The scope of tax evasion in Jordan: Estimating the unseen

tax evasion
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tax evasion

Hamza Alakaleek

Hamza Alakaleek has graduate degrees in International Political Economy and International Business Law from Yarmouk University and University de Montreal with focus in Internet of Things, Artificial Intelligence and Data Protection.

Tax evasion poses a significant challenge to economic stability, entailing the deliberate underpayment or nonpayment of taxes mandated by law. While accurately gauging the full extent of this issue proves inherently complex, numerous studies and reports underscore its potential magnitude. It is crucial to distinguish between tax evasion, constituting the illegal underreporting or non-reporting of income to evade taxes, and tax loopholes, which are legal provisions within tax codes that enable individuals or entities to lessen their tax obligations. Due to its clandestine nature, pinpointing the precise scope of tax evasion presents inherent challenges.اضافة اعلان

In a 2021 report by the International Monetary Fund (IMF), it was observed that despite Jordan's efforts to broaden its tax base and enhance tax compliance, the nation relied on indirect taxes such as sales tax. The report emphasized the imperative of addressing tax evasion and bolstering the effectiveness of direct tax collection, notably income tax, for the nation's fiscal well-being. While the IMF report refrained from precisely quantifying tax evasion, it underscored the significance of tackling this issue and addressing loopholes to bolster Jordan's financial landscape.

Notably, these estimates may fluctuate depending on the methodological approaches employed and should be interpreted judiciously. While these estimations convey a concerning portrayal of tax evasion's repercussions on economic advancement and the delivery of public services in Jordan, it is essential to recognize the problem's origins and the strategies deployed to combat it. Despite the elusive nature of quantifying the financial hemorrhaging arising from this issue, available evidence substantiates the gravity of tax evasion and the inequitable utilization of tax avoidance schemes in Jordan.

While the IMF report refrains from furnishing a specific numerical assessment of tax evasion cases in Jordan, it underscores an acknowledgment of the issue's severity, concentrating on the broader ramifications of loopholes and tax exemptions. In a report by the Jordan Strategy Forum (JSF), the estimated impact of combating tax evasion in Jordan approximated 2 percent of the gross domestic product (GDP), where the GDP is estimated at $52 billion. Consequently, over a billion dollars in revenue are forfeited due to unreported income tax liabilities, highlighting the substantial economic losses incurred.

Utilizing tax-saving strategies and leveraging legal provisions within Jordan's income law extends beyond the purview of small businesses and individuals. In fact, it is a practice observed among certain large corporations, exemplified by the strategic maneuvers employed by some Jordanian banks. These institutions exploit tax loopholes, notably through allocations for doubtful collections, in a manner that stretches the bounds of legal legitimacy.

One of the prevailing tactics is the use of doubtful debts, which are not issued by a court ruling but instead are only bad debts according to specified standards by the tax law. Although banks compensate for these lousy debts by insurance companies, per the arrangements concluded between banks and insurance companies, banks continue to pursue defaulting borrowers indefinitely. This occurs notwithstanding that these values are acquired from insurance companies in accordance with insurance contracts, where the loans are insured basically by the borrowers themselves, who pay the insurance amount on the loan as a prerequisite for loan approval. The doubtful debts are also tax-deductible from the banks' profits to determine the net taxable profit.

In alternative scenarios, banks incorporate allocations for doubtful debts into subsequent budgetary cycles or utilize active insurance proceeds originating from prior years to inflate profits artificially. This maneuver serves a dual purpose: enhancing profitability metrics and facilitating share sales, mergers, or the company's exit from the Jordanian market. It is noteworthy that Jordan's Income Law prohibits the revision of tax records beyond four years from the initial assessment year, underscoring the strategic timing employed by banks to evade audit review.

In conclusion, tax evasion impedes Jordan's economic stability, posing challenges beyond mere financial losses. The distinction between tax evasion and legal tax reduction strategies is crucial, highlighting the complexity of addressing this issue. Efforts to combat tax evasion must be multifaceted, encompassing legislative reforms, enhanced enforcement mechanisms, and improved data collection and analysis. By addressing these challenges head-on and implementing effective strategies, Jordan can safeguard its fiscal health and promote a fair and equitable tax system for all.

Views expressed by writers in this section are their own and do not necessarily reflect Jordan News' point of view.

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