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    23-Apr-2019

At least one out of five dinars generated in Jordan goes unchecked, untaxed in ‘grey’ market

 

The Jordan Times

 

 
 
AMMAN — The International Monetary Fund (IMF) defines the term “shadow economy” as all economic activities and transactions that take place informally, hidden from official authorities for monetary, regulatory and institutional reasons.
 
Notably, not all informal transactions are illegal, per se, but the fact that those exchanges go unchecked and untaxed makes them so, and hence, any such activities are considered part of the shadow economy, also described by IMF as the “grey”, “hidden”, “cash” economy, or simply the informal economy.
 
According to Forbes, one of the biggest problems worldwide, when it comes to shadow economies, is the fact that it goes untaxed, costing states hundreds of millions, if not billions, every year.
 
Statista charts show that nearly 8 per cent of the world’s combined GDP in 2013 was lost to tax evasion, a practice that is definitive and integral to shadow economies.
 
However, economist Mufleh Akel argued that a shadow economy is not all bad.
 
Good economy, bad economy
 
“There are two components of the shadow economy to consider. One is the grey market, where the commodities and services exchanged are legal in nature but unregulated and untaxed, and the second is the black market, where illegal commodities and services are exchanged, which, needless to say, also goes unchecked and untaxed,” he explained.
 
On the one hand, the grey market helps provide jobs to people unable to secure steady income employment via the formal labour market, Akel argued, adding that this type of economy provides income to families that have no other source of revenue. This includes unlicensed street vendors.
 
“In a way, the shadow economy alleviates some of the unemployment pressures off the government.”
 
“On the other hand,” the expert said, “dealing in the shadow gives rise to black markets, trading in illicit commodities, such as firearms and drugs; a big downside to the informal economy”, he noted.
 
Of course, Akel continued, there are factors that platform the expansion of shadow economies.
 
“When tax burdens increase, people tend to resort to the shadow market to save money, which is one aspect of it,” he explained.
 
“And in all honesty, for people to try avoid taxation is understandable. Taxes are too high and the tax-paying citizen is getting so little in return. The core of the relationship between the taxpayer and the state is disrupted by all the corruption and the deterioration of the quality and level of services provided, be it healthcare or public schools,” he said, “not to mention the politics”.
 
The state has the right to collect taxes, yes, Akel reaffirmed, but the people, “the taxpayers”, also have a right to access quality services and security, which the state has “historically failed to ensure”.
 
“This is a vicious circle of which comes first: paying dues or demanding rights, but there is a general lack of confidence in the state, which reflects on the people’s sense of duty to pay due taxes, which — again — is understandable,” he highlighted.
 
In 2014, the Jordan Economic and Social Council published a report on the scale and causes of tax evasion in Jordan.
 
In its report, the council cited various studies, estimating the scale of Jordan’s shadow economy at 18.3-21.7 per cent of the Kingdom’s GDP.
 
However, the World Bank in 2011 estimated it at somewhere between 20 and 25 per cent of Jordan’s GDP.
 
These estimates, ranging between JD5 billion and JD9 billion, include tax revenue lost to evasion, which the government estimated at JD695 million in 2014, according to the government’s Inform (Khabber) website, citing the economic social council’s data as a reference.
 
Tax evasion
 
Khabber explains that 29 per cent of Jordan’s evaded tax revenue is lost to income tax avoidance. The rest is lost to general sales tax avoidance.
 
In Jordan, tax evasion was estimated at JD1.5 billion in 2016, former general director of the Income and Sales Tax Department Bashar Saber stated in March 2017.
 
However, by August 2018, official estimates of tax evasion in Jordan dropped to JD650 million, the figure cited by Deputy Prime Minister and Minister of State Rajai Muasher at a meeting with political figures and civil society organisations.
 
On August 13, 2018, Muasher said that 38 per cent of the Treasury’s income from sales taxation is lost to evasion, contrary to government estimates of 2014.
 
The new estimate, according to Director General of the Sales and Income Tax Department Hussam Abu Ali, is based on revamped measures introduced by the government under Prime Minister Omar Razzaz, following Hani Mulki’s resignation.
 
Since then, the government has been pledging new anti-evasion measures and efforts to capture at least some of the revenues lost to tax evasion.
 
On Sunday, Abu Ali was quoted by the Jordan News Agency, Petra, as saying that the new tax laws has positively reflected on tax collection and anti-evasion efforts. He did not give exact figures.
 
To follow up on these pledges, The Jordan Times tried repeatedly to get a hold of Muasher to comment on Abu Ali’s statements, but to no avail.
 
In a phone call with The Jordan Times, Abu Ali explained that the department has no figures to disclose as of yet, but will soon. As for the drop in tax evasion estimates, Abu Ali stated that “not a single study has ever estimated tax evasion at JD1.5 billion in Jordan”.
 
Explaining discrepancies
 
“Studies we have place tax evasion at around JD650 million,” he stressed, including all tax evasion violations, not only income or sales tax, Abu Ali added.
 
When asked about the discrepancies in the figures over the years, Abu Ali said “it is important to differentiate between tax arrears and evaded taxation”.
 
Tax arrears are due taxes that are accrued taxes or unpaid, he explained.
 
When asked about estimates, Abu Ali did not comment, though it is shown in the government website, Khabber, that tax arrears in 2014 were estimated at JD370 million.
 
Also, when The Jordan Times asked the tax official on the arrears item in the budget, he did not comment.
 
However, combined, the government’s estimates of both arrears and tax evasion stand at around JD1.02 billion, according to the figures of provided by Abu Ali and Khabber.
 
Furthermore, Khabber shows that lost tax revenues are not entirely due to tax evasion, as nearly JD834 million’s worth of tax exemptions are issued on an annual basis, according to the council’s 2014 report.
 
Overall, the report cites lost tax revenues in 2012 at JD1.9 billion.
 
When asked about the totals, Abu Ali said: “Soon enough, the department will issue a report highlighting some details in regards to progress made on the tax evasion frontier. But what I can say for now is that the department has addressed 50 per cent more violations in the first quarter of the year 2019 than in the same period last year, in terms of value.”
 
He added that for legal purposes, since the cases are being reviewed in court, he could not elaborate further on the progress of anti-evasion efforts.
 
Earlier this month, however, Razzaz stated that the new tax laws have helped curb tax evasion, as reported by The Jordan Times.
 
As a result, tax revenues increased by 62 per cent to JD21 million during the first quarter of 2018, compared with JD13 million during the same period last year, the premier said.
 
Addressing and scaling tax evasion is not easy, at all, financial economist and Al Ghad columnist Yousef Damra told The Jordan Times.
 
“It can be indicated by the scale of financial activities and transactions carried out in the vocational sectors, which go untaxed,” he explained.
 
This, Damra said, could be resolved by means of digitising the billing process, which is what the government is trying to do.
 
“The shadow economy, tax evasion included, is very difficult to address, because it requires efforts on both the citizenry’s and the state’s sides, and a culture to support these efforts,” he added.
 
Evasion practices
 
Financial statements are somewhat easy to manipulate, in terms of figures, said a tax consultant who worked with one of the world’s top auditing and financial services companies.
 
The source, who preferred to keep his name and the name of the world-class company he worked for in Jordan off the record, said: “It is as easy as working the financial statements of major companies to manipulate net income and lower taxation.”
 
“You wouldn’t believe the kind of work some companies do in Jordan, consulting big-time businessmen and corporations on how to make it look like these companies are actually losing money,” he added.
 
This practice is not by any means exclusive to Jordan, he underlined.
 
“Such practices are standard worldwide, beyond tax havens to some of the world’s most taxed economies. This is legal, mind you,” he pointed out.
 
It is, however, for tax authorities to determine the financial realities of these companies, as there is nothing illegal about what tax consultants do, said the specialist.
 
“There are accounting standards and models. You fiddle around with it a little bit, you can maximise costs and minimise profit and ‘voila’ you have loss!”
 
This is why “the department’s operatives are no longer confined to assessing tax dues; the entire operation has taken a more auditing-oriented approach. We run a tax-auditing operation now,” Abu Ali said.
 
On the other hand, this is common everywhere, Akel noted.
 
“In the US, if you pay cash, you get plenty of benefits and discounts. The cash economy is more elusive than the digitised, electronic economy,” he added.
 
Is that all?
 
Other forms of tax evasion include customs duty avoidance, which is another cornerstone of the shadow economy, integral to a wider range of activities that entail smuggling.
 
“Many Jordanians prefer to consume smuggled commodities, first and foremost because it is cheaper,” Akel remarked.
 
Tobacco smuggling alone costs the Treasury no less than JD180 million every year in lost tax revenues, State Minister for Media Affairs and Government Spokesperson Jumana Ghunaimat said at a press statement in July last year.
 
The other aspects of the shadow economy will be probed in detail in the second part of this series.
 
 

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