In an interview with Al Rai Daily,

ABJ Chairman: Raising taxes on banks would raise interest rates on borrowers

Qadhi: High taxes crush investments, deter foreign, Arab and local capital

 

Interviewed by: Issam Qadamani

ABJ Chairman Hani Qadhi said the 35% income tax rate imposed on banks in the current law is very high, indeed one of the highest worldwide.

Qadhi, who is also the chairman of Arab Jordanian Investment Bank (AJIB) board of directors, said this tax rate does not ensure justice and equality between banks and other economic sectors. Raising the tax rate once again will burden banks with huge negative repercussions that would certainly overspill to individual and corporate borrowers, and the national economy as a whole.

“Raising tax rates on banks means further pressures on banks to raise the interest rates on borrowers, which would be reflected negatively on customers, whether individuals or companies,” he added to Al Rai.

He warned against subjecting distributed profits and capital profits on public shareholding companies to tax as this is double taxation, because taxes on those distributed profits are already paid. This would impede investment in Jordanian banks’ shares, force local capital to immigrate, and foreign shareholders to transfer their investments to other countries, thus affecting the years -long regressing performance of the Amman Stock Exchange.

Raising the income tax deduction on deposit rates from 5% to 10% would certainly affect banks’ ability to attract deposits, negatively harming banks’ competitiveness in the region, thus forcing deposits out of Jordan, he said. The trends of interest rates indicate a continued rise of minimum125% in the next two years, meaning that tax income arising of interest would be automatically increased without having to raise the interest rates imposed on them, he added.

He added that the Jordanian banking sector based its remarks on the amended income tax law on three main points, namely, keeping the interest rate on banks’ income as is in the law in force currently, which is 35%; distributed profits and capital profits of public shareholding companies should not be subject to taxation; keeping the deduction rate of the income tax on deposit profits, commission and deposit rates generated from investment in banks and financial institutions that do not pay interest as is in the valid law (5%), and not raising it to 10% as proposed in the draft law.

Promoting investments requires a stable and encouraging legislative environment, as well as a dynamic, efficient and competent business environment, especially in the terms and time required to get permits, the contract enforcement issue and taxes, which became one of the main impediments of investments.

Al Qadhi pointed to increased uncertainty and ambiguity as regards the course and prospects of national economy caused by the draft amendments on tax law. The confusion and feared economic instability affected the plans and programs of many businesses in the kingdom, and the investment plans of foreign investors who began to reconsider their investment decisions in light of the new facts.

ABJ chairman urged the government to escalate efforts to stimulate economic growth, which leads to increased economic activity that helps achieving full employment, increases economic competitiveness and attraction for investments, and increases the total demand in the kingdom. This would mean lower unemployment rates, greater profits to businesses, and higher tax revenues to the budget.

The government, he added, should take serious measures to rationalize and even stop the continued increase in public expenditures. It is not reasonable, he went on to say, that expenditures continue to grow in an accelerating way while public revenues grow at modest rates. Public finances indicators in the first eight months of 2018 show that public expenditures grew by 40% compared with the same period of the year before, despite the decline in capital expenditure by 165%, which increased the after-grants budget deficit by 206%. This increase in expenditures comes at a time when the government announces that it has adopted a package of measures to rationalize expenditures, he pointed out.

The following is the full text of the interview:

What is the ABJ’s position as regards the Draft Tax Law?

The ABJ’s meeting with the Economy and Investment Committee at the House of Representatives is part of a series of meetings that the parliamentary committee is organizing with representatives of the economic sectors in Jordan to discuss their remarks on the draft amended income tax law.

The ABJ briefed the committee of the most important remarks that concern banks in the draft amendments, and the negative effect they have on banks, individuals and the national economy in general. We stressed that the income tax rate imposed on banks, the 35%, is among the highest rates worldwide. It does not entail justice or equality with other economic sectors. Raising income tax rates on banks means huge negative repercussions on banks as well as on borrowers as individuals and as companies, and the national economy as a whole, as it would mean extra pressures to raise interest rates on borrowers, negatively affecting individual and corporate customers.

We pointed out to the committee that subjecting the distributed profits and the capital profits of public shareholding companies to taxes is double taxation, as taxes on those distributed profits are already paid. This would impede investment in Jordanian banks’ shares, force local capital to immigrate, and foreign shareholders to transfer their investments to other countries, thus affecting the years-long regressing performance of the Amman Stock Exchange. We also argued that raising the income tax deduction on deposit rates from 5% to 10% would certainly affect banks’ ability to attract deposits, negatively harming banks’ competitiveness in the region, thus forcing deposits out of Jordan. It is noteworthy that trends of interest rates indicate a continued rise of minimum125% in the next two years, meaning that tax income arising of interest would be automatically increased without having to raise the interest rates imposed on them.

The most important remarks and demands of the Jordanian banking sector on the amended income tax law revolved around three main points, namely, keeping the interest rate on banks’ income as is in the law in force currently, which is 35%; distributed profits and capital profits of public shareholding companies should not be subject to taxation; keeping the deduction rate of the income tax on deposit profits, commission and deposit rates generated from investment in banks and financial institutions that do not pay interest as is the case in the valid law (5%), and not raising it to 10% as proposed in the draft law.

We believe that the Economy and Investment Committee made significant changes on the draft income tax law, yet, there is a number of remarks that were not taken into consideration, especially in what concerns taxation of the profits generated from stock trading, and creating new taxes on entities under the name of national contribution account.

As regards the final structure of the law, we support the items that handle issues of tax evasion and disagree with the approach of raising tax rates on banks and the industrial sector, reducing exemptions on individuals and imposing taxes on stock trading profits as these issues have negative repercussions on macro economy and the stock market and increase burdens on individuals. For example, we all noticed the visible decline in Amman Stock Exchange once the income tax law was adopted; the capital market value of ASE declined by almost one billion dinars.

 

How can we stimulate investments and exit the economic bottleneck in Jordan?

Stimulating and attracting investments require a stable and investment friendly legislative environment, in addition to a dynamic, efficient and competent business environment. We still have many issues to work on to reach the state of investment friendly environment, especially in what concerns the terms and time it needs to get permits, the issue of contract enforcement and many economic laws and legislations, especially the tax legislations that have become one of the most important obstacles facing investments. Let’s take an example, since May of this year, the draft amendments of the tax law raised levels of uncertainty and ambiguity as regards the course and prospects of the national economy. They spread an atmosphere of confusion and economic instability, affecting the plans and programs of many businesses in Jordan, and the investment plans of foreign investors who came to reconsider their investment decisions in Jordan in light of the new facts.

As regards the macro economic situation in the kingdom, we believe the best way to solve our economic problems is stimulating economic growth, which leads to increased economic activity, helps full employment, increases economic competitiveness and attracts investments, and increases the total demand in the kingdom, which means in turn lower unemployment rates, more profits to businesses and higher tax revenues to the treasury.

The government should follow economic and monetary policies capable of backing the growth momentum in the kingdom, especially in what concerns focusing on private sector development, to back its role in leading economic growth, in addition to strengthening the status of the middle class in Jordanian economy as it is the biggest engine for total demand.

The government should take serious measures to rationalize and even stop the continued growth in public expenditure. This is urgently needed. It is not reasonable that expenditures should continue to grow at accelerating rates while public revenues grow at modest rates. Public finances indicators in the first eight months of 2018 show that public expenditures grew by 40% compared with the same period of the year before, despite the decline of capital expenditures by 165%, thus increasing the after grants budget deficit by 206%. This rise in expenditures come at a time in which the government announces it has adopted a package of measures to rationalize expenditures.

Solutions proposed as a way to increase budget revenues should not affect economic activity or economic sectors. Raising the efficiency of tax collection and combating tax evasion in income and sales taxes, officially estimated as JD650 million annually, might have crucial results in beefing up public revenues and reducing budget deficit without harming economic growth.

 

Some people believe banks should play a greater role in backing national economy

Banks play the role of financial intermediaries in Jordanian economy. It is the point where savers and investors meet through amassing savings and directing them to finance different economic sectors and productive projects. They offer different bank services to all sectors. They work to ensure the efficient and competent distribution of economic resources, and provide the main channels for monetary policy in a way that helps to increase the efficiency and competence of macroeconomic policies, in addition to the fact that the financial strength and soundness which the Jordanian banking sector enjoys is one of the main pillars of monetary, financial and economic stability in Jordan.

Jordanian banking system is the backbone of the national economy, and the main backer of economic development in Jordan. There is no development without financing; banks operating in Jordan (42 banks with a branch network of more than 820 branches in the kingdom and 1710 ATMs) provide different services, products and banking solutions to all customer categories of big companies, SMEs, individuals and public and government institutions. Banks account for more than 95% of financing sources of Jordanian economy. They are the Jordanian government’s biggest financier through their huge portfolio of government bonds. At the sectorial level, banks play  a critical role in providing the necessary financing to all economic sectors in the kingdom (agriculture, industry, trade and services), and financing huge projects through syndicated loans, in addition to financing different needs of the domestic sector. These services stimulate total demand, increase demands of the domestic sector on the services and products of other economic sectors, and allow individuals to possess their houses, cars and financing their different private needs.

Jordan’s is a bank-based economy, especially in light of the relatively big size of the banking sector compared with the size of the Jordanian economy as a whole. Banks’ assets constitute 173% of total Jordanian GDP, while deposits in banks constitute 117%, and credit facilities granted by banks constitute 87%, of GDP as at the end of 2017.

Total assets of banks operating in Jordan registered huge and continuous growth in the last 40 years, reaching JD 502 billion by the end of Sep. 2018, while the total deposits rose to JD 338 billion. Credit facilities granted by banks in Jordan rose to JD259 billion by the end of Sep. 2018. All of those indicators show the huge role played by banks in serving national economy.

Corporate social responsibility acts to serve the local community, are they sufficient?

Yes, we are content with what we give. Jordanian banking sector was in the forefront in shouldering its social responsibilities, either through collective or individual initiatives. This made banks in Jordan #1 in community contributions compared with other sectors. Banks’ contributions in different fields of social responsibility accounted for 33% of their net profits in 2017, which clearly reflects their interest in backing and strengthening the acts of social responsibility.

When comparing banks’ interest in, initiatives and contributions to, social responsibility acts in comparison with those of other economic sectors in the kingdom in light of the social impact of those contributions, we notice that banks’ social responsibility acts are a unique case of social integration and good citizenship. This is evident in banks’ focus on individual initiatives that have continuous and big effects that each bank implements on its own. Those initiatives cover a great spectrum of fields such as health, education, environment, culture, social and human development, and many others. All banks took part in important collective initiatives such as the scholarships of Martyr Muath Kassassbeh, which includes providing 52 scholarships to universities for students who cannot afford tuition; backing and financing Al Hussein Fund for Excellence, Al-Aman Fund For The Future of Orphans, The Jordanian Hashemite Fund For Human Development; and, financing the curricula of financial culture that are taught in all schools in Jordan.

Banks transformed its concept of social responsibility to a broader and more comprehensive concept, which is that of sustainability. Sustainability has four dimensions: financial sustainability for financial institutions and their customers of companies whom stability enables to continue their contribution to long-term development; economic sustainability of enterprises and companies that financial institutions finance through supporting local economy; environmental sustainability by preserving natural resources; and, social sustainability by improving living standards, fighting poverty, taking care of social welfare and respecting the basic human rights. In this respect, more than two thirds of banks working in Jordan have sustainability strategies. Many banks issue sustainability reports based on the framework of the Global Reporting Initiative. We predict great improvement in sustainability practices in banks in the next few years, and a noticeable growth in the number of banks that issue sustainability reports.

Do you see that mergers are necessary to create a balanced banking environment and a financial environment capable of facing difficulties?

The issue of bank mergers or bank acquisition of another bank is a decision for the relevant banks to take, when the merger decision is in their interest. Examples on this are the AJIB acquisition of HSBC bank in Jordan, and Societe Generale Bank’s acquisition of the National Bank of Abu Dhabi. Acquisitions and mergers are done according to legislations that govern this process, which is far from the scope of the ABJ work and mandate. The second section of the 11^th chapter of Jordanian Companies Law # 22 of 1997 and its amendments handles the issue of companies merger in Jordan in terms of procedures and bases. Banks Law of the year 2000 has a special section for banks mergers that consists of eight articles (from article 76 to 83, banks’ merger).

Is the ABJ entitled to force banks to take certain decisions?

Although membership in the association is mandatory for all Jordanian banks and branches of non-Jordanian banks operating in Jordan, according to the provisions of the Banks Law and the ABJ bylaws, yet the ABJ is not a supervisory or regulatory authority for banks. It rather plays a coordinating role that aims to foster and serve the interests of member banks, and to serve their common interests according to valid laws, instructions and regulations, in addition to coordinating between banks and regulatory and supervisory agencies, and representing banks and advocating the interests of the banking sector for their voice to be heard by relevant parties.
the ABJ is run by a board of directors consisting of nine members elected by the general assembly. The board is diversified as it represents all banks operating in Jordan whether commercial or Islamic, Jordanian or foreign.