New Draft Tax Law Compels Companies to Stay Small and Divide their Projects

New Draft Tax Law Compels Companies to Stay Small and Divide their Projects

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The draft Tax Law, issued recently, has opened the doors wide to examining whether the ratios set are attracting or detracting to investments in Jordan.

At a time when countries strive to motivate their economies by reducing taxes to relieve burdens for companies, the Jordanian government issued a draft income tax law with rates for a number of basic sectors reaching 40%, starting at 25%.

Since most entrepreneurial nascent companies in Jordan work in the field of communications and information technology, they will fall within the following category according to the new draft tax law:

  • 25% per Dinar for the first 250,000 Dinars.
  • 30% per Dinar after that, until one million Dinars
  • 40% per Dinar for every Dinar above that.

 

Let alone what the sector carries in terms of tax burdens internationally, paying 10% of all revenues earned by companies, 16% for communications services amounting to 16%, and a sales tax on communications services amounting to 12%, an income tax on annual profits from companies at 24%, a sales tax of 8% on cellular phones, let alone an increase of electric power fees exceeding 100%, with the difference in cost in 2012 reaching about JD25 million.

According to experts, these ratios do not represent any element of attraction for investment in the Kingdom, particularly that Jordan is not a secluded island insulated from the rest of the world, but exists in an area witnessing competition over attracting investments, especially those related to the services sector which includes communications and information technology, foremost of which is Dubai, where leaders in the sector recently expressed concern over current investments running away to neighboring countries, which is not limited to foreign investors transferring their business to other countries, but from our own investors moving to other countries.

The director of the Communications and Information Technology Companies Association (INTAJ), Jawad Abbasi believes that in case income taxes are raised in the communications sector by a rate of 40%, the repercussions will be negative for the sector.

He added that there should be better thinking regarding the Jordanian investment environment, since a rate like this, which will be imposed, will represent an element of detraction for them, rather than one of attraction, especially that the sector pays a 24% income tax, 10% as fees for revenue-sharing, and 21% to the Communications Commission.  In other words, the actual tax paid by this sector in this respect is 55%.

He expressed surprise at treating the communications sector on equal footing as the mining sector, pointing out that the communications sector has value added to the national economy, and does not consume human resources like the mining sector.

Abbasi believes that it is likely for the results to be negative on the sector in case such a tax was imposed, since companies did not even absorb the increase in electric power prices against them, which burdened them with an additional JD25 million.

Experts believe that the draft new law will push companies into options, the best of which is bitter.  They can either divide company business activities into small companies so they would not reach the 40% rate classification, and remain within the 25% classification, or transfer their business to neighboring countries, especially that tax rates in neighboring countries range between 10 and 20%, or for companies operating in the Kingdom to resort to transferring their profits out of the country, especially that a large number of these companies have regional offices outside Jordan, and some of them are connected to foreign companies, like the largest communications companies in the Kingdom.

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