This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 AMMAN 009954 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN KMPI KTDB ECON JO
SUBJECT: JORDAN'S TAX REFORM: A PROTRACTED TURN IN THE 
RIGHT DIRECTION 
 
¶1. (SBU) SUMMARY:  On November 19, Jordan's government 
enacted a temporary law - effective January 1 - that makes 
fundamental changes to the tax code.  The changes are based 
primarily on two years of work by Jordan's Income and Sales 
Tax Department (ISTD) and its USAID contracted advisor. 
While not all of the advisor's final recommendations have 
been implemented in the new law, three basic pillars of the 
tax reform package remain: simplifying tax rates, broadening 
the tax base, and lowering tax revenue leakage by eliminating 
narrowly-defined tax exemptions that favor certain tax 
payers.  Some cabinet ministers favor new exemptions for 
certain business sectors under the new law.  The ISTD has the 
full support of the new Minister of Finance to stand its 
ground on the tax reform agenda. 
 
¶2.  (SBU) Some Embassy contacts are concerned over the law's 
legitimacy.  Enacted days before the last cabinet left 
office, the tax amendment was made law in the absence of 
Parliament under an emergency provision.  Subsequently, the 
Chamber of Deputies rejected the law as unconstitutional, and 
sent its ruling to the Senate for review.  Weak public 
support for the personal income tax (PIT) part of the 
amendment is an additional concern.  There is some risk of 
the law being overturned, though few government leaders feel 
the Senate would do so.  The Ministry of Finance and ISTD 
will develop a communication plan to educate the public and 
Parliament on the effectiveness of the new tax law.  END 
SUMMARY. 
 
Income & Sales Tax Changes: The Highlights 
------------------------------------------ 
 
¶3.  (U) According to the Income and Sales Tax Department 
(ISTD), the PIT changes limit exemptions and make them 
available to all individuals.  Additionally, tax brackets 
have been lowered from four to two: ten and fifteen percent, 
depending on income level.  For businesses, the tax rate will 
be fifteen percent in all industries except banking and 
finance, which will continue to be taxed at thirty-five 
percent. 
 
¶4. (U) In the sales tax arena, the law broadens the tax base 
with more companies now required to pay and collect the 
General Sales Tax (GST).  Additional regulatory changes (in 
progress) will be required to insure the GST exemption for a 
large number of products is removed, and sales tax 
administration and compliance is made easier. 
 
Streamlining/Unifying Exemptions 
-------------------------------- 
 
¶5.  (U) A key pillar of the Income Tax amendment is the 
"unification" of exemptions.  Exemptions (with no limit on 
claim amounts) previously used mostly by high-income earners 
for education, rent, interest on housing loans, and medical 
treatment have been eliminated.  Additionally, exemptions on 
fifty percent of taxable income for public-sector employees 
and twenty-five to fifty percent for private-sector employees 
have also been eliminated.  NOTE: Under the old law, 
self-employed taxpayers (mostly low-income) received no 
exemptions on their taxable income.  END NOTE.  In the place 
of these exemptions, the standard exemption has been raised 
from 1000 Jordanian Dinars (JD) to 5000 JD for all PIT 
payers.  Exemptions for dependents are capped at 3000 JD. 
This includes an additional 1000 JD allotted for a spouse and 
500 JD per child.  As a result, the full standard deduction 
of up to 8000 JD, applicable to all PIT payers, will be 
applied evenly and prevent tax revenue leakage from high 
exemption claimants.  The only exemptions outside of standard 
deductions are income contributions made to the Social 
Security Corporation, company-sponsored retirement fund, 
nonrefundable life insurance, and health care insurance 
premiums. 
 
Tax Rates for Individuals 
------------------------- 
 
¶6.  (U) Under the amended law, two tax brackets are targeted 
at two different income levels: lower/middle and high.  The 
first 6000 JD earned by a household, after all exemptions, is 
taxed at ten percent.  Further income is taxed at twenty 
percent, with a provision to lower it to fifteen percent 
(falling by one percent each year until 2011), down from the 
current twenty-five percent.  Lowering the tax brackets from 
four to two simplifies the tax code and, combined with the 
higher standard deduction (which excludes most low-income 
earners from having to pay taxes), shifts the tax burden to 
those with a higher ability to pay. 
 
Tax Rates for Businesses 
------------------------ 
 
¶7.  (U) Under the amended law, two tax brackets are 
delineated: thirty-five percent for banks and financial 
institutions, and fifteen percent for all other companies. 
The only change from previous policy is for companies 
involved in providing services whose tax burden falls from 
twenty-five to fifteen percent by 2015 (dropping one percent 
each year).  According to the USAID contracted advisor, the 
push to bring the tax rate for service-based businesses in 
line with industrial-based businesses is "a small step 
forward," but the ten-year timeline to do so "is 
disappointing."  The exceptionally high tax rate for 
banking/financial companies contradicts the USAID advisor,s 
recommendation that all companies be treated equally, 
regardless of which business sector they are in.  While 
bringing parity to the tax rate for the banking and finance 
sector was considered, the previous Minister of Finance noted 
that there was "too much opposition by National Agenda 
Committee members." 
 
Changes in General Services Tax (GST) Not Yet Finalized 
--------------------------------------------- ---------- 
 
¶8.  (U) On the sales tax side, changes in the law are less 
pronounced, though promised changes in regulation should have 
an impact when approved.  The USAID advisor recommended 
moving all products to the sixteen percent single general 
sales tax (GST) rate and broadening the tax base, i.e., 
lowering the sales threshold for business entities required 
to pay and collect GST from customers.  The tax amendment 
broadens the tax base by requiring retail, wholesale, and 
manufacturing businesses that conduct sales amount volume of 
50,000 JD or more to pay and collect GST.  The previous 
threshold for these companies was between 60,000 and 100,000 
JD depending on business sector.  The law leaves special 
manufacturing and service-oriented businesses that conduct 
less than 10,000 and 30,000 JD in sales volume, respectively, 
exempt from GST. 
 
¶9.  (U) When asked why the government did not consolidate the 
five categories of goods that have a zero-rate GST, the 
twenty-seven categories that are exempt from tax, and the 
ninety-two groupings that receive a preferential four percent 
reduced rate, under the single, actual sixteen percent GST, 
ISTD Director Qudah replied that these changes "are 
regulatory and do not require changes in the law."  Changes 
to move these products to the sixteen percent GST rate were 
drafted with the new law, but could not be submitted in time 
for the previous cabinet to approve.  Qudah conveyed his 
plans to have the new cabinet approve the regulatory changes 
when the budget is discussed in early 2006.  COMMENT:  Until 
that change is made, tax administration and compliance in 
this area will remain a challenge to administer.  END 
COMMENT. 
 
¶10. (U) NOTE:  While Jordan,s Parliament has previously 
legislated the GST tax rate of 16 percent, it does not 
legislate which products receive a preferential tax rate. 
Removing the tax subsidies that so many products receive is a 
regulatory decision for the cabinet to make, not a 
legislative one for Parliament.  END NOTE. 
 
Treading Cautiously 
------------------- 
 
¶11. (SBU) Concern in the press over the change in the tax law 
is growing.  Criticisms of the revisions include accusations 
that the end result will be a heavier tax burden on the poor, 
and that bypassing Parliament means the government has 
instituted "taxation without representation."  NOTE:  Even 
though the Chamber of Deputies has voted to repeal the 
temporary law, and some members contest its 
constitutionality, it remains in effect unless the Senate 
joins the lower house in voting it down.  If the Senate votes 
in support of the temporary law, the issue returns to the 
Chamber of Deputies for action.  At that point, if the lower 
house again votes down the law, the two houses combine to 
vote and a simple majority of the joint session decides the 
issue.  In the interim, the temporary law stands.  END NOTE. 
 
¶12.  (SBU) In a December 15 meeting new Finance Minister Ziad 
Fariz held with his team, a communication plan was proposed 
to educate Parliament and the public on the positive impact 
of the new tax law.  When Fariz requested ISTD Director Iyad 
Al-Qudah's feedback on this plan in the meeting, Qudah 
expressed concern over a lack of a budget for communications, 
e.g., newspaper ads, TV campaign, etc., and over the 
possibility the Senate would overturn the amended tax law. 
While Fariz shared Qudah's concern about the law,s standing, 
he expressed confidence that the Senate would not reject the 
law, and asked the group move forward on a communications 
plan. 
 
¶13.  (SBU) In a follow-up December 18 meeting with Qudah, 
EconOff asked Qudah about any other variables that might 
derail the new tax law.  Qudah expressed concern about 
Minister of Industry and Trade Sharif Zubi's submission of a 
draft investment law that would allow tax exemptions for 
certain business sectors such as industrial zones and the 
garment sector under the new tax law.  Asked if he planned to 
take any action, Qudah was quick to clarify that his 
responsibilities at the ISTD were limited to income and sales 
tax law design, and that he did not have control over laws 
that other ministers submitted.  Subsequently, Finance 
Minister Fariz said he opposed the draft investment law that 
gave some private-sector companies favorable tax relief, and 
requested that Qudah and ISTD draft his arguments against it. 
 
¶14.  (SBU) To date, neither the ISTD nor Ministry of Finance 
leadership has yet to respond to near unanimous opposition in 
newspaper op-ed pieces that call for the rejection of the tax 
law changes.  COMMENT:  ISTD Director Qudah's actions 
demonstrate both his appreciation for his chain of command, 
and his cautious approach in taking political risk to defend 
tax reform.  The Finance Minister's strong support for the 
tax law amendment is important for moving ahead the tax 
reform agenda, but without a public endorsement of the 
amendment, he increases the risk of the Senate not passing 
the changes. 
 
¶15.  (SBU) COMMENT CONT.'D:  While changes in PIT and GST 
demonstrate a commitment to reform, more follow-through is 
needed.  Qudah, having made what he considers major changes 
to the tax code and sales tax regulation, prefers no further 
changes in the short-term.  His current challenge now is to 
educate the public on the income tax changes and help 
shepherd the promised regulatory changes in sales tax through 
Parliament. 
Hale