Dr. Hamza Alakaleek

Tax law experts view excessive tax avoidance as exploiting legal loopholes that drain public resources intended for the government’s treasury. Such practices contravene the original intent of the law, which allows taxpayers to utilize legal provisions only for their intended purposes, not as a means to evade their fair share of taxes.

Public finance data reveals a significant decrease in tax collection, amounting to approximately 500 million dinars in the first half of 2024. Logically, rising interest rates should lead to higher profits and consequently, increased tax payments. However, Jordanian banks present a different scenario: years with substantial profit growth often coincide with decreased tax revenues in the same period.

This discrepancy can be partially attributed to banks exploiting loopholes in the income tax law. They do this by taking advantage of exemptions and deductions, as well as by inflating certain income items. For instance, they might conceal income from reinvesting deposits from branches to the central office and inflate the related costs to reduce profits.

Another common practice among Jordanian banks is the deliberate inflation of their operating expenses. According to the head of the Economic Committee in the Jordanian Parliament, Jordanian banks maintain operating costs significantly higher than their counterparts in neighboring countries, often exceeding global averages. This intentional strategy is designed to reduce profits and exploit tax avoidance mechanisms, thereby undermining the very purpose for which these legal provisions were established. The deputy noted that Jordanian banks incur high operating costs compared to their regional peers, and they engage in practices such as deducting executive travel expenses unrelated to business, including expenses for tax-exempt trips, and inflating depreciation on fixed assets.

Furthermore, banks manipulate their budgets to increase branch expenses allocated by the head office, depreciate leased assets, and exploit discrepancies between tax accounting and financial accounting to manage carried-over losses and write off debts without court orders.

Additionally, there is widespread manipulation of interest paid on deposits to reduce income tax by increasing expenses. The average growth rate of interest-bearing deposits in Jordanian banks reached 27.7% at the end of 2023, while the growth rate of interest paid on these deposits was 54.4%, indicating irregularities aimed at reducing income tax.

Regarding facilities and loans, their value reached 33.4 billion dinars by the end of 2023, with a 2.6% increase compared to the previous year. Notably, Jordanian individuals accounted for 24% of borrowers, primarily for consumer loans such as housing and vehicles. Reports suggest that borrowers' monthly payments and interest often constitute 60% of their monthly income, exceeding global averages.

Despite the central bank's directive for banks to accept only audited financial statements to prevent data discrepancies and tax evasion, some institutions continue to rely on unofficial data in their credit decisions.

To address these issues, it is crucial to randomly select a sample of loans granted to small and medium-sized enterprises and verify the consistency between loan terms and the financial data provided by these companies. This will help ensure that credit decisions are based on the same data submitted to tax authorities and not on unofficial information provided to banks. Banks that cannot justify discrepancies between their clients' financial standing on paper and the size of loans granted should be required to comply with the central bank's instructions.

Dr. Hamza Alakaleek is a Corporate Lawyer and Tax Attorney with post-graduate degrees in International Political Economy, International Business Law, and Law and Technology with focus on (IoT, AI, DPA & CSL).