline many of the tax expenditures

that generate significant fiscal sacrifice to the GoJ, including recommendations to improve

transparency and fiscal accountability in the budget process as it relates to tax expenditures.

Reducing or eliminating some of these tax concessions would negatively impact specific interest

groups or segments of the population and from a political perspective these may not be easy to

implement. From an economic perspective, the measures recommended would have a positive

impact on the general welfare of Jordanians, while improving transparency, efficiency and

fairness in the tax system.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 v


Personal Income Tax

Rate structure: Consider a rate increase.

Exemptions: Limit deduction to JD 12,000 per household (e.g. JD 6,000 for principal taxpayer, JD 4,000 for

second earner; JD 500 for each dependent up to JD 2,000.

Agricultural income exemption: implement a threshold beyond which income from agricultural activity is

taxed.

Capital Gains: Treat all capital gains (including gains on corporate stock) as ordinary income subject to full

taxation.

Business Taxation

Special investment incentives: No new incentives; phase out existing incentives.

Exemptions: Limit to certain entities, including some income sources of non-profit organizations.

General Sales Tax

Zero rates: Limit application only to exports.

Exemptions: Revoke exemptions to specific sectors.

Reduced Rate: current base for preferential rate is too broad; constrain to a small number of basic

necessities considered to be material components of low income household consumption.

Custom Duty

Zero rating: rationalize list of entities and items on this list.

Special exemptions by PM decisions or Cabinet of Ministers: Do away with ad hoc decisions on this

exemption.

Property Taxes

Property tax rates: higher on vacant land.

Property values: do a general revaluation

Exemptions: consolidate the exemptions list for the municipal, sewerage and education tax.

20 percent depreciation allowance: eliminate.

Transfer tax: lower rate is ok, eventually do away with the tax and substitute with capital gains tax, or

compensate loss from annual property tax collections.

Investment Incentive Scheme

Income tax exemptions: do away with income tax exemptions for specified projects.

Exemptions: eliminate favoritism with certain sectors of the economy; exempt all or tax all.

Structure: Restructure the cumbersome, multi-layered investment incentive scheme, consolidate into a new

scheme that is neutral with respect to the various categories of investment.

Evaluating Tax Expenditures

Data: Create a Tax Expenditure data framework; aim at quantifying annually; review impact of programs that

use tax expenditure mechanism.

Reporting: Produce an annual tax expenditure study to evaluate proposed changes to the tax law and estimate

the impact on tax expenditures, as well as changes on tax expenditures over time.

Tax Expenditures in the Budget Process

Transparency and Accountability: publish an annual tax expenditure report as part of the annual budget process

and subject to scrutiny.

Control spending from tax expenditures: impose thresholds and/or ceilings.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 vi


1. INTRODUCTION

1.1. Background and Purpose of the Study

This report presents an analysis of tax expenditures in Jordan. Tax expenditures are spending

programs implemented through the tax code. These programs give people and businesses special

tax credits, deductions, exclusions, exemptions, deferrals, and preferential rates in support of

various government policies. Some of these programs help Jordanians save on their investments,

promote trade, encourage international companies to invest in the country, others subsidize

agricultural activity, and much more.

Inadequate treatment of tax expenditures are a concern for fiscal accountability and transparency.

They represent a large share of discretionary spending and excluding them from Government

fiscal analysis and from the budget process can pose serious tradeoffs in budget allocations

across functions, sectors, and other spending constraint to expenditures financed by tax revenues

collected. While direct budgetary expenditures are evaluated every budget cycle—and are

approved, adjusted, or rejected during the budget process—there is no process in place to review

or periodically re-evaluate tax expenditures once they are passed and placed in the law.

The Government of Jordan (GoJ) through its National Agenda calls for a review of the tax

system aiming to widen the tax base and improve tax revenue collections. While the new income

and sales tax legislation in 2010 introduced some positive changes to the legal framework for

taxation, yet tax revenue mobilization continues to be challenged by the numerous tax incentives

and concessions contained in the tax code—exemption for capital gains, incentives for export

earnings, and high family allowances.

For instance, the personal income tax contributes very little, about 5.2 percent (FY2010) to the

overall tax revenue collected. The high family allowance exempts persons who earn more than

eight times the average per capita income, while in other countries a person who earns the

respective country’s average income is subject to the tax. While the tax on business (corporate

income tax) contributed about 15.8 percent (FY2010) to tax revenue collections, it is also flawed

with numerous incentives and preferential treatment in different sectors, which help explain the

low yield in tax revenue from these two taxes.

Improving fiscal accountability and transparency of the budget process involves establishing an

adequate tax expenditure framework—building appropriate databases, estimating the cost of tax

expenditures for inclusion in the budget, and ensuring that tax expenditures are efficiently

delivering desired results. The present study becomes an important step in this direction.

Improving tax revenue collections in Jordan is of paramount importance as the country faces

economic and fiscal challenges. Scrapping ineffective tax expenditures—just the same as

ineffective spending programs—becomes an important public expenditure perspective.

There are important reasons for analyzing tax expenditures in Jordan, including:

• Review and oversight. To provide the Government quantifiable measures of the impact of tax

expenditures in the resource allocation process, thus facilitating fiscal policy formulation.

• Fiscal analysis. To improve budget analysis and accountability in spending through informed

decisions regarding resource allocation. Tax expenditures can become another element of

scrutiny in prioritization and rationalization of spending programs.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 1


Reporting. To inform citizens and the tax administration about elements affecting tax

revenue collection, thus improving fiscal transparency and elevating tax policy discussions.

A tax expenditure study developed by the Ministry of Finance in 2002—limited to evaluating tax

exemptions and incentives under the Income Tax Law—found that the value of forgone revenue

to the treasury for the year 2000 is JD 210.6 million (3.5 percent of GDP or 10.7 percent of

public expenditures). After nearly a decade, the study presented herein offers a comprehensive

analysis of the tax expenditures affecting four categories of taxes in Jordan: the income tax

(personal and business), the general sales tax and special sales tax, custom duty, and the tax on

real property (annual property tax and the property transfer tax).

Organized into six separate sections, this document analyzes all aspects of Jordanian tax

expenditures. Part I, contains the introduction and background; part II provides detailed

explanation of how to establish a normal tax or a benchmark tax and identifies tax expenditure

provisions as found in the Jordanian tax code and other related laws. Part III presents the

methodology for calculating tax expenditures and provides calculations of tax expenditure by

type of tax. Part IV concludes with a summary of recommendations for streamlining tax

expenditures in Jordan.

1.2. What are Tax Expenditures?

Tax expenditures are provisions in the tax code, such as exemptions (amounts excluded from the

tax base); allowances (amounts deducted from the benchmark to arrive at the tax base); credits

(amounts deducted from tax liability); rate relief (a reduced rate of tax applied to a class of

taxpayer or taxable transactions); and tax deferrals (a relief that takes the form of a delay in

paying tax). These are designed to encourage certain kinds of activities or to aid taxpayers in

special circumstances.

According to Mann and Burke (2002), tax expenditures are used as policy tools and they can

reflect different types of governmental objectives, including:

• Economic growth. Some provisions in the tax code are designed to influence decisionmaking

and behaviors of agents in the economy.

• Fairness. Certain preferential treatment can be justified as proper measurements of the ability

to pay principle, designed to promote equity by reducing tax burdens to certain groups of

taxpayers.

• Programmatic. There are certain administrative economies of scale and scope in using the

tax system to implement certain government spending programs. The tax code is then used to

assign resources to specific groups while reducing their tax liability which would be paid

otherwise, and avoids the administrative effort of managing an additional program and

delivering payments.

• Administrative. Provisions in the law are introduced in situations where it would be difficult

to tax certain groups of taxpayers, instances when costs outweigh the benefits of collecting

the tax. Costs can be monetary or related to efficiency (behavioral effects).

Despite all the advantages that tax expenditures may have, several concerns have been voiced

about their effectiveness. First, tax expenditures can represent a substantial amount of forgone

Evaluating Tax Expenditures in Jordan. Final Report October 2011 2


evenue. Second, the advantages of tax expenditures can be undermined by the lack of scrutiny

in the annual budget process. Lastly, tax expenditures may disproportionately benefit well-off

taxpayers due to progressivity of the income tax and due to the choice of tax incentives, in

addition to generating distortions and complexity in the tax system.

This study helps to inform the first two of these concerns by quantifying the amount of forgone

revenue due to tax expenditures and by providing information for the annual budget process. The

third of these concerns can be better addressed through a tax incidence analysis.

2. IDENTIFYING TAX EXPENDITURES FROM THE TAX LAWS

Identifying and estimating tax expenditures requires establishing a “normal” or “benchmark” tax

structure that applies the relevant tax rates to a broadly defined tax base. Tax expenditures are

then defined as deviations from this benchmark. After defining the tax benchmark and before tax

expenditures can be calculated, it is necessary to identify tax expenditures by reviewing the tax

laws and any other laws and regulations related to the taxes being evaluated. Identifying the

benchmark tax and consequently tax expenditures is not an exact science, nor is it an easy task.

In general, most taxes have a series of features that define their basic structure. These features

are:

• A base, on which the tax is levied, such as net income, or a particular class of transactions;

• A taxable unit, such as a person or a corporation;

• A rate, to be applied to the base;

• A definition of the geographic limits of tax jurisdiction; and

• Provisions for the administration of the tax.

The tax benchmark then becomes the model of an “ideal” tax, this means establishing the norms

of a tax applied to a wide base where no government spending programs are implemented

favoring activities and groups. The tax benchmark reflects tax decisions that take into account

considerations of the ability to pay principle, and the economic, administrative and compliance

costs of the tax.

The principal criterion for identifying the benchmark design is that the benchmark:

represents consistent tax treatment of similar activities or classes of taxpayers and neither

favors nor disadvantages similarly placed activities or classes of taxpayers; and

includes certain tax provisions (i.e. exemptions, deductions, tax credits, and other preferences)

to adjust taxable income in order to: (i) comply with the ability-to-pay principle; (ii) enhance

the economic and collection efficiency of taxation; and (iii) simplify or make feasible tax

administration with respect to a class of taxpayers or type of activity.

While this general definition seems straightforward enough, the task of compiling a

comprehensive list of tax expenditures presents many conceptual problems. Reasonable

differences of opinion exist about what should be considered a benchmark tax system and hence

about what should be considered a tax expenditure. These can differ widely between countries.

This report takes a broad approach and includes all but the most fundamental structural elements

of the Jordanian tax system, providing more rather than fewer tax expenditure estimates (to the

Evaluating Tax Expenditures in Jordan. Final Report October 2011 3


extent that data availability allows) so that the necessary information is available to those

charged with making policy judgments. Following is a description of the tax benchmark

presented for each type of tax. Additionally, tax expenditures are identified for each type of tax.

In drawing the list of tax expenditures, an attempt was made to read and search for all laws and

decrees that apply to each of the taxes.

Jordan does not lack for laws that either directly or indirectly provide tax incentives. Indeed, it is

a challenge to identify all such laws. Apart from the major tax laws (i.e. the Income Tax Law of

2009, the General Sales Tax Law of 2009, the Customs Law of 1998, and the Building and

Lands Tax Law of 1998) there are other laws containing tax incentives or provisions, including:

• The Free Zones Corporation Law of 1994

• The Jordan Industrial Estates Corporation Law of 1985

• The Investment Promotion Law of 1995 and its amendments for the year 2000

• Incentives under the Qualified Investment Zone Agreement between Israel and Jordan

• The Aqaba Zone Economic Zone Authority beginning in 2002

• The Investment Law of 2003

The temporary Income Tax Law alone makes reference to certain provisions contained in other

16 separate laws, including the Banks’ Law, the Companies’ Law, the Investment Promotion

Law, the Council of Ministers’ exemption list, the Parties Law, and a set of 11 other laws which

contain additional provisions. 1

This study reviews the major tax laws, and adjacent laws to the extent that they are available and

translated to English, to draw the main tax expenditures for each type of tax. The tables

presented as follows then become the databank that allows access to relevant information about

tax expenditures in Jordan. Each table provides information on the type of tax expenditure,

reference to the law, a brief description, and the Government’s objective for introducing the tax

expenditure. It is highly recommended to maintain the following lists up-to-date, as changes

apply, if the GoJ decides to take on the task of analyzing tax expenditures over time.

2.1. The Personal and Corporate Income Tax

A key part of the task is to define the tax reliefs which form part of the benchmark tax. This task

is important because it allows the identification of the tax expenditures for review. A tax

benchmark has never been undertaken previously for the Jordanian tax system and what is

presented as follows may serve as a useful template for the future.

The benchmark tax for the personal income tax (PIT) and corporate income tax (CIT) systems is

defined by considering the tax base, existing tax rates and brackets, the unit of taxation, the time

frame of taxation, and the treatment of inflation for calculating income. In addition, the

1

These include the Charity Fund Law, Al Hussein Corporation for Cancer Law, King Hussain Bin Talal Foundation

Law, the Law of National Commission of Mine Action and Rehabilitation, Law of National Council of Family

Affairs, Law of Jordan River Foundation, King Abdullah II Fund for Development, Public Debt Exemption Law,

Hashemite Fund for Al Aqsa Reconstruction, Royal Albeit Foundation for Islamic Through, and the Laws on

ratification of concession agreements.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 4


enchmark includes measures that reduce or eliminate double taxation 2 , recognize expenses

incurred to earn business income, and allow business losses to be claimed over a number of years.

Finally, the legal immunity of the Government and the King from taxation is recognized as part

of the benchmark tax or normal structure for income taxation.

A broadly based system of the benchmark for income taxes is used in this report. The essential

features are found in Table 1, representing the PIT and the CIT benchmark tax.

Table 1. The Benchmark tax structure for the PIT and CIT

Personal Income Tax

• The tax unit is the individual (physical person)

Taxation is imposed on a calendar year basis

• Residents are taxed on worldwide income, non-residents on income sourced from Jordan

• Current tax rates and income brackets are taken as given (7% up to JD12,000 and 14% on each JD over)

Taxable net income is gross income reduced by the allowable costs of earning income

• Losses carried forward for five years

• Income is defined in nominal rather than inflation-adjusted terms

• Structural measures that reduce or eliminate double taxation and improve the fairness of imposing taxes on a

calendar-year basis are included

• Exemptions provided for persons subject to diplomatic privileges on a reciprocal basis

• Deduction available for foreign income tax paid or incurred to any foreign country

• Exemption provision for the King, and central and local government institutions in the context of providing

services on a non-commercial basis

Corporate Income Tax

Tax unit is the legal person

Taxation is imposed on a calendar year basis

• Resident entities taxed on worldwide income, non-residents on income sourced from Jordan

Taxable income as calculated on the basis of balance sheet methods

• The current general tax rates are taken as given (14% for all legal persons; but 24% on communications

companies, financial and insurance companies, and financial lease business; and 30% on banks)

• Depreciation: depreciation based on the economic life, using the straight-line method or declining balance method

• Losses carried forward by five years

• Structural measures that reduce or eliminate double taxation and improve the fairness of imposing taxes on a

calendar-year basis are included

• Deduction available for foreign income tax paid or incurred to any foreign country

• Exemption provision for central and local government in the context of providing services of a public nature on a

non-commercial basis.

2

Jordan has signed agreements for the prevention of double Taxation with Austria, Bahrain, Belgium, Canada,

Cyprus, Denmark, Egypt, France, Iraq, Kuwait, Libya, Malaysia, Oman, Pakistan, Qatar, Romania, Saudi Arabia,

Spain, Syria, Tunisia, Turkey, United Arab Emirates, United Kingdom, the United States and Yemen.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 5


Having established the PIT and CIT normal or benchmark tax allows us to identify tax

expenditures. When the tax system deviates from the established benchmark, a tax expenditure is

said to exist. Tax expenditures for the personal and corporate income tax in this study involve a

review of the Income Tax Law of 2009, as well as three additional laws, the Companies’ Law,

the Investment Promotion Law and the Council of Minister’s exemption list.

There are 33 provisions identified from the Income Tax Law and the Investment Promotion Law

that deviate from the tax benchmark, and therefore are considered tax expenditures. The items

currently designated as part of tax expenditures in this study are not immutable and the

Government properly retains the right to alter their status. The various types of tax expenditures

for the PIT and CIT identified are the following:

Exclusions from Gross Income: Gross income is the starting point in the calculation of income

tax liability and, in the absence of tax expenditures, would include all income received from all

sources. Items of income that are excluded or exempted from gross income typically are not

reported by the taxpayer on his or her tax return, and they escape taxation permanently.

Provisions stated in Article 4 of the Jordanian Income Tax Law (ITL) of 2009 contain a list of

earnings that are exempted from taxation. While many of these provisions for exclusion are

generally found in other countries, such as exemption for public and official institutions,

government, religious and charity institutions, income generated from the blind, handicapped

persons, there are others that are not so commonly found in other countries, such as the

exemption for the taxation of capital gains and profits from stocks and dividends for individuals.

Another major exemption found in Article 6 of the ITL involves the tax exemption granted to all

income generated from agricultural activity for an individual, and the first JD 75,000 for

agricultural business taxation. These two provisions can be costing the GoJ a large sum in terms

of foregone revenue.

Deductions from Gross Income: Certain amounts are subtracted from gross income to arrive at

adjusted gross income (AGI). Many of these deducted amounts reflect the costs of producing

income (business expenses), and are not properly part of the income tax base. Such deductions

are not tax expenditures and are considered to be part of the benchmark tax, such as those listed

in Article 5 of the Jordanian Income Tax Law. Other deductions which do not reflect business

expenses constitute tax expenditures, which permit corresponding amounts of income to escape.

Perhaps, the most significant deduction in terms of forgone revenue granted in the Income Tax

Law is the personal and family related deductions provided in article 9 under the personal

income tax. The deduction represents JD 12,000 for the taxpayer, and an additional JD 12,000

for the dependants. The high family allowance of JD 24,000 exempts persons who earn more

than eight times the average per capita income, resulting in only 6 percent of the Jordanian

population to be part of the tax net under the personal income tax.

Deductions from Adjusted Gross Income (AGI): Taxable income results from the subtraction of

certain deductions and exemptions from AGI. Certain of these subtracted items represent

amounts of income necessary for subsistence; their exclusion is part of the basic structure of the

income tax. Other subtracted items represent tax expenditures, which permit corresponding

amounts of income to escape taxation permanently. One common example is the deduction for

paid donations to public institutions and certain non-profit organizations, as stated in Article 10

of the Income Tax Law.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 6


Preferential Rates of Taxation: Generally, all income from the same source is taxed at the same

rate. When an item of income is taxed at a rate below the rate ordinarily applied to that class of

income, a tax expenditure results. The result is equivalent to excluding a portion of the income

from taxation. Article 11 of the Jordanian Income Tax Law indicates the rate schedule applicable

to individuals and companies based on a progressive tax rate system. The progressive nature of

the income tax rate structure is considered to be part of the benchmark tax.

Corporate income tax rates are differentiated by sector. The most favored sectors including

mining, hotels, hospitals, transportations, construction and electricity, are taxed at the lowest rate

which is 14 percent. Banks and other deposit taking financial firms are taxed at the highest rate

of 30 percent. Other sectors including trade, communications, insurance companies (non-banking

financial services) are taxed at a median rate of 24 percent.

Additionally, the tax treatment of interest income in Jordan is unbalanced. With limited

exceptions, interest on deposits held by banks and other financial institutions that is paid to

physical and legal persons is subject to withholding at the rate of 5 percent. The withholding is a

final tax for physical persons and legal persons other than companies. For companies, interest

income is aggregated with other forms of income and is taxed at the applicable corporate tax rate

under the current law. The tax withheld at source is credited against the company’s tax liability.

While withholding as a final tax may reduce tax administration burdens, it results in interest

income being treated in a manner that is distinct from other forms of income, and in many cases,

subject to preferential tax treatment.

Credits Against Tax: After a taxpayer's basic tax liability has been calculated by applying the tax

rates to taxable income, the taxpayer may subtract certain credit amounts from this initial

liability in determining the actual amount of taxes that must be paid. It is important to note that,

whereas a one dollar exclusion or deduction results in a tax savings of only a few cents (one

dollar times the applicable tax rate), a one dollar credit results in a one dollar tax savings which

has an even greater impact on the tax expenditure budget.

Investment incentives and Free trade zones: A multi-layered tax incentive structure has evolved

in Jordan over the years. The Income Tax Law and the General Sales Tax Law include

provisions that provide for investment incentives (or disincentives) through exemptions for

different industries (e.g., banks and financial companies) and different activities (e.g., the buying

and selling of real estate). Additionally, both tax laws provide the Cabinet of Ministers, upon

recommendation from the Minister of Finance, to provide tax preferences not otherwise available

under the tax laws.

Apart from tax expenditures coming from the Income Tax Law of 2009, there are other laws

allowing investment incentives through income tax exemptions including the Jordan Industrial

Estates Corporation (JIEC) Law of 1985, the Investment Promotion Law of 1995 and its

amendments of 2000, the Free Zones Corporation Law of 1994 and most recently the Aqaba

Zone Economic Zone Authority (AZEZA) established in 2002. According to these last two laws,

profits in free trade zones are exempt from income and social services taxes for periods of twelve

years, with the exception of profits generated from storage services that involve goods released

to the domestic market. Additionally, net profits generated from most export revenues are fully

exempt from income tax.

One of the largest deduction to tax (which work as a credit against the tax due), is the investment

promotion exemption granted to projects within certain sectors and development areas as

Evaluating Tax Expenditures in Jordan. Final Report October 2011 7


provided in the Investment Promotion Law. Sectors that benefit from this law are: industry,

agriculture, hotels, hospitals, maritime transport and railways, leisure and recreational

compounds, convention and exhibition centers, transport and distribution of water, gas and oil,

call and contact centers, research and development centers. According to the Investment

Promotion Law (IPL) No. 16 of 1995 and its amendments for the year 2000, Article 7 provides

exemptions of 25%, 50% and 75% for areas A, B and C, respectively, providing exemptions

from income tax and socials services due on taxable income inside the Kingdom for up to ten

years.

According to an evaluation of Jordan’s tax incentive program undertaken in 2002 by Chen et al,

Jordan’s investment incentive program is too complicated and inefficient, formulated on a

highly selective basis in terms of sectors, regions, conditional exemptions, and lengths of period

to qualify for certain tax incentives.” Not only do these investment incentives generate a large

fiscal sacrifice to the government, but the current investment incentive scheme significantly

worsens tax distortions and tax holidays which are not necessarily attractive to long-term capital

investment nor do investors allocate their capital investments according to the degree of

generosity of the tax incentives offered by development areas in Jordan. Hence the need to

reformulate the current incentive scheme in order to encourage overall investment in Jordan.

Given the complexity of the investment incentive schemes, the current study evaluates tax

expenditures from the Income Tax Law and the Investment Promotion Law. Tax expenditures

from income tax in Jordan’s Free Zones Corporation Law and ASEZA are not included in this

study.

Table 2. List of Tax Expenditures from Income Taxes

Legal Basis Description Purpose

1 ITL, Art. 4

Exemptions from Income Tax

Exemption of King’s Allocations To relief monarchy from

(a)(1)

tax burden

2 ITL, Art. 4 Income of public and official institutions and municipalities (excluding To avoid tax burden on

(a)(2)

their income from rent and key money)

public entities

3 ITL, Art. 4 Income of unions, professional commissions, cooperation societies, and To promote socio-

(a)(3)

other societies legally registered and licensed from non-profit activities economic values

4 ITL, Art. 4 Exempted from income tax are any religious, charity, cultural,

To promote social

(a)(4)

education, sports, or health institutions which serve the public, they are (religious, cultural,

not-for-profit, and/or receive income from charity awqaf (public educational, sports and

endowment), and the income from the Orphans Development Fund

Investment.

health) values

5 ITL, Art. 4 Income of exempted registered companies according to the companies’ Decision by tax authority.

(a)(5)

law, which is incurred from activities undertaken outside the Kingdom,

except income derived from income sources subject to tax according to

the provision of the income tax law.

International tax treaty?

6 ITL, Art. 4

(a)(6)

7 ITL, Art. 4

(a)(7)

Profits from stocks and dividends distributed by a resident to another

resident, except profits of mutual investment funds of banks and

financial companies.

Capital gains incurred inside the Kingdom, other than profits from assets

subject to depreciation.

To avoid double taxation

(part of the benchmark)

To encourage investment

Evaluating Tax Expenditures in Jordan. Final Report October 2011 8


8 ITL, Art. 4

(a)(8)

9 ITL, Art. 4

(a)(9)

10 ITL, Art. 4

(a)(10)

11 ITL, Art. 4

(a)(11)

12 ITL, Art. 4

(a)(12)

13 ITL, Art. 4

(a)(13)

14 ITL, Art. 4

(a)(14)

15 ITL, Art. 4

(a)(15)

16 ITL, Art. 4

(a)(16)

20 ITL, Art. 4

(b)(1)

21 ITL, Art. 4

(b)(2)

22 ITL, Art. 4

(b)(3)

23 ITL, Art. 4

(b)(4)

Income derived from inside the Kingdom from trading in dividends and

stocks, bonds, equity loan, treasury bonds, mutual investment funds,

currencies, commodities, in addition to futures and options contracts

related to any of them; except those incurred by banks, financial

companies, financial intermediation and insurance companies and legal

persons who undertake financial lease activities.

Income from trading immovable properties located in the Kingdom,

except: (1) Income incurred from such trade by a legal person, and (2)

Income incurred from building and selling real estate.

Income from non-Jordanian resident investors from sources originating

outside the Kingdom for investing on capital, returns, profits, and

investment liquidation return or selling his project, shares after taking

them out of the Kingdom according to the effective Investment Law or

any law that will replace it.

Compensation paid by insurance entities, other than what is paid as a

reimbursement for the loss of income from business activity or

employment.

Income from employment paid to members of non-Jordanian diplomatic

or consular bodies representing other countries in the Kingdom subject

to the reciprocal treatment principle

Income from distribution of estates or will for the inheritors or the

devisees according to the provisions of the effective legislations.

End of service rewards for the employees according to the effective

legislations or any group arrangements concluded according to the

approval of the Minister as follows:

A- 100% of any amount accrued before the effective date of this law

To encourage investment

To encourage investment

To encourage investment

Equity

International tax treaty

Avoid double taxation

Equity

B-50% of any amount accrued after the effective date of this law

The first JD400 of monthly pension salary paid by a resident person Equity

Income generated by the blind or any person totally incapable of

working

Other exemptions from employment income

Additional allocations and bonuses paid from employment abroad of

Jordanian diplomats, consular members and government public and

official institution employees

Equity

Administrative decision

Meals provided for the employees at the work site Administrative decision

Accommodations services provided for employees for work purposes Administrative decision

Equipment and uniforms, necessary for carrying out work activities

provided to the employee by the employer

24 ITL, Art. 4 (d) Income from public or private pension funds and savings funds and any

other funds approved by the Minister shall not be subject to tax if this

income is derived from the employees and employers contributions.

Administrative decision

To promote socioeconomic

values

25 ITL, Art. 9 (a)

Deductions on PIT: Physical persons

Deduction from the gross income of a physical resident person include:

1. JD 12,000 for the taxpayer

2. JD 12,000 for the dependants regardless of their number

Equity and Administrative

26 ITL, Art. 9 (b) If joint filing then exemption for a single family shall not exceed JD

24,000

Equity and Administrative

Evaluating Tax Expenditures in Jordan. Final Report October 2011 9


27 ITL, Art. 9 (c) Jordanian non-residents can benefit from the exemption of dependants

residing in Jordan if he is responsible for their support

28 ITL, Art. 9 (d) Non-Jordanian residents can use dependent deduction if dependent is a

resident in the Kingdom

Other Deductions: Donations on the physical and legal persons

29 ITL , Art. 10 (a) Person may deduct any amount paid during the tax period as donation to

any government departments, public or official institutions or

municipalities from the gross income in the period in which the payment

occurred.

30 ITL , Art. 10 (b) Person may deduct the subscriptions and donations paid for religious,

charitable, humanitarian. Scientific, environmental, cultural, sport,

professional purposes. Shall not exceed 25% of the taxable income after

deducting what is provided for in 10(a) of this article.

Exemptions on Agricultural Income

31 ITL, Art. 6 (a) Income generated from agricultural activity will not be taxable if

generated inside the Kingdom for a physical person

32 ITL, Art. 6 (a) The first JD 75,000 are not taxable if generated inside the Kingdom for a

legal person

Investment Promotion Exemption

33 IPL, Art. 7 (a) Projects that fall within one of the sectors and subsectors in Article (3)

of the same law shall be exempted from income and social services tax

by the following percentages in accordance with the development area

applicable: 25% for projects in class A area of development; 50% for

projects in class B, and 75% for projects in class C.

2.2. The General Sales Tax and the Special Sales Tax

Equity and Administrative

Equity and Administrative

Promotion of social values

Promotion of social values

Incentive for agricultural

activity

Incentive for agricultural

activity

To promote investment in

certain sectors and areas

in the kingdom

The benchmark or normal tax for the General Sales Tax (GST) outlined in this study is a broadly

based, multi-stage, value-added tax collected using a tax credit mechanism to relieve the tax in

the case of inputs or supplies. The main structural elements of the multi-stage consumption tax

system are taken to be part of the benchmark—tax is applied to the sales of goods and services at

all stages of the production chain. Tax credits are allowed to recover the tax paid on inputs and

so the tax applies only to the value added. The only tax that is not refunded is the tax collected

on sales to final consumers, so that the tax is imposed on final consumption.

The benchmark system has only one tax rate for the GST, this is 16 percent in 2010. The

benchmark system applies tax only to goods and services consumed in Jordan. Accordingly, the

tax applies to imports as well as domestically produced goods and services. In many instances a

rate of zero for exports is considered part of the normal tax. As a result, GST provisions that

depart from this single rate are considered to be tax expenditures. As with the income tax

benchmark, legal immunity from taxation for the King and the Government is recognized as part

of the benchmark system for the GST.

Commonly, special sales taxes are established in separate legislation from the sales tax law and

are commonly referred to as excises. In Jordan, the GST Law, Schedule 1 found in Annex 1,

specifies nine categories of commodities as being subject to rates other than the general sales tax

rates, and these form the group of goods and services that are subject to a special sales tax. In

several instances, these rates are specific rather than ad valorem. The SST is subject to the same

provision on zero-rated supplies and tax exempt purchases.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 10


The essential features representing the GST and SST benchmark tax are found in Table 3 below.

Table 3. The Benchmark tax structure for the GST and SST

General Sales Tax (GST)

• Basic structural features of a broadly based, destination-based, multi-stage tax system

• Single rate at 16%

• Calendar year basis for the taxation period

• Recognition of constitutional immunity of the King

• Exemptions related to normal customs treatment of transit trade, free zones, bonded warehousing, temporary

importation, change of residence, etc

• Exemption provisions for government and its agencies and non-government organization providing services of a

pubic character and on a non-commercial basis (as specified in the law)

• Deliveries to persons with diplomatic privileges are fully exempted (zero rated)

Special Sales Tax (SST)

• Destination based, multi-stage stage tax

Tax period: monthly

• Timing of payments (as specified in the law)

• List of tax rates specified for different products in Schedule 1 of the GST Law

• Exemptions for exports and for persons with diplomatic privileges

• Exemptions related to normal customs treatment of transit trade, free zones, bonded warehousing, temporary

importation, change of residence, etc

Tax expenditures from the General Sales Tax and Special Sales Tax originate from exemptions

and deductions determined by the General Sales Tax Law (GSTL), provisional law No. 29 for

the year 2009, the Investment Promotion Law, and the bodies exempted by cabinet decisions for

the year 2010.

Tax expenditures from the GST and SST include:

Reduced Rate of Tax: Reduced rates of taxation under the GST law are found in Schedule 2 of

the GST law for zero rated goods and services and Schedule 5 for goods subject to the reduced

rate of 4 percent. For goods and services that are zero-rated, this means that they're taxable under

the GST or SST, but the tax rate is zero per cent rather than the general tax rate of 16 percent. In

this case, vendors do not charge the GST on their sales of zero-rated goods and services (whether

these sales are to other business or to final consumers). However, vendors are entitled to claim

input tax credits to recover the full amount of GST they paid on inputs used to produce zerorated

products (this is in contrast to tax exempt goods or services, where the tax cannot be

claimed on purchases). As a result, zero-rated goods and services are tax-free.

Reductions to the tax base: Under the GST, reductions to the tax base are largely the result of

exemptions. Exemptions under the sales tax law apply to particular supplies as found in Schedule

3 of the GST law (e.g. exemptions for categories of basic food like wheat, bread and water) and

for particular suppliers as provided in Articles 21 and 22. GST is not applied to the sale of goods

and services that are exempt. Unlike zero-rated goods and services, however, vendors of exempt

goods and services are not entitled to claim input tax credits to recover the GST they paid on

their inputs.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 11


Registration threshold: The tax base is also reduced through the registration threshold, for which

any business with total supplies below the threshold is deemed exempt. Whether or not the

threshold constitutes a tax expenditure is debatable and is challenged by the basic policy

intention that the cost of collection for businesses below the threshold exceeds any net revenue

generation. However, fully excluding the threshold from the list of tax expenditures can also be

misleading if these thresholds are set too high. In this study, registration threshold is considered

to be part of the benchmark tax.

Annex 1 provides a list of schedules that further inform tax expenditures originating from the

General Sales Tax and the Special Sales Tax, including the list of goods subject to the Special

Tax (schedule 1), the list of zero-rated goods and services (schedule 2), Tax-exempt goods and

services (schedule 3), and the list of goods subject to the reduced general tax rate at 4%

(schedule 5).

Table 4. List of Tax Expenditures from Generals Sales and Special Sales Taxes

Legal Basis Short Description Purpose of tax

expenditure

1 GSTL, Art. (7)

(a.1 and c)

2 GSTL, Art (7)

(a.2)

3 GSTL, Art. (7)

(a.3)

4 GSTL, Art. (7)

(b,c,d)

6 GSTL, Art. (10)

(a)

7 GSTL, Art. (10)

(b)

Zero-rated goods and services

Supply of goods listed in Schedule 2 annexed to the GST

law are zero rated.

Becomes taxable if their supply is combined or linked with

other supply of goods subject to the general sales tax.

Goods and services supplied to free zones, cities and duty

free shops, or exported to places outside the Kingdom.

Goods and services supplied to the bodies relieved from the

payment of tax from Art. 21 of this Law.

Tax exempt goods and services

Goods and services listed in schedule 3 annexed to the GST

law. Becomes taxable if their supply is combined or linked

with other supply of goods subject to the general sales tax.

Any of the financial services exempted under schedule 3 if

supplied in combination with taxable goods, the supply of

such goods remains taxable, by reference to its value before

it became combined with the exempted service.

Supplies not subject to tax

Supply of goods and services if made after these were used

for private purposes or for purposes not related to the

taxable business licensed to be exercised by the taxable

person according to this Law, unless he has already

deducted or recovered the tax charged on these goods or

services.

Supply of immovable property

Equity, social values, and

promotion of certain

markets

Promotion of exports,

employment and

investment

International agreements

and promotion of social

values

Equity, social values,

promotion of investment

8 GSTL, Art. (10) Supply of shares and stocks in companies, investment funds Investment promotion

Evaluating Tax Expenditures in Jordan. Final Report October 2011 12


(c) and securities of all kinds.

9 GSTL, Art. (10)

(d)

10 GSTL, Art. (10)

(e)

12 GSTL, Art. (10)

(f)

13 GSTL, Art. (21)

(a.1)

14 GSTL, Art. (21)

(a.2-4)

Remuneration paid to officials, employees and workers in

return for their service or for whatever associated with their

service in ministries, government departments, public

institutions and other public sector bodies. Also, all

earnings received by employees and workers in return for

their work or for whatever is related to their work for their

employers, including bonuses and any other sums paid to

board members of juridical Persons.

Goods and services imported from places outside the

kingdom for the businesses established in the free zones,

cities and duty free shops within the limits required to meet

their purposes according to their own legislations provided

that non-liability to tax be limited to their operations carried

out in these free zones, cities and duty free shops.

Goods and services exported from the free zones, cities and

duty free shops to places outside the kingdom.

Tax-exemption

Goods and services imported or purchased for HM the

King.

Goods and services imported or locally purchased by nonhonorary

embassies, commissions and consulates for own

use and subject to reciprocity; those of the diplomatic and

consular corps based on reciprocity; international and

regional organizations working in the kingdom and their

non-Jordanian staff enjoying diplomatic status.

Zero-rated

15 GSTL, Art. (22) If imported or locally purchased by any of the following

bodies or projects: Armed Forces, the Public Security,

Intelligence, and Civil Defense, Mosques, churches,

orphanages, the elderly people, sport and cultural clubs, and

individuals of special needs.

16 Regulation No.

81 of 2001

pertaining

registration

threshold

Projects that enjoy the exemptions provided for under the

Investment Promotion Law. Goods, services, as well as

persons shall be tax-exempt if so approved, whether wholly

or partially, by the Council of Ministers, in certain cases

and for justifiable reasons upon recommendation by the

Minister.

Other exemptions

Registration threshold for a person supplying taxable goods

and services is that at which his taxable turnover, amounts

or exceeds the following sums: (1) JD 10,000 in relation to

manufacturers producing goods subject to the special tax;

(2) JD 50,000 in relation to persons supplying goods and

with the exception those listed in (1) above; and (3) JD

30,000 in relation to service supplier.

Relief monarchy from tax

burden

Evaluating Tax Expenditures in Jordan. Final Report October 2011 13


2.3. Custom Duty

Customs duty collections account for 9.2 percent of total tax revenue (FY2010) or about half of

what it represented a decade ago, reflecting a continuing program to reduce tariff rates in line

with Jordan’s commitments under the WTO and other international bilateral and multilateral

agreements. In determining the normal tax for custom duty, it can be determined that different

rates are part of the normal tax structure depending on the type of product category as provided

in the schedule of the Custom Law of 1998. Exemptions from samples, personal gifts, used

personal effects and household furniture (with the exception of cars) brought by Jordanians

coming for permanent residence in the Kingdom are taken as part of the normal tax and do not

generate a tax expenditure. Table 5 summarizes the normal tax structure for Custom Duty.

Table 5. The Benchmark tax structure for Custom Duty

Custom Duty

• Differentiated duty rates depending on the type of product

• Recognition of legal immunity of the King

• Exemptions related to normal customs treatment of transit trade, free zones, bonded warehousing, temporary

importation, change of residence, etc

• Exemption provisions for government and its agencies and non-government organization providing services of a

pubic character and on a non-commercial basis (as specified in the law)

• Deliveries to persons with diplomatic privileges are fully exempted (zero rated)

Tax expenditures from custom duty represent revenue forgone from exemptions to importers.

These exemptions originate mainly from exemptions provided in the Custom Tariff Law (CTL),

these provisions may also be found in other laws, including the Investment Promotion Law, in

special trade agreements, in Prime Minister’s decisions, the Free Zones Corporation Law of

1994, and the Aqaba Zone Economic Zone Authority.

Tax expenditures under Custom Duty include the following categories:

Due to Zero Rating: With the objective of promoting investment and enabling industry to be

competitive the GoJ zero rates a number of products, including capital asset imports, machinery,

equipment, transportations, raw materials, and industrial inputs and on unfinished articles to

process them for exportation. Exemption of exports from customs tariff duties are considered to

be part of the normal tax structure.

Due to trade agreements: The Foreign Trade Policy and Relations Department at the Ministry of

Industry and Trade deals with international multilateral economic and trade agreements

(including the World Trade Organization), as well as bilateral trade agreements between Jordan

and other countries. Jordan has signed numerous regional and bilateral trade agreements,

Evaluating Tax Expenditures in Jordan. Final Report October 2011 14


including trade agreements with 19 Arab countries and 58 non-Arab countries. Additionally,

Jordan holds eight free trade agreements (FTA). 3

Subject to reduced tariffs: There are certain provisions for reduced tariff rates in the Custom

Law and in the Investment Promotion Law of 1995. The latter law allows the three development

areas Zone A, B and C, complete exemption of customs duties on imported fixed capital for the

first three years of doing business.

According to special agreements (Prime Minister’s decision and investment promotion law):

These exemptions from custom duties mainly originate from export incentives provided under

laws other than the Custom Law, as well as free trade zones agreements. The Zarqa Free Zone is

Jordan’s major free zone area. Other areas include the Sahab Industrial Estate Free Zone, Queen

Alia International Airport Free Zone, the Gateway Qualifying Industrial Zone, and the Aqaba

Special Economic Zone. Goods imported and exported from free trade zones are exempt from

import taxes and customs duties, with the exception of goods released to the domestic market.

Industrial goods manufactured in free zones enjoy partial customs duties exemption once

released to the domestic market, depending on the proportion of the value of local inputs and

locally incurred production costs.

Table 6 below presents the list of exemptions as found in the Customs Law of 1998.

Table 6. List of Tax Expenditures from Custom Duties

Legal Basis Short Description

1 CTL, Chapter 1,

Article 149

2 CTL, Chapter 2,

Article 150

Exemptions

The following shall be exempted from customs duties and other fees and taxes:-

Articles imported in the name of His Majesty the King.

Grants and donations imported to the Ministries, government public departments and

institutions, official universities, municipalities, rural councils and council of joint

services.

Any items the council of ministers may decide to exempt upon recommendation of the

minister, The minister shall determine the terms and procedures to be fulfilled in order to

benefit from this exemption.

Exempted imports may, by the Department’s approval, be sold after being used or in case

they were unsuitable for use. 75% of the sale return shall go to the Department in lieu of

customs duties and other fees and taxes

Diplomatic and Consular Exemptions

The following shall be exempted from customs duties and other fees and taxes on

condition of reciprocity and within its limits and they shall be subject to inspection when

necessary with the knowledge of the Ministry of Foreign Affairs:

Personal effects of the heads and members of the Diplomatic and consular Mission of the

non Jordanian nationals working in the Kingdom and the non-honorary personnel, and

whose names are mentioned in the lists issued by the Ministry of Foreign Affairs. The

3

These include the Greater Arab Free Trade Area (GAFTA), Jordan - EU Association Agreement, Jordan US FTA,

Jordan - EFTA Free Trade, Agadir Agreement, Jordan - Singapore Free Trade Agreement, Jordan - Canada FTA,

and the Jordan - Turkey FTA.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 15


3 CTL, Chapter 2,

Article 151

exemption includes the effects of their spouses and underage children residing with them.

The articles imported by the Embassies, legations and non-honorary consulates for official

use. The imported articles which enjoy exemption under the provisions of this Article and

paragraph A should be compatible with the real needs and within reasonable limits. When

necessary, the Minister may determine the maximum limit for some imports upon the

proposal of a committee comprising representatives from the Ministry of Foreign Affairs

and the Department.

Articles imported for personal use are subject to inspection procedures, such as personal

effects, furniture and household effects belonging to the administrative members of the

Diplomatic and Consular Missions who carry the citizenship of such missions and do not

benefit from the customs exemption provided that the importation is effected within six

months of the arrival of the beneficiaries. This delay period may be extended to another

six months upon the approval of the Ministry of Foreign Affairs. People under this

category shall be given temporary entries for their cars for a period which initially does

not exceed three years subject to extension upon the approval of the Ministry of Foreign

Affairs. Drivers and servants shall not be considered as administrative staff for the

purpose of applying the provisions of this Article.

The exemptions referred to in this Article shall be given through a decision by the

Director or whomever he authorizes in pursuance of a request from the head of the

Diplomatic or Consular Mission accompanied by a recommendation from the Ministry of

Foreign Affairs in accordance with the requirements of the situation.

First

The items exempted under Article 150 of this Law shall not be disposed of for a purpose

other than the one for which the exemption was given and must not be assigned to

anybody except after the Department is notified and the customs duties and other fees and

taxes are paid in accordance with the conditions and values of these Articles and on the

basis of the customs tariff in effect at the date of the disposal or the assignment or the date

of the registration of the customs declaration depending on whichever is higher. The party

which benefited from the exemption shall not be permitted to assign these items to the

others except after the completion of customs formalities and after a customs assignment

permit is obtained from the Department.

Second-

With the exception of cars, Customs duties and other fees and taxes shall not be due if the

beneficiary from the exemption under Article 150 disposed of the exempted items five

years after their withdrawal from the Department on condition of reciprocity.

Third-

1- The exempted car shall not be disposed of before the elapse of three years from the date

of the registration of its exemption declaration except for the following cases:-

Expiry of commission of the member of the embassy or the consular who benefited from

the exemption.

When the car after the registration of its exemption declaration sustains damaged by an

accident and rendered unfit for the use requirements of the diplomatic or the consular

member and upon a joint recommendation from the Drivers and licensing Department and

the Jordan Customs. In both these two cases, no reduction on the due fees shall be made.

Sale of the car by one member of the Embassy or the consular to another on condition that

the buyer enjoys the right of exemption if the car is subject to Exemption. Otherwise, the

general rules governing this matter shall be applied.

2- If the car was assigned three years after the date of the registration of its exemption

declaration, it shall be dealt with as follows:-

Evaluating Tax Expenditures in Jordan. Final Report October 2011 16


4 CTL, Chapter 2,

Article 152

5 CTL, Chapter 2,

Article 153

6 CTL, Chapter 2,

Article 154

7 CTL, Chapter 3,

Article 155

8 CTL, Chapter 6,

Article 158

If the assignment was made for reason other than the end of the term in the country, the

car shall be subject to all customs duties.

If the assignment was made at the end of the term of its Diplomatic or consular owner,

customs duties due on the car shall be reduced by 30% under an exception from the

provisions of Article 22 of this Law.

3- The administrative personnel who benefited from temporary entry for their cars may at

the termination of the granted period or the end of their terms due to a transfer or any

other reason either assign their cars to persons enjoying the right of exemption or

temporary entry or re-export them or pay the due customs and taxes in full on the basis of

the tariff and regulations in effect at the date of registering the declaration of submittal for

consumption.

The right of exemption for its beneficiaries under Article150 of this Law shall take effect

on the date of the start of their official work in the Kingdom.

The concessions and exemptions prescribed in Article 150 and151 of this Law shall not be

given unless the Laws of the country to which the diplomatic or the consular mission or

their staff belong give the same concessions and exemptions or better concessions and

exemptions to the Jordanian mission and its staff. In a case other than that, the

concessions and exemptions shall be given within the limits of what is applicable in the

concerned country.

Each member of the Diplomatic and consular corps or those working with them who has

already benefited from any exemption under the provisions of this law should submit to

the Department, through the Foreign Ministry upon his transfer from the kingdom, a list

of his household and personal effects and the car which he previously brought for an exit

permit. The Department shall have the right to carry out an inspection for that purpose

when necessary provided that this is done with the knowledge of the Foreign Ministry.

Military Exemptions

Exemption from the customs duties and other fees and taxes shall be put into effect with

regard to the imports of the armed forces and any Arab forces stationed in Jordan. The

exempt shall cover ammunition, weapons, equipment, clothes, vehicles and their spare

parts and any other items which the Council of Ministers determine upon recommendation

of the Minister.

If the imports prescribed in paragraph (A) of this Article were sold after being used or

were rendered unfit for use, 75% of the sale return shall go to the Department in lieu of

customs duties and other fees and taxes.

Imports of the Military Consumer Establishment shall be exempted from customs duties

and other fees and taxes in accordance with kinds, quantities and values determined by the

Council of Ministers upon recommendation from the Minister in case there is no

counterpart among the authorized Jordanian Industries determined by the Council of

Ministers upon recommendation from the Minister and the Minister of Industry and

Trade, notwithstanding any stipulation to the contrary in any other Law.

Other Exemptions

The following articles shall be exempted from customs duties and other fees and taxes

under the conditions determined by the Director:-

Samples which have no commercial value.

Samples which can be benefited from and whose value shall be determined by directives

from the Minister.

Supplies, fuels, lubricating oils and spare parts needed by ships and aircrafts and also

items needed by their crew and passengers in their trips abroad within the limits of

Evaluating Tax Expenditures in Jordan. Final Report October 2011 17


eciprocity.

Calendars designed for advertising.

Decorations and sport and scientific prizes of no commercial characteristic.

Personal gifts brought by the passengers on condition that they must have no commercial

characteristic in accordance with directives issued by the Minister upon recommendation

from the Director.

All educational and medical materials, supporting aids, instruments, machinery and the

parts, in addition to means of transportation required for schools, establishments and

programmers belonging to handicapped and productive projects, either individual or

collective, possessed and administered by handicapped, as well as means of transport

especially designed for the use of handicapped upon recommendation from Ministry of

Social Development and under the terms agreed upon by the Jordan Customs and the

above-mentioned Ministry.

The grants, donations and gifts received by Mosques, Churches and Monasteries for their

private use.

The imports of the Civil Consumer Corporation (Civil Servants shop ) subject to the

kinds, quantities and values determined by the Council of Ministers upon the

recommendation of the Minister in case of no counterpart among Jordanian Industries

determined by the Council of Ministers upon recommendation from the Minister and the

Minister of Trade and Industry and not withstanding any other Law that prescribes

otherwise.

2.4. Real Property Taxes: Annual Property Tax and Transfer Fee

The normal tax structure of the tax on real property is based on a broad tax base, with limited

exemptions and deductions. The base of the annual property tax is the annual rental value of all

residential, commercial, and industrial properties and of vacant land. Three separate taxes are

imposed on the assessed value of real property: the municipal property tax (10 percent), the

sewerage tax (3 percent earmarked for the water authority) and the education tax (2 percent

earmarked for the Ministry of Education) found in three separate laws. Any deviation from the

15 percent tax rate is considered a tax expenditure. Exemptions for the King and the Government

non-commercial property are considered part of the normal tax structure. Additionally,

promotional discounts for early payments and exemptions of the education and sewage tax from

vacant land are also considered part of the normal or benchmark tax.

Tax expenditures arising from the annual property tax originate from three different laws. Three

of these laws are related to the annual property taxation—Building and Land Tax Law (BLTL)

No. 11 of 1954, also known as annual municipal property tax; the Education Tax Regulation

(ETR) No. 3 of 1988; and Public Sewerage Law (PSL) No. 18 of 1988—and are imposed on the

annual rental value of properties. The last tax on real property, referred to in Jordan as the

transfer fee, is a tax on transactions regarding property transfers.

The type of tax expenditures originating from real property taxes include:

Exempted properties: For the municipal property tax, special exemptions include the “standard”

categories, i.e., churches, schools, charities, government properties, etc. as found in the BLT Law,

Article 13. The problem with the exemptions list is that the BLT Law does not share a common

exemption list with the Education Tax Regulation and the Public Sewage Law. As such, these

exemptions are applied separately for each property, thus adding additional complexity.

Reduced Tax Rate: Vacant land is subject to a separate tax regime. It is assessed according to

its market (capital) value, and then “decapitalized” at a rate of 2 percent to obtain an estimate of

Evaluating Tax Expenditures in Jordan. Final Report October 2011 18


annual rental value. This estimated rental value is then taxed at a nominal rate of 2 percent. In

effect, vacant land is taxed at 0.04 percent of assessed rental value. Additionally, incomplete

buildings are subject to the vacant land tax giving rise to a tax expenditure.

Depreciation Deduction: The 20 percent depreciation allowance is an entitlement for all

property taxpayers, and the same percent deduction applies no matter the age of the property.

Only when construction is pre-1974 does the percentage rise. In effect, the depreciation

deduction is less an allowance to correct valuation for age than it is a standard deduction from

property tax liability and it can represent a significant amount of foregone revenue.

Discount on tax due: Empty buildings are granted under the law a 50 percent reduction on the

tax due. The property needs to be empty for most of the year in order to be entitled to such tax

discount.

Real Estate Market Incentives: Due to the sluggish economy and as a way to stimulate the real

estate market, the Council of Ministers on May 5, 2009 decided that the property transfer fee

would be subject to a sizeable (temporary) rate reduction to 4.5 percent from 10 percent. The

council then decided to extend such reduction on June 20, 2010, and was later further extended

through 2011. Moreover, in order to support adequate access to housing for low and middle

income families the Government passed a temporary exemption for the year 2010 and scheduled

to expire on March 31, 2011. The exemption applies to Jordanian citizens buying a flat or single

housing development within urban areas not to exceed 150 m2. Under these circumstances, the

transfer fee is exempted one time only.

Table 7. List of Tax Expenditures from Real Property Taxes

Legal Basis Short Description

Exemptions, Deductions, Reduced Tax Rate

1 BLTL, Art. 13 The following shall be exempt from property tax:

1-Property of the King;

2-Property owned by the Kingdom’s treasury;

3-Property owned by the Greater Amman Municipality, other governorates’

municipalities, or any other entity serving as a municipality;

4-Property owned by a foreign country and used as an office of a commission or a

consulate, if such country grants exemption to offices of Jordanian commission or

consulate on reciprocal basis. If the said country does not impose such tax, the opinion of

the Minister of Foreign Affairs shall be considered in this regard.

5-Archaeological sites;

6-Property designated for worship (e.g., mosques, churches, and convents), and

government-licensed schools that specialize in teaching religion and the libraries of these

schools upon consultation with the Ministry of Education\Directorate of Private

Education, provided that such schools were not established for investment to generate

profit and revenues. Buildings rented for such purpose shall not be exempt from the

building tax;

7-Property owned by local or foreign sports, cultural, or social clubs, or any religious or

charitable entity approved by the government and registered and licensed in the Kingdom

and used as a head office for these entities. Buildings established for investment purposes

or rented buildings shall not be exempt from the building tax;

Evaluating Tax Expenditures in Jordan. Final Report October 2011 19


8-Property owned by government-approved Jordanian political parties which are

registered and licensed in the Kingdom and used as head offices of such parties. Buildings

established for investment or rented buildings shall not be exempt from the building tax.

2 BLTL, Art. 2, A Incomplete buildings shall be subject to vacant land tax;

3 BLTL, Art. 11,

2(B)

Vacant land tax shall be at the rate of (0.04%) and as stated in clause (D) of paragraph 1

of the same article above.

4 ETR, Art. 3, A The following buildings shall be exempted from the education tax:

1. The buildings occupied by His Majesty the King

2. The buildings occupied by the government or any official public department or

corporation subordinate thereto including the Jordan Hijaz Railway Management.

3. Buildings occupied by municipalities.

4. Buildings occupied by the charity and religious organizations and societies as well as

scientific institutes, hospitals and sport and cultural clubs.

5. Buildings occupied by the staff of the foreign countries diplomats of the nationalities of

such countries in the event of reciprocal treatment.

The council of ministers may, upon recommendation of the Minister of Education exempt

any other buildings from the education tax.

5 PSL, Art. 21 Notwithstanding what has been provided in any other legislation, no government

department, official or national institution or any corporate or natural person shall be

exempted from the fees or cost of construction, piping and participation in the cost of any

project, prices and amount of utilization realized or imposed for the services carried on by

the Authority pursuant to the provisions of this law.

3. ESTIMATING THE SIZE OF TAX EXPENDITURES

Tax expenditures are tax reductions in tax liability due to special tax provisions. The existence of

special tax incentive provisions or tax expenditures, generate reductions in tax revenue

collections—also known as fiscal sacrifice. The specialized literature distinguishes three

principal methods for estimating the ‘fiscal sacrifice’ from tax expenditures:

• Foregone Revenue Method, ex-post quantification of reduction in tax revenue (relative to a

benchmark) due to tax expenditures. Does not take into account taxpayers behavioral

changes.

• Outlay Equivalent Method, estimates the subsidy or transfer that would leave taxpayers with

an income (net of taxes) similar to that which they would obtain from the existence of the tax

expenditure.

• Revenue Gain Method, measures how much revenue could increase if a particular tax

concession were removed. Accurate estimation of this cost would require estimates of the

secondary or behavioural effects associated with such a change.

While the revenue gain approach would be most consistent with budget estimates, it also requires

substantial information regarding behavioral responses and interactions with the rest of the tax

system as well as assumptions regarding the order of tax expenditures. For instance, the removal

of a tax expenditure would cause taxpayers to change their behavior to minimize the amount of

extra tax they would have to pay. As such, the omission of behavioral responses in the estimates

generates cost estimates that may exceed the revenue increases that would result if a particular

Evaluating Tax Expenditures in Jordan. Final Report October 2011 20


provision were eliminated. Accounting for this behavioral effects as well as other interaction of

tax measures becomes extremely complex (and arbitrary) as the number of tax expenditures in a

system increases.

The different methodologies used to measure tax expenditures can result in significantly different

estimates of their value. For similar reasons, comparisons of the level of tax expenditures

between countries are difficult. Differences in tax systems, benchmarks, classification systems

and coverage of estimates mean that comparisons of the value of tax expenditures between

countries are unlikely to be meaningful.

This study uses the revenue forgone approach to calculate tax expenditures and estimate the size

of the fiscal sacrifice to the GoJ, which is consistent with the approach used in most OECD

countries that report tax expenditures. It is the most reliable method of estimating the level of

assistance the tax system provides to taxpayers. This approach calculates tax expenditures as the

difference in tax paid by taxpayers who receive a particular concession relative to a benchmark

that incorporates structural elements of the tax system and is representative of similar taxpayers

who do not receive that concession.

Interpretation of the Estimates

Care should be taken when interpreting the results calculated by the revenue forgone method

because the estimates of reported tax expenditures are not necessarily reliable indicators of the

budgetary impact of eliminating particular tax expenditures, and would not necessarily yield the

full amount of revenues shown in the tax expenditures calculations. Furthermore, aggregated

estimates of tax expenditures are not reliable indicators of the total value of tax expenditures and

should only be taken as broad indicators of trends in the value and composition of tax

expenditures over time.

In this study, each estimate of tax expenditure represents the tax forgone due to a given tax

expenditure, everything else being equal. The estimates do not take into account changes in

taxpayer behavior, consequential government actions or impacts on aggregate tax collections

through induced changes in economic activity. Accordingly, the elimination of a tax expenditure

as estimated in this study would not necessarily yield the full amount of revenues indicated in the

summary of tax expenditure calculations (Table 8).

Independent Estimates

The estimate of the cost of each tax expenditure provision undertaken in this study should be

evaluated separately, assuming that all other provisions remain unchanged. Consequently, the

lack of micro level data, and the use of aggregate values and aggregate costs of individual

measures often would provide a biased estimate of the total cost of a particular group of tax

expenditure or of all tax expenditures combined.

This issue arises from the fact that the income tax structure is progressive and tax measures

interact with one another. The simultaneous elimination of more than one personal income tax

expenditure would generate larger estimates because of progressive income tax rates—causing

an individual to move to a higher tax bracket than what applies when the tax measure exists. To

the extent that this occurs, aggregate of the individual estimates may under-represent the “true”

cost in forgone revenues, although an attempt is made to account for this change in the

calculations. Moreover, given the interaction of certain tax measures, the revenue impact of

Evaluating Tax Expenditures in Jordan. Final Report October 2011 21


eliminating two or more measures simultaneously would differ from taking the independently

estimated numbers presented in this report and aggregating them.

Estimating Tax Expenditures

The estimations presented below refer to fiscal year 2010 (2009 for exemptions to basic food

commodities and adjusted import values from ASEZ Report 2006) and are calculated using the

foregone revenue approach. The estimates presented refer to the authors calculations based on

data provided from various data sources (except for estimates from the property transfer tax

which were taken directly from calculations published on the DLS’ Annual Report 2010). Lack

of statistical information, appropriate databases, and economic models for estimating tax

expenditures in Jordan limits the ability to estimate the value of tax expenditures of all tax

concessions identified in Section II. Nevertheless, all major tax expenditures for each type of tax

have been quantified and represent an estimated value of at least JD 2,830.3 million or 14.5

percent of GDP in 2010.

Table 8. Summary of Tax Expenditures in Jordan, by type of tax (2010)

GDP Nominal (2010) = JD 19,527.90 mill

Tax

Expenditure

(in JD million)

As %

of GDP

Source

TOTAL, ALL TAXES 2,830.3 14.5%

Total, Indirect Taxes 1,141.2 5.8%

GST Domestic 405.4 2.1%

Zero-rating and exemptions 405.4 2.1% ISTD (GST Tax Returns 2010)

Basic food commodities 98.4 0.5% SEPD Study (2009 values)

GST Imports 428.6 2.2%

Basic food commodities 41.7 0.2% SEPD Study (2009 values)

The Free Zones Corporation Annual Report

Free Zones 323.4 1.7% 2009

Aqaba Special Economic Zone (ASEZ) 63.6 0.3% ASEZA Annual Report 2006

Custom Duty 307.2 1.6%

Due to Zero Rating 154.1 0.8% Customs Dept. Annual Report 2010

Due to trade agreements

According to special agreements (Prime

51.0 0.3% Customs Dept. Annual Report 2010

Minister decision, diplomats, IPL) 102.0 0.5% Customs Dept. Annual Report 2010

Total, Direct Taxes 1,689.1 8.6%

Personal Income Tax 1,450.6 7.4%

Personal and family deduction 1,188.6 6.1% ISTD & DOS' Household Survey (2008)

Agricultural income exemption 0.1 0.0005% ISTD (Income tax returns 2010)

Exemption under Investment Promotion Law 0.01 0.00003% ISTD (Income tax returns 2010)

Export exemption (industrial income) 0.11 0.001% ISTD (Income tax returns 2010)

Deduction on donations 0.48 0.002% ISTD (Income tax returns 2010)

Capital gains exemption (stocks) 261.3 1.3% Amman Stock Exchange

Corporate Income Tax 40.3 0.2%

Agricultural income exemption 0.9 0.005% ISTD (Income tax returns 2010)

Evaluating Tax Expenditures in Jordan. Final Report October 2011 22


Exemption (public and official institutions,

non-profit organizations) 11.20 0.1% ISTD (Income tax returns 2010)

Exemption under Investment Promotion Law 6.9 0.04% ISTD (Income tax returns 2010)

Other exemptions and deductions (export

exemption on industrial income and

donations) 21.3 0.1% ISTD (Income tax returns 2010)

Real property taxes 198.1 1.0%

GAM (municipal, education, sewage) 41.3 0.2% Greater Amman Municipality

All other municipalities 6.8 0.03% MOF, Property Tax Division

Transfer Fee (reduced rate, exemptions) 150.0 0.8% DLS Annual Report 2010

Source: Author’s calculations from multiple data sources.

The ratio of tax expenditures to Jordan’s tax collections in year 2010—which reached JD 2,985.1

million or 15.3 percent of GDP—would certainly be greater than one taking into consideration

that tax expenditures that are unquantifiable in this report are greater or at least equal to 1 percent

of GDP. The numbers reveal the urgent need to evaluate tax concessions granted in the Jordanian

laws as well as consideration of options and recommendations for tax revenue mobilization

presented in this study.

A more disaggregated review shows that direct taxes have the larger share of tax expenditures at

8.6 percent of GDP, while tax expenditures from indirect taxes represent approximately 5.8

percent of GDP. Tax expenditure from the personal income tax alone represents 7.4 percent of

GDP. As shown in Figure 1, the personal income tax accounts for 51 percent of the total

estimated tax expenditures followed by tax expenditures from the sales tax at 30 percent. Custom

Duty comes in third place contributing to11 percent of tax expenditures, and real property taxes

account for 7 percent of total tax expenditures. It should be noted that the CIT estimates underrepresent

the true value of tax expenditures from this tax given the lack of data to calculate tax

expenditures from type 3 companies—banks—which could otherwise contribute to a large

amount of tax expenditures, if quantifiable.

Figure 1. Distribution of Tax Expenditures, by type of tax (2010)

Evaluating Tax Expenditures in Jordan. Final Report October 2011 23


The personal and family deduction provided in the Income Tax Law represents the single largest

tax expenditure in 2010. Worthy of mention is the fact that the personal income tax contributed

only 0.8 percent of GDP in tax collections in 2010, and it generates tax expenditures estimated at

nearly JD 1.2 billion or 6.1 percent of GDP.

The tax year 2010 is of particular importance since it represents the first year in which the new

tax legislation for the income tax and the sales tax took effect. This study underscores the need to

evaluate the legislation and consider alternatives to making the personal income tax (and the

entire tax system) more efficient, equitable and productive.

At first glance, after reviewing the tax expenditure estimates, it appears that the GoJ could

rapidly increase tax revenue collections by eliminating some (or most) of tax expenditures. The

foregone revenue estimation approach meets the purpose of this study which is to quantify the

revenue forgone to the Government due to tax concessions; however, calculations cannot be used

to argue that removing tax expenditures would result in increases in tax collection in the same

amount since economic and behavioral effects are not taken into account.

The remainder of this section presents short descriptions and calculations on tax expenditure

calculations for each type of tax, including data sources, limitations, and calculation formulas.

Annex 2 presents more detailed calculations for certain taxes.

3.1. The Personal and Corporate Income Tax

The majority of the personal income tax estimates were computed from the Income and Sales

Tax Department (ISTD) data especially requested for this study. Ideally, this estimate would be

calculated based on a personal income tax micro-simulation model. This model simulates

changes to the personal income tax system, including for the purpose of calculating tax

expenditures. This would require building a database containing a stratified sample of individual

tax returns collected from the ISTD. During the development of this study, attempts were made

to obtain such sample to build a micro-simulation model, but efforts to obtain the data required

failed.

Replacing the lack of a micro-simulation, this study estimates tax expenditures based on

aggregate values of different line items from tax returns for individuals and business taxpayers.

Additionally, supplementary data is used from household surveys available from the Department

of Statistics (DOS), the Amman Stock Exchange (ASE) and fiscal database available at SEPD.

While using this approach is inferior to a micro-simulation model, it represents the next best

available option.

Data availability allows for estimating the following tax expenditures from the personal income

tax: personal and family allowance, agricultural income exemption, export exemption from

industrial income, capital gains exemption, and deductions from paid donations.

a. Personal and family allowance

The personal income tax in Jordan has very low performance in terms of tax collections,

resulting from the JD24,000 family allowance (almost 8 times the GDP per capita), as well as tax

evasion and the informal sector. The Household Expenditure & Income Survey 2008 published

by the Department of Statistics indicates that 86.4 percent of the population has an annual current

income less than JD 12,000, all of whom are automatically exempted from income tax due to the

Evaluating Tax Expenditures in Jordan. Final Report October 2011 24


high personal deduction. The additional JD 12,000 deduction for dependents magnifies the

exempted population even further. According to the ISTD, only 6.4 percent of individuals in the

Kingdom were subject to the personal income tax in FY2010.

The tax expenditure resulting from the JD 24,000 deduction is very significant, reaching 6.1

percent of GDP in FY 2010. The calculations presented in Table 9 use data provided from the

ISTD on the number of active taxpayers (registered taxpayers who filed a tax return in FY2010,

both individuals and employees). If the personal and family deduction were to be eliminated, all

personal income taxpayers with net taxable income less than JD 12,000 would pay tax at the

corresponding marginal tax rate of 7 percent. The forgone revenue from this group of taxpayers

alone represents 2.38 percent of GDP.

The effect of the personal and family allowance to persons with income greater than JD 12,000 is

that they would pay additional tax on the deduction at the corresponding average tax rate—if the

allowance were eliminated. The resulting tax expenditure from deductions applied to the group

of taxpayers with income greater than JD 12,000 is 3.7 percent of GDP.

Table 9. Tax Expenditure from the individual and family deduction of the PIT (FY 2010)

Net

Taxable

Income

# of Active Taxpayers

(individuals &

employees)

% of

Taxpayers

Average

Deduction

Marginal

Tax Rate

Tax

Expenditures

(in JD mill.)

As % of

GDP

>24,000 169,721 19% 24,000 10.5% 427.70 2.2%

12,000

24,000

155,651 18% 19,560 9.7% 295.49 1.5%


Table 10. Tax Expenditure from agricultural activity - Individuals (FY 2010)

Aggregate

Value

Average

Tax Rate

Tax

Expenditure

(in JD mill)

As % of GDP

Net income from agricultural

activity

840,753 10.5% 0.09 0.0005%

Source: Author’s calculations from ISTD data.

In the case of legal persons, calculating the exemption of agricultural income less than JD 75,000

becomes more complex due to lack of data. It is known from ISTD that there are 192 companies

that declared agricultural income in FY 2010, 12 of which had a net taxable income from

agriculture that was greater than JD 75,000. The remaining 180 companies had net taxable

income less than JD 75,000 and thus were exempted from the income tax. Making the heroic

assumption that the average level of net taxable income for each of these companies is JD 37,500,

we can estimate tax expenditures from the companies’ exemption to be JD 700,000 (less than

0.005% of GDP).

Table 11. Tax Expenditure from agricultural activity-Companies (2010)

Average

Net

Income

# of

Companies

Aggregate

Net Income

(in JD mill.)

Average

Tax Rate

Tax

Expenditure

(in JD mil.)

As % of

GDP

Net income from

agricultural activity

37,500 180 6.75 14% 0.71 0.004%

Source: Author’s calculations from ISTD data.

The overall impact of exemptions to income from agricultural activity is very small relative to

the rest of tax expenditures from the income tax.

c. Capital Gains Exemption

In Jordan, capital gains incurred inside the

Kingdom (other than profits from assets

subject to depreciation) are fully exempt

from the income tax. The taxation of capital

gains is relatively a complex area—both in

concept and in practice—which makes it

difficult to quantify tax expenditures from

this exemption.

Table 12. Tax Expenditure from capital gains of

corporate stocks (2010)

Description (in JD million)

Value of Traded Shares in 2010 6, 690

Value of Shares held during the year 4,683

Price/Book Value 1.67

Book Value of shares 2,804

Capital gain from traded shares 1,879

Cost of transactions 12

In this study, we estimate tax expenditures Net gain 1,867

from capital gains of corporate stocks using Marginal Tax Rate 14%

data from the Amman Stock Exchange

Tax expenditure 261.3

(ASE) for year 2010. Using statistics

As % of GDP 1.3%

published for the year, the assumption is

Source: Author’s calculations from ASE data

that a capital gain is realized once a stock

has been sold and has been held over a period of time. Some countries differentiate taxation on

capital gains according to the holding period—higher tax rate for short term holdings and lower

tax rate on long term holdings, usually one year.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 26


Assuming that a capital gains tax would apply on shares held for at least one year, using the

value of traded shares in 2010 published by the ASE (as a proxy for stocks that were sold during

the year), and incorporating the World Bank’s financial indicator of 30 percent for Jordan’s

traded stocks turnover ratio, results in an estimated JD 4,683 worth of stocks that were held

during the year 2010. Furthermore, capital gain is calculated as the difference between the value

of traded shares and the estimated book value. The resulting capital gain from traded shares is

reduced by costs of transactions. Applying a marginal tax rate of 14 to the resulting net gain

generates tax expenditure for capital gains from stocks at JD 261.3 million or 1.3 percent of GDP.

d. Exemption under the Investment Promotion Law

The investment incentive scheme in Jordan is very complex. Multiplicity of laws provides tax

incentives on income tax, sales tax, and custom duties for different industries and different

geographic areas. Just as the investment incentive scheme is very complex, so is the

quantification of tax expenditures originating from these. In this study we estimate tax

expenditures from investment incentives affecting the income tax, particularly those provided

under the Investment Promotion Law.

Table 13. Tax Expenditure from

Investment Promotion (2010)

Estimates come from ISTD data from personal and

company tax returns, line item 99530—investment

promotion exemption from income tax and social services

due on taxable income inside the Kingdom. This line item

works as a set-off to income tax due, and as such, the

aggregate value from this line item represents the forgone

tax revenue to the GoJ.

Investment Promotion Exemption from

income tax and social services due on

taxable income (line item 99530)

Individuals 6,526

Companies 6,888,717

Tax Expenditure 6,895,243

As % of GDP 0.035%

Source: Author’s calculations from ISTD data

The tax expenditures under investment promotion is

approximately JD 6.9 million or less than .05% of GDP, as

presented in Table 13. When providing the data, however,

ISTD acknowledged that there were missing values in this

line item and so the numbers presented in Table 13 may underestimate the true impact of the

investment promotion on the income tax revenue collection. Additionally, the Investment

Promotion Law provides exemptions for up to 10 years, which means that the overall loss to the

Government is approximately, JD 70 million.

e. Exempted Income from public, official institution, and other non-profit organizations

According the Income Tax Law income from public and official institutions and municipalities

(Article 4.a.2) is exempted from income tax, as well as income from unions, professional

commissions, cooperation societies, and other societies legally registered and licensed from

nonprofit activities (Art. 4.a.3). According to the ISTD, the estimated net taxable income from

these institutions is approximately JD 80 million. While the exemption of this type of income is

considered part of the benchmark tax, we still estimate the tax expenditure from this exemption

to be JD 11.2 million (or 0.6% of GDP), if this were to be taxed at the lowest company tax rate

of 14 percent. This calculation excludes net taxable income from religious, charity, cultural,

educational, sports, or health institutions (art. 4.a.4) which is not available from ISTD.

f. Other Exemptions and Deductions

Other quantifiable exemptions and deductions from the individual and corporate income tax

returns include: (1) export exemption from industrial income (line item 993102); (2) Donations

Evaluating Tax Expenditures in Jordan. Final Report October 2011 27


paid to public departments and institutions (line item 993105); and (3) paid donations and

subscriptions in the kingdom for religious, charitable, human, scientific, sport, professional or

partisan purposes (99120), under the Income Tax Law. Obtaining data from income tax returns

for year 2010, and using aggregate values from the line items specified for both individuals and

companies, tax expenditures from these exemptions and deductions are estimated at JD 21.89

million or 0.11% of GDP in 2010 (See Annex 2 for more detailed calculations).

3.2. General Sales Tax and Special Sales Tax

The GST and SST is chargeable on all taxable supplies of goods and services made by a taxable

person. Under the sales tax, tax expenditure is the revenue forgone due to exemptions and zerorating

of certain goods and services as well as exemptions from payments of the tax by certain

bodies and persons. Zero rating of exports is not considered a tax expenditure since the GST in

Jordan is applicable on a destination based principle but we include it as a tax expenditure in the

calculations. Exemption thresholds are part of the baseline tax and are not considered tax

expenditures.

The approach followed for estimating tax expenditures from the GST and SST is to use a set of

models and databases to make the best use of the best data available, and to rely as little as

possible on the least reliable data. In order to estimate tax expenditures from the GST, what is

typically needed is information on the transactions involved in the supply of goods and services,

or any agent related information.

According to Hutton (2010) a framework for evaluating tax expenditures from value added taxes

can be developed using the following sources of data, ordered in line with the reliability ranking

for each these data sources: customs entries, VAT returns, National Accounts Statistics, and

input-output statistical tables.

Customs entries provide highly detailed accounts of what goods have been imported by which

particular agents in the economy. GST tax returns, while providing information directly from

taxpayers, can only provide highly aggregated data. The National Accounts statistics and the

Input-Output table provide highly aggregated data on the value-added by various sectors of the

economy and so generally have a high relative margin of error.

In line with these general assumptions about the ranking of the quality of data sources, the

estimates of tax expenditures from the GST and SST in this study are derived from the more

reliable data sources—custom entries and GST and SST tax returns.

a. Zero-rated and tax-exempted Goods and Services

Subject to the provisions of the GST Law, the supply or importation of certain goods and

services may be zero rated, including:

• Zero-rated goods and services per Schedule 2 of the GST tax law (See Annex 1),

• Zero rated goods and services supplied to free zones, cities and duty free shops, or

exported to places outside the kingdom,

• Zero-rated goods and services supplied to bodies relieved from payment of tax (e.g.,

diplomatic missions, international organizations, military, investment promotion and

religious organization.

Tax-exempted goods and services per Schedule 3 of the GST law (See Annex 1)

Evaluating Tax Expenditures in Jordan. Final Report October 2011 28


In calculating tax expenditures from the above-mentioned exemptions, the amount of forgone

revenue should be estimated only from the value added of sales and delivery of services. The

estimation methodology consists on multiplying the value of sales of goods or services by the

general GST tax rate during fiscal year 2010, and subtracting the estimated amount of tax paid

on supplies in the following manner:

(Value of Sales * 16%) (GST paid on purchases)

The following estimates are calculations resulting from this estimation methodology. Using

aggregate values of line items from the 2010 GST tax returns of individuals, partnerships and

corporations on their sales and purchases, the estimates of the amount of tax due on the value

added that is collected under the current system (including zero rating and exemptions) versus

the amount of tax that would be collected if tax concessions would be eliminated can be

calculated using a simulation model (See Annex I for more details on this calculation).

The tax expenditure resulting from zero rating and tax exemptions under the GST amounts to JD

405.4 million or 2.1 percent of GDP, representing the second largest tax expenditure after the

personal and family deduction under the Income Tax Law. The SEPD (2009) study helps further

inform this figure indicating that nearly 25 percent of this tax expenditure category originates

from basic food commodity exemption under the GST law.

i. Free Zones and Special Zones

Under the Free Zone Corporation Law and ASEZ Law, there are certain provisions for

exempting goods and services from the sales tax. In Free Zones, goods imported to and/or

exported from free zones are exempt from import taxes and customs duties, with the exception of

goods released to the domestic market. According to the ASEZ Law, shall be subject to the sales

tax on goods and services, exempting the rest of them.

Information regarding activity in special zones is available in annual reports. According to the

Free Zones Corporation Annual Report 2009, the value of imports in 2009 is JD 2,021 million

resulting in a tax expenditure of JD 323 million or 1.7 percent of GDP.

From ASEZA Report 2006 (the latest available), and using the value of imports into the Zone

and extrapolating the value to 2010 using a compound annual growth rate of imports, the

resulting estimated value of imports into ASEZ in 2010 is JD 397.2 million resulting in a tax

expenditure of JD 63.6 million of 0.3 percent of GDP.

3.3. Custom Duty

Tax expenditure with respect to custom duty is revenue foregone from exemptions provided to

importers. There are four important categories of tax expenditures under the custom duty in

Jordan, including tax expenditure due to zero rating, exemptions due to trade agreements, and

exemptions according to special agreements (e.g., Prime Minister’s decision, Investment

Promotion Law, entities exempted by law).

The tax expenditure from custom duty can be calculated obtaining the value of imports that are

not subject to tax due to the various provisions in the law. The Customs Department Annual

Report 2010 presents the aggregate distribution of exempted import values by type of exemption,

including the following three categories: imports subject to zero rating; imports exempted due to

Evaluating Tax Expenditures in Jordan. Final Report October 2011 29


trade agreements, and imports exempted according to special agreements. With this information

in hand, tax expenditure is calculated as follows:

Revenue foregone = c.i.f. value of exempted imports x the tariff rate applicable

Given that there is no single tariff rate applicable to an aggregate value of goods, an average

tariff of non-exempted imports is calculated using duties collected in 2010 and the value of nonexempted

imports. The resulting average duty rate is 5 percent. An estimate of tax expenditures

from custom duty is presented in Table 7 using data from the Customs Department Annual

Report. The total tax expenditure from the three categories of exemption is JD 307 million or 1.6

percent of GDP.

Table 14. Tax Expenditure Estimates: Custom Duty (2010)

Tax Expenditure Category Import Value

(in JD mill)

Tax

Expenditure

As % of

GDP

Due to zero Rating 3,346 154 0.8%

Due to trade agreements 1,108 51 0.3%

According to special agreement 2,215 102 0.5%

Total value 6,669 307 1.6%

Source: Author’s calculations using data from the Customs Department Report 2010

3.4. Real Property Taxes: Annual Property Tax and Transfer Fee

Jordan taxes real property in two ways: with an annual property tax on rental values and with a

levy on the value of property transfers. Together these two taxes account for less than 3 percent

of total central and local government revenues. The base of the property tax is the annual rental

value of all residential, commercial, and industrial properties and of vacant land. Quantifying tax

expenditures from the annual property tax is by the fact that many of the exempted properties are

not appraised and are not included in the property tax records.

The annual property tax is a 15 percent tax on the annual rental value enabled in three separate

laws that do not share a common exemption list—the municipal property tax (10 percent), the

sewerage tax (3 percent earmarked for the water authority) and the education tax (2 percent).

Vacant land receives preferential treatment taxed at a reduced rate of 2 percent on the municipal

tax. Additionally, if the building is not occupied the municipality introduces a 50 percent

discount on the tax due for the purpose of the municipal tax. The same tax reduction does not

apply for the education and sewage tax on unoccupied property.

The property transfer fee, instead, is a levy on real property transfers at a rate of 10 percent. As

part of the Government economic incentive measures, a help exemption was issued on the real

estate transaction fee (tax) for Jordanians buying flats or within housing developments within

urban areas not to exceed 150 m2. Under these circumstances, the transfer fee is exempted one

time only. The exemption is an additional tax incentive to the reduced 4.5 percent rate as

determined by the Council of Ministers since May 2009 and extended through 2011. According

the DLS’ end of year report 2010, the estimated value of exemptions for the year is JD150

million. The total value of exemptions since the exemption was introduced in May 25, amounts

to JD177 million.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 30


The estimates of tax expenditures from real property taxation found in this study represent the

best attempt to quantify the tax concessions from all the separate laws, using data from the

Greater Amman Municipality (GAM), the Ministry of Finance (Property Tax Division), and the

Department of Land and Survey (DLS).

Estimating tax expenditures from the annual property tax requires estimating revenue forgone

from exempted properties separately for each tax (municipal, education and sewage) due to

different exemptions lists. Estimations of tax expenditures under the annual property tax use the

following formulas applied to the annual rental value (ARV) of properties under each category of

tax expenditure, as follows:

Revenue forgone due to: Formula:

Exemptions = ARV of exempted properties * corresponding tax rate

Reduced rate on vacant land = (ARV of vacant land * standard 15%) (tax paid on vacant land)

20 % depreciation allowance = (0.20 * ARV) * corresponding tax rate

The following calculations represent estimates of tax expenditures estimated using data on the

annual rental value of exempted properties from the annual property tax, sewage tax and

education tax for all municipalities. Additionally, data was provided on the annual rental value

of vacant land, the tax collected from empty buildings, and the amount of revenue forgone on the

reduced rate and exemptions from the transfer fee as provided by the DLS’ Annual Report 2010.

The total tax expenditures from real property taxation represent JD 204.91 million or 1 percent of

GDP.

Table 15. Tax Expenditure Estimates: Real Property Taxes (2010)

Description

(in JD million)

Aggregate

ARV

Tax

Expenditure

As %

of GDP

GAM

Municipal tax exempted properties 30.4 3.0 0.02%

Sewage tax exempted properties 30.4 0.9 0.00%

Education tax exempted properties 30.4 1.5 0.01%

Reduced rate on vacant land 0.3 15.2 0.08%

20% depreciation allowance 137.6 20.6 0.11%

Total GAM

All Other Municipalities

41.3 0.21%

Municipal tax exempted properties 0.94 0.09 0.0005%

Sewage tax exempted properties 0.22 0.004 0.00002%

Education tax exempted properties 0.01 0.0002 0.000001%

Reduced rate on vacant land 1.35 0.14 0.001%

Empty buildings (50% deduction on tax due) - 0.13 0.001%

20% depreciation allowance 42.9 6.44 0.03%

Total - All other municipalities 6.80 0.03%

DLS incentive- all municipalities 150.00 0.77%

TOTAL - All Real Property Taxes 198.14 1.0%

Evaluating Tax Expenditures in Jordan. Final Report October 2011 31


Source: GAM, MOF (Property Tax Division), and DLS

While the Government collects less than 3 percent in real property taxes, tax expenditures

amount to 1 percent of GDP, or a third of what is actually collected in taxes. The amount of

forgone revenue is amplified by the undervaluation of properties under the annual property tax

(Bahl,2010).

4. A PROPOSAL FOR STREAMLINING TAX EXPENDITURES

The high cost of tax expenditures presented in this study reveals the loopholes and flaws in the

current Jordanian tax structure—a tax system where the cost of tax exceeds the level of tax

revenue collections. Tax expenditures in Jordan are estimated to be at least 14.5 percent of GDP

in 2010, while tax revenue collections in the same year reached 15.3 percent of GDP. Low

compliance, high levels of tax evasion and the cost of tax expenditures all contribute to the low

levels of revenue productivity in Jordan posing a threat to the consolidation of Jordan’s public

finances.

Personal income tax collections in 2010, in particular, declined by 14 percent from the previous

year, due in part to sluggish economic activity and in part to changes introduced in the temporary

Income Tax Law. With approximately 94 percent of the tax base exempted from personal

income tax as a result of the change in the tax-free threshold, the PIT produces the largest single

tax expenditure estimated at a cost of 6.1 percent of GDP. While the high family deduction of JD

24,000 was introduced for administrative and equity justifications, unless the government

seriously considers reducing the tax-free threshold, the prospects for a rebound in PIT collections

and improved tax revenue mobilization appear slim. Meanwhile, income and inflation growth are

the only factors that could contribute to whittling down this tax expenditure over time.

The second major source of tax expenditure originates from exemptions and zero rating of

numerous products under the General Sales Tax Law. While zero rating of exports is part of the

normal tax, tax schedules 2 and 3 under the GST law include a number of products subject to

either zero rates or an exemption. These schedules need to be re-evaluated and zero rating should

be limited to exports only, while exemptions should be granted only to selected products known

to benefit a selected population based on the intended objective of the exemption (i.e. a tax

incidence analysis of the basic food exemption list could help inform this decision). Furthermore,

rationalizing the list of entities and items on the zero rating list under the custom duty—which

accounts for nearly one percent of GDP—is also another avenue towards tax revenue

mobilization.

Additionally, tax incentives in Jordan are provided from multiple channels and ad hoc—by law,

by government officials, by interest groups—leading to erosion of the tax base and consequently

of tax collections. Such cumbersome incentive scheme also adds difficulty in quantifying the

cost of tax expenditures, particularly those provided as investment incentives, which have been

analyzed in more detailed by Chen (2005) and have proven to be inefficient and ineffective in

attracting large-scale long-term capital investments. Additionally, revenue from the annual

property tax could significantly improve if coupled with a general revaluation of properties, thus

providing an improved revenue source to municipalities.

Anticipating further future tax reforms leading to a more efficient, equitable and productive tax

system, the following figure summarizes recommendations to streamline many of the tax

expenditures that generate significant fiscal sacrifice to the GoJ. Reducing or eliminating some

Evaluating Tax Expenditures in Jordan. Final Report October 2011 32


of these tax concessions would negatively impact specific interest groups or segments of the

population and from a political perspective these may not be easy to implement. From an

economic perspective, the measures recommended would have a positive impact on the general

welfare of Jordanians, while improving transparency, efficiency and fairness in the tax system.

Implementing recommendations presented here would result in a more revenue neutral system

with significant increases in income tax and general sales tax collections.

Figure 2. Summary of Recommendations for Streamlining Tax Expenditures in Jordan

Personal Income Tax

Rate structure: Consider a rate increase.

Exemptions: Limit deduction to JD 12,000 per household (e.g. JD 6,000 for principal taxpayer,

JD 4,000 for second earner; JD 500 for each dependent up to JD 2,000.

Agricultural income exemption: implement a threshold beyond which income from agricultural

activity is taxed.

Capital Gains: Treat all capital gains (including gains on corporate stock) as ordinary income

subject to full taxation.

Business Taxation

Special investment incentives: No new incentives; phase out existing incentives.

Exemptions: Limit to certain entities, including some income sources of non-profit organizations.

General Sales Tax

Zero rates: Limit application only to exports.

Exemptions: Revoke exemptions to specific sectors.

Reduced Rate: current base for preferential rate is too broad; constrain to a small number

of basic necessities considered to be material components of low income household

consumption.

Custom Duty

Zero rating: rationalize list of entities and items on this list.

Special exemptions by PM decisions or Cabinet of Ministers: Do away with ad hoc decisions on

this exemption.

Property Taxes

Property tax rates: higher on vacant land.

Property values: do a general revaluation

Exemptions: consolidate the exemptions list for the municipal, sewerage and education tax.

20 percent depreciation allowance: eliminate.

Transfer tax: lower rate is ok, eventually do away with the tax and substitute with capital gains

tax, or compensate loss from annual property tax collections.

Investment Incentive Scheme

Income tax exemptions: do away with income tax exemptions for specified projects.

Exemptions: eliminate favoritism with certain sectors of the economy; exempt all or tax all.

Structure: Restructure the cumbersome, multi-layered investment incentive scheme, consolidate

into a new scheme that is neutral with respect to the various categories of investment.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 33


Evaluating Tax Expenditures

Data: Create a Tax Expenditure data framework; aim at quantifying annually; review impact of

programs that use tax expenditure mechanism.

Reporting: Produce an annual tax expenditure study (at SEPD, MOF?), to evaluate proposed

changes to the tax law and estimate the impact on tax expenditures, as well as changes on tax

expenditures over time.

Tax Expenditures in the Budget Process

Transparency and Accountability: publish an annual tax expenditure report as part of the annual

budget process and subject to scrutiny.

Control spending from tax expenditures: impose thresholds and/or ceilings.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 34


REFERENCES

A) Reports and Studies

Al-Hmoud, Khalid and Hanadi Rifai, (2010), “Analysis of the fiscal impact on the exemption of

thirteen basic food commodities: Exemptions from the sales tax and tariffs,” Studies and

Economic Policy Department, Ministry of Finance, Jordan.

Bahl, Roy (2010), “Jordan: The Taxation of Real Property,” Prepared for the USAID-funded

Fiscal Reform Project II under DAI Subcontract Agreement No. 1001030-13028-10S.

Chen, Duanjie, Jack Mintz, and Gabi Afram (2005), “Reformulating the Tax Incentive Program

in Jordan: Analysis and Recommendations,” Prepared for USAID-funded AMIR Project

under Task Order No. 512-01-01.

Hutton, Eric (2010), “A Basic Framework for Evaluating Value Added Tax Expenditures,”

Institutional Capacity and Finance Sector, Discussion Paper No. IDB-DP-138, Inter-

American Development Bank.

Jordan Customs Department Annual Report (2010)

Jordan Department of Land and Survey Annual Report (December 2010)

Khalaileh, Ayman, Metri Mdanat and Shatha Yousef (2002), “Tax Expenditures: First Phase:

Income Tax,” Supervised and reviewed by Ismail Zaghloul, Directorate of Studies and

Research, Ministry of Finance, November 2002.

Mann, Arthur and Robert Burke (2002), “El Gasto Tributario en Guatemala,” Prepared for

USAID-funded SEGIR Program under DAI Subcontract Agreement No. 4153-00.

B) Legal Documents Reviewed

1. The Constitution of the Hashemite Kingdom of Jordan.

2. Temporary Income Tax Law of the Hashemite Kingdom of Jordan (2010).

3. Temporary Sales Tax Law of the Hashemite Kingdom of Jordan (2010).

4. Temporary General Sales Tax Law No. 29 (2009)

5. Custom Law No. 20 of the Hashemite Kingdom of Jordan (1998).

6. Building and Land Tax Law within the Municipality Areas No. 11 for the year 1954 and its

amendments.

7. Public Sewage Law.

8. Education Tax Regulation No. 3 (1998).

9. Investment Promotion Law and its amendments (1995).

10. Jordan Industrial Estates Corporation Law No. 59 and its amendments (1985).

11. Aqaba Special Economic Zone Law No. 32 (2000).

12. Sales Tax Regulation on the Goods and Service within the Aqaba Special Economic Zone

(ASEZ) (2000).

13. The Free Zones Corporation Law (1994).

Evaluating Tax Expenditures in Jordan. Final Report October 2011 35


ANNEX 1. LIST OF TAX SCHEDULES

Evaluating Tax Expenditures in Jordan. Final Report October 2011 36


Table A-1. GSTL, Schedule 1: Special Sales Tax Schedule

No . Description

1. Cement of all kinds.

2. Construction and reinforcement iron, plates, rods, angles, shapes, sections, tubes and the like,

prepared for use in structures, of pig iron, iron or non-alloyed steel.

3. Mineral lubricants and other lubrication materials and preparations containing by weight 70% or

more of petroleum oils or of oils obtained from bituminous materials.

4. Beer (including non-alcoholic beer).

5. Ethyl alcohol , undenatured.

6. Spirits and alcoholic beverages, including wines and other fermented beverages.

7. Tobacco and tobacco products.

8. Vehicles (cars).

9. Mobile phones and radios subscription service.

Table A-2. GSTL, Schedule 2: Goods and Services Subject to the General Tax at Zero-Rate

No. Description

1. Food preparations for infant or handicapped use; food preparations exclusively used for

special illnesses.

2. Supplies used by the handicapped.

3. Inputs of drug manufacturing, industrial machinery and equipment exempted under the

Customs Tariff Tables and used to manufacture drugs, laboratory devices and its

accessories needed for drug industry and spare parts, whether local or imported.

4. Books and similar printed materials, whether or not loose-leafed, printed newspapers,

magazines and periodicals, whether or not illustrated or containing advertisements,

illustrated children books, drawing and coloring books.

5. PVC granules (polyethylene) of low density, of black color only and of recycled

materials by (75%) or more.

6. Petroleum oils and oils obtained from bituminous minerals, crude; other than crude;

petroleum gases and other gaseous hydrocarbons. (Excluding lubricants and other

lubricating materials and preparations. containing by weight 70% or more of petroleum

oils or of oils obtained from bituminous materials.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 37


Table A3. GSTL, Schedule (3): Tax-Exempt Goods and Services

Exempt Goods

No. Description

Tariff heading as published

in The Gazette on February

28,2002

1. Wheat or meslin flour. 11.01

2. Bread . Of heading 19.05

3. Water, other than water put up in containers of capacity not

exceeding 5 liters.

Of heading 22.01

4. Olive oil. 15.09

5. Meals catered by restaurants unclassified by the Ministry of Tourism,

or by restaurants not required to fulfill the conditions and

requirements of tourist restaurants, namely (Humus, Fool, Falafel and

relevant items, vegetables, fries, rice and relevant items, and drinks,

whether hot or cold).

6. Plastic floor coverings. Of heading 57.03

7. Banknotes and coins and similar monetary articles. Of headings 71.18 and 49.07

8. Gold of all kinds, jewelry and ornaments of gold, valuable metals and

their parts and other precious stones.

Diamonds, whether or not worked, but not mounted or set.

Precious stones and semi-precious stones, whether or not worked.

Waste and scrap of gold.

Articles of jewelry and parts thereof, of precious metal.

Articles of goldsmith’s wares and parts thereof, of precious metal.

Other articles of precious metal.

9. Goods supplied by Islamic banks and already purchased from

persons unregistered for sales tax.

Of headings 71.06,

71.08

Evaluating Tax Expenditures in Jordan. Final Report October 2011 38

71.02

71.03

7112.91

71.13

71.14

71.15

10. Electrical energy. 27.16

11. Motor cars and other motor vehicles duly cleared, registered,

licensed, and locally used following the licensing process.

87.03


12. Hand-operated vehicles without pedals for use by disabled persons. Of heading 87.03

13. Fire-fighting vehicles. Of heading 87.05

14. Aircraft, ships, and parts thereof. Of chapter 88 and 89

15. Goods gifted or donated to orphanage centers, shelters of the

disabled, hospitals, mosques, Zakah Fund, Zakah Committees,

Charities and churches.

Exempt Services

No. classification International Coding

1- Production, collection and distribution of electricity.

4001

2- Collection, purification and distribution of water.

3- Construction, performed under a contract endorsed by the Jordanian

Contractor’s Association, excluding the following sub-headings: (a)

(4550) renting of construction and destruction equipment; (b)

(451002) selling of materials resulting from construction, subject to

the exempt construction activity be not made in combination with

any other activity making the exempt activity taxable.

4- Land transport; transport via pipelines, excluding the following:

(a) (602104) passenger transport by cable elevators (Telefrique).

(b) (602203) car rental, together with drivers.

(c) Passenger transport by tourist buses.

5- Water transport.

6- Air transport.

7- Other supporting and auxiliary transport activities.

8- Financial intermediation, except insurance and pension funding

provided by associations and firms licensed under the Bank Law in

force.

9- Insurance and pension funding, except compulsory social security.

10- Activities auxiliary to financial intermediation provided by

associations and firms licensed under the Securities Law in force. 67

Evaluating Tax Expenditures in Jordan. Final Report October 2011 39

41

45

60

61

62

6303

11- Real estate activities (selling and purchasing of lands and buildings,

whether or not residential). 701001

12- Real estate activities with own or leased property.

13- Law offices’ activities associated with case litigations at courts.

65

66

701002

741101


14- Public administration and defense; compulsory social security.

15- Education.

16- Health and social work, except sub-heading (853203) concerning

Charities’ activities. 85

17- Sewage and refuse disposal, sanitation and similar activities.

18- Activities of religious organizations.

19- Activities of political organizations.

20- Radio and television activities.

21- News agency activities.

22- Library and archives activities, museums and other cultural activities.

23- Funeral and related activities.

24- Office activities rendered for establishments outside the Kingdom.

25- Extra-territorial organizations and bodies

26- Services subject to the Additional Tax under law 28 of 1969 as

amended.

27- Catering service of meals consisting of the following items (Humus,

Fool, Falafel and relevant items, vegetables, fries, rice and relevant

items, and drinks, whether hot or cold) supplied by restaurants

unclassified by the Ministry of Tourism, or by restaurants not

required to fulfill the conditions and requirements of tourist

restaurants.

28- Oil Pressing Service

29- Health and Accident Insurance

30- Reinsurance

31- Sporting, Training and Education

Table A-4. GST, Schedule (5): Goods Subject to the Reduced Rate of General Tax at 4 Percent

No.

1.

2.

DESCRIPTION

Live animals.

Meat and edible meat offal.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 40

75

80

90

9191

9192

9213

922

923

9303

98

99


3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

Fish or fish fillets and other fish meat, other than crustaceans, mollusks and other aquatic invertebrates.

Dairy produce, Birds’ eggs, natural honey.

Live trees and other plants, bulbs, roots and the like.

Edible vegetables and certain roots and tubers, other than frozen or dried, such as canned legumes.

Edible fruit and nuts, fresh or chilled, other than frozen or dried.

Tea.

Cereals.

Thyme.

Products of the milling industry, excluding wheat, starches, inulin and wheat gluten.

Seeds, fruit and spores, of a kind used for sowing, whether or not preserved or canned.

Plants and parts of plants (including seeds and fruits), of a kind used primarily in perfumery, in pharmacy or

for insecticidal, fungicidal or similar purposes, fresh or dried, whether or not cut, crushed or powdered.

Cereal straw and husks, unprepared, whether or not chopped, ground, pressed or in the form of pellets.

Swedes, mangolds, fodder roots, hay, Lucerne (alfalfa), clover, sainfoin forage kale, lupines, vetches and

similar forage products, whether or not in the form of pellets.

Vegetable fats and oils, other than olive oil.

Preparations of meat, of fish, other than Prepared or preserved caviar and caviar substitutes.

Cane or beet sugar and chemically pure sucrose, in solid form.

Molasses for yeast production.

Uncooked pasta not stuffed or otherwise prepared (such as macaroni, vermicelli).

Vegetables, fruit, nuts and other edible parts of plants prepared or preserved by vinegar or acetic acid.

Tomato paste.

Olives preserved otherwise than by vinegar or acetic acid.

Inactive yeasts.

Sweetened sesame seed meal (Halawa), Unsweetened sesame seed meal.

Table salt.

Kenafa, Hareesa, Awamma, Barasiq and (pies other than pizza), uncombined with catering service.

Residues and waste from the food industries; prepared animal fodder.

Pebbles, gravel, broken or crushed stone, of the kind commonly used for concrete aggregates, for road

metalling. Limestone flux; Limestone and other calcareous stone, of a kind used for the manufacture of lime

or cement other than crude sandstone.

Natural Phosphates.

Potash.

Radioactive chemical elements and radioactive isotopes (including the fissile or fertile chemical elements

and isotopes) and their compounds; mixtures and residues containing these products.

Sodium hydrogencarbonate (sodium bicarbonate).

Pharmaceutical products.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 41


35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

45.

46.

47.

48.

49.

50.

51.

52.

53.

54.

55.

56.

57.

58.

59.

60.

61.

62.

63.

64.

65.

66.

Fertilizers.

Diagnostic or laboratory reagents.

Sterilizers.

Acidic salts.

Disposable bags for patient's use.

Egg holders.

Sheath contraceptives.

Plates, sheets and strips used for retreading rubber tyres.

Other articles of vulcanized rubber other than hard rubber, Imported by retreaders.

Camel-back strips for retreading rubber tyres.

Unvulcanised rubber thread and cord used for retreading rubber tyers.

New pneumatic tyres of rubber of a kind used on buses or lorries, of inner diameter 17-24 inch.

Erasers.

Pencil sharpeners.

Ball point pens, pencils and pastels.

School satchels.

School copybooks and university lectures books.

Drawing sets, slide rules.

Agricultural fertilizers, peat.

Pesticides, insecticides, rodenticides, fungicides, herbicides, anti-sprouting products and plant growth

regulators; disinfectants.

Foils of plastic for agricultural use, pars of drip irrigation systems.

Seedling trays used in agriculture.

Containers prepared for packing of agricultural fresh products.

Kerosene or gas fuel operated stoves.

Structures of agricultural plastic shelters.

Agricultural tractors.

Hand tools, the following : spades, shovels, mattocks, picks, hoes, forks and rakes; axes, bill hooks and

similar hewing tools; secateurs and pruners of any kind; scythes, sickles, hay knives, hedge shears, timber

wedges and other tools of a kind used in agriculture, horticulture or forestry.

Agricultural, horticultural or forestry machinery for soil preparation or cultivation; lawn or sports-ground

rollers, poultry-keeping or bee-keeping machinery or Milking machines.

Harvesting or threshing machinery, including straw or fodder balers; grass or hay mowers; machines for

cleaning, sorting or grading eggs, fruit or other agricultural produce, other than machinery of heading No.

84.37. Grounds of Tariff Tables.

Tents and accessories thereof.

Firefighting equipment, alarms, and air and liquid purification equipment used for environment protection.

Ambulances and hearses.

Evaluating Tax Expenditures in Jordan. Final Report October 2011 42


67.

68.

69.

70.

71.

72.

73.

74.

75.

76.

77.

78.

79.

80.

81.

82.

83.

84.

85.

86.

87.

88.

89.

90.

91.

Medical lenses, including medical contact lenses.

Filters of artificial kidneys.

Balloons to aid heart muscles.

Device to aid heart muscles.

Various medical catheters.

Various medical joints.

Rubber pipes for blood dioxides.

Blood dioxides.

Heart veins widening nets.

Artificial heart valves.

Ozone therapy, oxygen therapy, aerosol therapy, artificial respiration or other therapeutic respiration

apparatus

Breathing appliances and gas masks.

Syringes, with or without needles.

Tubular metal needles and needles for sutures.

Orthopaedic appliances, including crutches, surgical belts and trusses; splints and other fracture appliances;

artificial parts of the body; hearing aids and other appliances which are worn or carried, or implanted in the

body, to compensate for a defect.

School uniform and fabrics thereof.

Shampoos for treatment of nits, lice and fugal diseases.

Sesamum seeds, whether or not broken.

Dry leguminous legumes.

Cakes containing by weight 50% or more of cocoa flour or other food preparations.

Materials used as fertilizers, namely, (Potassium nitrite, Magnesium nitrite, Calcium nitrite, Copper

Sulphate, Zinc Sulphate, Manganese Sulphate, and Monopotacium Phosphate).

Used tires imported by retreaders as row materials to be incorporated in the retreading process.

Canned legumes and inputs thereof.

Quicklime, slaked lime, limestone blocks.

Perlite and chiolite.

Table A-5. Bodies Exempted (2010)

Seq. Bodies exempted for 2010

1 International federation for red cross societies/ agreement

2 Power generation project I/ Amman east/ exemption

3 Transport reduction project in Amman/ exemption

4 Micro-financing co. (Phinca)

5 Jordan corporation for micro-financing

6 Trade and transport support and rehabilitation project

7 Middle east democracy and freedom reinforcing project

8 Rusaifa water network rehabilitation project

Evaluating Tax Expenditures in Jordan. Final Report October 2011 43


9 Book-house project

10 Tafilah university

11 German university

12 Al Hussein Bin Talal university

13 Royal society club for radio hobbies

14 Public-private sectors partnership support project

15 ‘Hakaya ‘project for enhancing and protecting cultural diversity and interaction with domestic culture.

16 ‘Zaatari’ water transfer rehabilitation project

17 National museum/ JAICA grant

18 Fiscal reform project

19 Political involvement report in Jordan

20 Antidiscrimination against Jordanian women married to foreigners

21 Yarmouk university/ Tempos project

22 Jordan commercial railway

23 Primary schools establishment project

24 ‘Baddad’ co. for media and communication

25 Traditional fashion apparel manufacturing co.

26 Project for supporting, developing and implementing human rights national policies

27 BB and national petroleum co.

28 Capacity building project in the Ministry of Political Development

29 Water waste reduction project in Karak

30 Technology and research support project

31 Water efficiency increase project in the Jordan Valley

32 Wind quality control system project

33 Service sector modernization and development project

34 Nuclear materials illegal trafficking project

35 ‘Takeyyet Um Ali’ for voluntary activities and charities

36 Swedish association for individual relief

37 Sustainable urban transport planning project in the Middle east.

38 ‘Ahliyyeh’ co. for micro-businesses development

39 The Hashemite Fund for Jordan Badeya Development

40 Jordan oil shell Co./JOSCO

41 ‘Hama’ Turkish Co./ DESI water transfer project

42 French school construction project belonging to the French embassy

43 Jordan-Dubai Islamic bank/ Abdali

44 Middle east Co. for micro-businesses financing

45 Emirate Co. for Tourist Investment/ Abdali

46 Jerash Festival Friends Society

47 South Amman water plant project

48 Jordan Hashemite Fund for human resources development

49 Jordan-Egyptian Co. for Dead sea products

50 Jordan project for supporting education development

51 National bank for micro-businesses financing

52 Diabetes National Center

53 Health computerization Co.

54 GTZ projects

55 ‘Samra’ water plant project

Seq. Bodies exempted by law

1 Embassies, commissions and non-honorary consulates

2 Members of the diplomatic and consular missions accredited to Jordan

3 International and regional organizations working in Jordan and their non-Jordanian staff

4 The armed forces

5 Public security

Evaluating Tax Expenditures in Jordan. Final Report October 2011 44


6 General intelligence

7 Civil defense

8 Mosques

9 Churches

10 Orphanage and elderly centers

11 Sport and cultural clubs

12 Individuals of special needs

Seq. Bodies exempted by Cabinets decisions

1 Jordan Education Society

2 SOFIX Show

3 Hussein Cancer Center

4 Cos. Existing in QIZs

5 Queen Rania Academy for teacher training

6 Royal Tanks Museum

7 Cancer early detection unit

8 Arab Thought Club

Evaluating Tax Expenditures in Jordan. Final Report October 2011 45


ANNEX 2. DETAILED CALCULATIONS

Evaluating Tax Expenditures in Jordan. Final Report October 2011 46


Table A-6. Estimating Tax Expenditures from Income Tax: Other Exemptions and Deductions (2010)

Export

exemption

(industrial

income) --Line

Exemption

Individuals Companies-Type 1 Companies-Type 2 Companies-Type 3 Total

Average

Tax Rate

item 993102 1,005,987 10.5% 105,629

Donations paid

to public

departments and

institutions --

Line item

993105 3,020,416 10.5% 317,144

Donations paid

in the Kingdom

for religious,

charitable,

human,

scientific, sport,

professional or

partisan

purposes under

the law--Line

item 99120 1,560,849 10.5% 163,889

Tax

Expenditure Exemption

Marginal

Tax Rate

134,037,496 14%

675,212 14%

300,056 14%

Tax

Expenditure Exemption

Marginal

Tax Rate

Evaluating Tax Expenditures in Jordan. Final Report October 2011 47

Tax

Expenditure Exemption

Marginal

Tax Rate

Tax

Expenditure

18,765,249 22,462 24% 5,391 N/A 30.0% - -

94,530 55,000 24% 13,200 N/A 30.0% - -

42,008 14,000 24% 3,360 N/A 30.0% - -

Totals

Total as % of

5,587,252 586,661 135,012,764 18,901,787 91,462 21,951 7,925,752 2,377,726 21,888,124

GDP 0.003% 0.097% 0.0001% 0.012% 0.112%


Table A-7. Estimating Tax Expenditures GST: Zero-rating and Exemptions (2010)

in JD million

line item Description Value GST amount Value

Individuals Partnerships Corporations

GST

amount Value

2 Standard-rated Domestic Purchases 960.7 153.7 3,340.7 534.5 1,446.1 231.4

3 Standard-rated imports

Imports under deferred payment

459.4 73.5 2,125.0 340.0 854.6 136.7

4 status 32.1 5.1 736.3 117.8 187.7 30.0

5 Tax-exempt purchases and imports 265.2 42.4 779.9 124.8 404.2 64.7

6 Standard-rated Domestic Sales 1,656.9 265.1 9,152.5 1,464.4 2,851.8 456.3

7 Zero rated Domestic Sales 164.6 26.3 1,724.2 275.9 396.3 63.4

8 Exported Sales 91.2 0.0 2,641.1 0.0 241.0 0.0

Evaluating Tax Expenditures in Jordan. Final Report October 2011 48

GST

Amount Totals

9 Tax-exempt Domestic Sales 193.6 31.0 1,965.8 314.5 494.7 79.2

Tax Due

(Current

System) Tax Due (6 - (2 + 3)) 37.9 589.9 88.2 716.0 3.7%

Tax Due(w/o

exemptions) Tax Due (6 + 7 + 9) - (2+ 3 + 4 + 5) 47.6 937.7 136.0 1,121.4 5.7%

Tax

Expenditures Difference in Tax Due 9.8 347.8 47.9 405.4 2.1%

Source: Author’s calculations from ISTD data.

% of

GDP


Fiscal Reform II Project (FRP II)

Northern Abdoun, Samer Rummaneh St.

Building 12 - First Floor

P.O. Box 840126 Amman, 11181 Jordan

Phone: +962 6 5922819

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