Jacob Rabie, an Ernst & Young partner, discusses why a sound and fair tax policy is needed to boost investment in Jordan and Iraq.
Jacob Rabie joined EY Jordan in 2010, bringing a complementary skill set to the Jordan/Iraq tax practice. He first joined the global accounting firm as an executive manager, becoming a partner four years later. Rabie joined a mature and well-staffed Jordan tax practice which helps Jordanian and international clients with their Jordanian taxation affairs, while also focusing his efforts on supporting the company’s work in Iraq, where the tax market was still nascent.
With his background in tax and law coming from the United States, his attention was directed at working with the multi-nationals investing in the war-battered country. Here, Rabie weighs in on the tax environments in both Jordan and Iraq and how they need to evolve to strike a balance and create a climate that’s more conducive for investment.
Who are your clients in Iraq and Jordan?
In Iraq we have a variety of clients across several sectors, but most of my clients are working in the oil and gas sector, as well as infrastructure and defense contractors. In Jordan, it is a lot more diverse across all sectors. The profile of the clients derives greatly from each locale’s economic drivers.
Investors in Jordan have long complained of the constantly changing laws around taxation. Do you think the Kingdom’s tax law is pushing them away or is it how it is implemented?
What applies to the laws of the Kingdom in general, naturally applies to the tax laws as well. It is a stretch to say that the tax laws or the way they are implemented are pushing investment away. Parliament approves proposed legislation as part of the lawmaking process, and the government is entrusted with the execution strategy, which applies to the tax law as well. Investors look at this, amongst other variables, when making their investment decisions.
What are the main problems that your clients face when it comes to the tax law in Iraq?
The current tax law in Iraq came into effect in 1982 and has since been amended only slightly. Iraq’s economy, and the global economy at large, is very different today from it was in 1982. Therefore the taxpayers in Iraq find themselves operating within modern business realities that raise tax issues which were never contemplated when Iraq’s tax law came into effect. So taxpayers are hoping that Iraq’s tax law is revisited so that it is updated and brought in line with international tax standards and best practices.
How does EY help these clients navigate these tricky environments and reduce risk?
The fact that EY has long-time tax practitioners in Jordan and Iraq, with diverse professional backgrounds including former public servants, means that you have knowledgeable people, not just in terms of knowing the law, but also in terms of its application. Our tax professionals know how to get practical solutions for our clients to resolve their tax issues within the parameters of the law. That is our strength. You can have anybody come in and talk in theory about what the law says and how it should be applied, but the difference that you make to your clients is having people who know how to get results, lawfully.
How can tax systems be improved?
Generally income taxes are labeled as progressive taxes particularly when you have fair graduated rates. The sales taxes are typically referred to as regressive because they are levied without any differentiation to the economic status of the taxpayer. The tax regime in Jordan relies heavily on the value added tax, which is called the General Sales Tax. It is a regressive tax because it is hitting people’s pockets in the same way irrespective of their means. In Iraq, for instance, their system in general is a bit fairer because it relies heavily on the income tax, and there is a minimal sales tax. They are just starting to introduce more sales taxes. A fairer way to tax people requires a delicate balance of the direct and indirect taxes, with a proper graduation of rates within the income tax brackets. Interestingly, look at what’s happening in the Gulf. It’s an anomaly. They introduced a sales tax before introducing income taxes of general applicability, which is very strange. It’s a lot easier to get tax collections from a value added tax or sales tax system, whereas the income tax is more difficult to collect particularly when a large segment of the taxpayers is made up of small business owners or nonemployees.
How can tax governments clamp down on tax evasion?
There are improvements that can be made to make it more detrimental to evade. This includes stronger tax enforcement mechanisms, more efficient tax administration, and more transparency in how the tax function is running. And on the flip side of that, the public is going to ask what have you done for me lately with my tax money? So you are talking about a subject that’s much bigger than just tax evasion. It is balancing the taxes collected with the services being offered by the government.
Which do you think is a successful tax law model in the region?
Our region is probably not a good place to pick an example from. Without picking a market, the model that you need to adopt needs to have some balance. What is tax? It’s all about public policy. If you set your public policy properly, that means the tax laws will be driven by that policy and then everyone is happy to a certain extent. You need to have a balance between progressive direct taxes and indirect taxes and within the direct taxes you need to make sure that you have proper graduated rates if the constitution allows, some places don’t allow that but Jordan does. You want to make sure that you’re striking a balance between what the law says and the application of the law, and transparency is important for the taxpayers to feel that they are getting something back for their tax money.
Does the government ever consult with companies like EY before issuing a tax law?
Yes they do. They ask for feedback from several stakeholders and they do receive public comments.
Jordan is expected to pass its new Income Tax Law soon. Do you think certain segments like medical practitioners and engineers should be obliged to pay the income tax?
The doctors and engineers have always been within the tax net; it is not about the tax law itself, but about the tax administration and enforcement. And it’s not only about doctors or engineers but about everyone who is not fully compliant with the laws.
How do you see progress in taxation in both Jordan and Iraq in the future?
The Royal Hashemite Court is definitely interested in making improvements to the tax landscape. The Parliament has said the same, and so have successive governments so there is a push to improve, especially with how the entire region is shifting towards a reality whereby taxation is necessary even for formerly low tax or tax free jurisdictions. Also, countries in our region are getting themselves more inline with international tax concepts. For example, the EU has published a list of uncooperative tax jurisdictions, including several Middle Eastern countries, whereby the latter have promised improvements in their tax regimens and their tax climates by certain dates so they are no longer listed by the EU as non-conforming countries, which carries with it negative ramifications in future dealings with the EU. I believe this is an area that will definitely improve because there’s too much attention on it and it is necessary now.
As for Iraq, I think it will be a longer journey. The tax authority there has been working on improving things, so improvements are happening but at a very slow pace. The country has been struggling with getting past the ill effects of several years of instability, especially the most recent war effort to defeat ISIS, which was coupled with the drop in oil prices, so Iraq has a long list of priorities that has put tax reform on the back burner.