Maliyat
Journal, No. 15, Spring 1997
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
In recent months, the
tax administration has issued some circular letters, under which the officials
are required to pay due attention to strict observance of the law. They are
also called for basing their judgment on affirmative proof and evidence, and
also on facts and realities of each case. As we mentioned in previous issues of
this journal, the best way for raising the level of tax compliance, is to ascertain
that the duties of tax administration are fulfilled according to the exact
provisions of law. The arbitrary actions and discretionary decisions should be
abandoned as far as possible. It is a must also, that the taxpayers would feel
that the tax demanded from them, is determined on basis of convincing evidence
and documents. This in its turn constitutes another manifestation of the ruling
of law, as well as the most eminent sign of justice.
The circular letters
referred to above, are issued for these purposes, and in direction of ensuring the
logicality of the tax decisions. The subject of our discussion is a particular
circular, which deals with the theme of the verdicts issued by first instance
BSTDs (the Boards of Settlement of Tax Disputes).BSTDs are the most important
bodies, vested with the power of settling tax disputes, and all claims of this
type are to be reviewed first by them. The opinion rendered by the BSTD, can be
objected by the interested parties, namely the taxpayers and tax officials. The
objection will be considered by an appellate BSTD, the rule of which is final
and enforceable. The right of tax official for appellation is conditioned on
the prerequisite that the tax assessment made by them, to be adjusted by the BSTD
more than 20%. In such cases, the officials seldom choose to refrain from
protesting. Thus, the course of dispute is inevitably prolonged, even if the
first instance BSTD's verdict is wholly correct and justifiable. The reason
behind such behavior is the concern of tax officials about their prestige. They
are worried that in case of leaving the issue, they might be regarded unserious
about the revenue of the government. This course of action has been practiced
for decades, and it has become well routed habit, or even tradition, among tax
officials.
The circular under
discussion aims at terminating this state of affairs. The officials are warned
against raising useless complaints, when they feel that there are no convincing
evidence and facts against the awards of the first instance BSTDs. They are
ordered to refrain from protesting, except where there are sufficient grounds
in favor of tax assessment made by them. According to the circular, those
breaching this order shall be subject to disciplinary sanctions.
The circular emphasizes
also on significance of the work of first instance BSTDs. They are -according
to the circular - under obligation to do their best to realize perfect
proceedings, so that all relevant facts and evidence, and any kind of necessary
investigation are fulfilled before delivering their judgment. The tax assessors
are also directed to defend their case in this stage, thoroughly and perfectly.
By doing so, the need for raising objection before the higher
organs will be considerably limited.
The substance of this
comparatively detailed and long circular letter is the emphasis on legality and
reasonableness. Both these factors are determining elements for healthy
performance of the tax administration, as well as for ascertaining high degree
of compliance among the taxpayers.
Dr. Aliakbar
Arabmazar
TREATY DEVELOPMENTS
A COMMENT
ON RECENT TAX TREATIES
CONCLUDED
WITH A DOZEN OF FOREIGN COUNTRIES
PART THREE
By:
Dr. Mohammad Tavakkol
In previous issues of this journal, we commented on Articles 1 through 4
of the Iranian tax treaties concluded recently with several foreign countries.
The treaties under review are drawn on the basis of a pattern agreement, which
in its turn is based on the OECD Model Double Taxation Convention on Income and
Capital. Thus the OECD model Convention, the said pattern agreement, and one of
the signed treaties - namely the Iran-
Permanent Establishment (Article 5)
Non of the parties to the double taxation
agreements are allowed to impose their taxes on enterprises of the other
contracting party, except when those enterprises have permanent establishments
in the first country, through which they carry on their businesses. That is why
the term "permanent establishment" is defined under the agreements.
Definition
Paragraph 1, Article 5 of the Iranian tax treaties,
like the OECD Model, presents a definition for the term permanent
establishment. The substance of the definition is the same in both, the Iranian
and the OECD Conventions. The only difference between two texts is that the
OECD Model gives a more general definition of the term, while the Iranian text
is more specific. In other words, the Model defines the term as such, while the
Iranian text specifies it as a part or ingredient of the agreement itself. The
text in question is as follows:
"For
the purpose of this agreement, the term 'permanent establishment' means a fixed
place of business through which an enterprise of a
As it can be seen, the characteristics of a
permanent establishment given in the above text, are the same as presented by
the relevant section of the OECD Model: the existence of a place of business,
its fixity, and the carrying on of the enterprise's business through the same
place.
Examples of Permanent Establishment
A list of examples of permanent establishment is
given under the second paragraph of the Article6. This list is obviously not
exhaustive, but it contains some prima facie instances of the permanent
establishment. No doubt, that those cases should also meet the other
requirements referred to in paragraph 1. The paragraph 2 provides:
"The
term 'permanent establishment' includes especially:
a) a
place of management;
b) a
branch;
c) an
office;
d) a
factory;
e) a
workshop;
f) a
mine, an oil or gas well, a quarry, or any other place of exploration,
exploitation or extraction of natural resources;
g) a
warehouse or other structure used as a sales outlet."
Examples enumerated above, are similar to those
mentioned in the paragraph 2, Article 5 of the OECD Model, except for two
cases:
A. Subparagraph 2 of the Model refers to "a mine, an oil or gas well, a quarry or any
other place of extraction of natural resources", while the Iranian
text speaks of "any other place of exploration,
exploitation or extraction of natural resources". Two points are worth
mentioning in this respect:
1. The OECD Model dose not refer to the exploration
of natural resources, therefore the question whether the activity of
exploration is carried on through a permanent establishment, is to be resolved
by seeing if the requirements of paragraph 1 are met or not. But the parties to
the Iranian treaties chose to consider the places of exploitation of natural
resources as permanent establishment, anyway.
2. As far as the term "exploitation" is concerned, a point might be raised: whether
the "extraction" is something
different from "exploitation"?
The writer of this article can hardly find a substantial difference in this
respect, so that to justify the mentioning of these subjects as two distinctive
categories of activity.
B. The second difference between the Iranian and
OECD conventions is the addition of the extra subparagraph "g" to the
text of the paragraph 2 by the Iranians: "a warehouse or other structure used as a sales outlet". The
"structure used as a sales outlet"
can be logically considered as a permanent establishment. Shops and stores
established in a
Building Site, etc.
According to paragraph 3, Article 5 of the OECD
Model:
"A
building site or construction or installation project constitutes a permanent
establishment only if it lasts more than twelve months."
The same rule is provided under the Iranian
treaties, except that two other kinds of activities are added to the categories
mentioned under the OECD Model. Those are the "assembly project" and "supervisory activities" in connection with those projects.
The supervisory activities can be regarded as
permanent establishment, only if they are carried out by enterprises other than
those responsible for the main projects. They must also be concentrated and
carried on in separate fixed places. If such activities performed by project contractors
themselves, and in the same place as is used by those contractors, then there
would exist only one permanent establishment. The expression "construction,
installation and assembly project" can be construed as covering buildings,
facilities, factories, roads, pipe-lines, and many other similar structures.
Exceptions
A number of business activities are listed under
the paragraph 4 of Article 6, that by themselves meet the requirements of
Article 1 and therefore, they can be regarded as examples of permanent
establishment. The activities are performed through fixed places of business,
and they are carried on for the enterprises of the other
a and b ) Facilities used
solely for the purpose of storage, display or delivery of merchandise; and the
stock of merchandise maintained for the same purposes. The word "delivery" is deleted in the Iranian
treaties. The reason is not clear; perhaps they thought the term delivery could
cover also the case of handing over something for sale.
c) Sub-paragraph
"c" pertains to a case where a stock of goods or merchandise is
maintained for processing on behalf of an enterprise of the other
e)
Sub-paragraph "e" of the OECD Model is different from that of
the Iranian treaties. So, we will study them separately. The Model reads:
"The
maintenance of a fixed place of business solely for the purpose of carrying on,
for the enterprise, any other activity of a preparatory or auxiliary
character."
This sub-paragraph renders a new requirement or
condition for the place of business to be recognized as permanent
establishment. The purpose of such
places must be identical to the general purpose of the main enterprise. An
establishment performing activities of a preparatory or auxiliary character
does not contribute directly to the productivity of the enterprise, and it is not
easy to allocate to it an appropriate percentage of enterprise's profit.
Therefore they can not be subjected to the provisions of permanent
establishments.
Iranian
treaties- The text of the sub-paragraph "e" in the Iranian treaties is
somehow disorderly arranged. It reads:
"The
maintenance of a fixed place of business solely for the purpose of carrying on,
for the purpose of advertising, for the supply of information, for scientific
research, any other activity of a preparatory or auxiliary character"
Some clerical errors, perhaps, have caused the
confusedness of the text. Leaving that aside, the cases mentioned in the text,
namely advertising, supply of information, and scientific research, are few
examples of preparatory ;and auxiliary"
activities. Besides, the term "supply
of information" is another face of "collecting information", which is mentioned in the
sub-paragraph "d", and it is not advisable to repeat it here again in
sub-paragraph "e".
Based on what said above, the text of the
sub-paragraph "e" of the Iranian treaties is advisable to be
substituted with the text used in the OECD Model.
"The
maintenance of a fixed place of business solely for any combination of
activities mentioned in sub-paragraphs a) to e) provided that the overall
activity of the fixed place of business resulting from this combination is of
preparatory or auxiliary character."
As already mentioned, paragraph 4 of the Article 5
provides a new requirement for recognition of a place of business as permanent
establishment. The nature of activities performed in such places must be
identical with that of the main enterprise, and they must not be of purely
preparatory or auxiliary character. Sub-paragraph "f" states that the
performance of a combination of all activities mentioned in sub-paragraphs
"a" to "e" by one and the same fixed place of business,
does not mean of itself that a permanent establishment does exist. This rule of
sub-paragraph "f" is conditioned on one requirement: the combination
of activities so defined should be of preparatory nature and must not lead to
an overall result that could fairly be described as an essential part of the
main enterprise.
Dependent Agents (paragraph 5)
Paragraph 5 contains another exception to the rule
defined in paragraph 1, of the Article 6. The existence of a permanent
establishment is conditioned on availability of a fixed place of business. The
paragraph 5 states that an enterprise shall be deemed as having a permanent
establishment in a country, if there is a person acting for it, even if such a
person may not have a fixed place of business in that country. The conditions
stipulated by the paragraph 5 for recognition of permanent establishment in
this particular case, are as follows:
a) The
persons in question must be dependent agents of the main enterprise. It means
that the activities of such persons in the host country should be performed on
behalf of the enterprises of the other
b) Such persons must have "authority to conclude contracts in the name of the [main]
enterprise". This means that the recognition of status of permanent
establishment in such exceptional cases is to be limited to persons who have
sufficient authority to secure the main enterprise's participation in economic
life of the host country.
c) The authority referred to above, has to be
habitually exercised in the host country. The authority limited to one or few
transactions would not constitute proper basis for recognition of status of
permanent establishment.
Independent Agents
(Paragraph 6)
"An
enterprise of a Contracting State shall not be deemed to have a permanent
establishment in the other Contracting State, merely because it carries on
business in that other state through a broker, general commission agent or any
other agent of an independent status, where such persons are acting in the ordinary
course of their business. However, when the activities of such an agent are
devoted wholly or almost wholly on behalf of that enterprise, he shall not be
considered an agent of an independent status within the meaning of this
paragraph."
For a person - either individual or legal entity -
to be considered as independent agent, some criteria are to be met. The
independence must be in both, the legal and economical spheres. This depend son
the extent of obligations of the agent toward the enterprise. If the activities
of the agent are to be performed according to detailed instructions of the
enterprise, such person could not be defined as independent.
The risk of transactions should also be born by the
agent, and not by the enterprise. Another requirement is that the activities of
the agent are to be performed in the ordinary course of his business, even when
acting on behalf of the main enterprise. This means that the agent's activities
should belong to the sphere of their own business from the economical point of
view.
The second sentence of paragraph 6 is an addition to the Iranian
treaties and it is not contained in the OECD Model. It provides for a special
case, where the activities of the agent are wholly, or almost wholly, devoted
to the main enterprise. In this case, the agent shall not be considered
independent from the enterprise.
The provision of this additional part is nothing except the confirmation
of the rule provided under the first part of the paragraph.
Affiliation of Companies (Paragraph 7)
"The
fact that a company which is resident of a Contracting State controls or is
controlled by ***company which is a resident of the other Contracting State, or which carries on
business in that other State (whether through a permanent establishment or
otherwise), shall not of itself constitute either company a permanent
establishment of the other****."
The logic behind the above rule is the fact that
the affiliated companies are considered separate legal entities, and they are
normally taxed as separate taxpayers. However, the rule is not absolute and
applicable in all cases. An affiliated company may satisfy all conditions
provided for permanent establishments. In this case it can also be recognized
as a permanent establishment.
ABSTRACTS OF PERSIAN
ARTICLES
EDITORIAL
The Ministry of Economy and Finance issued several circular letters,
with the aim of promoting the reasonableness of actions taken by the tax
officials. The Editorial in this issue deals with this new initiation of the
tax administration, both in Persian and
Economic and Taxation
Issues in the
As before, the text of a new interview is reflected in the present issue
of the Maliyat journal. The interviewee this time was Mr. Nasser Kalantari, the
Director General of Economic Affairs and Finance of the
Taxpayer's Rights in
the Iranian Law
It is for the first time that the topic of taxpayer's rights is reviewed
in this country as a subject of legal studies. The right of confidentiality
under the Iranian tax law is analyzed in the present issue. Article 223 of the
Direct Taxation Act orders the tax officials to refrain from disclosing any
information before them, except for the purpose of assessment of the tax
liability of taxpayers. Those invading this duty shall be -according to the
said Article - subject to punishment in accordance with the Islamic Criminal
Law. The issue is reviewed in detail by the author, and he comments on some
legal ambiguities in this respect.
Drafting of Tax Law
This article examines the various technicalities pertaining to the art
of tax law drafting. The style to be used in preparation of the law; its
integration with the legal system of the country, as a whole; taking into
account the reaction of the parliament at the stage of legislation, and the
response of the judiciary at the stage of interpretation; another aspects of this
delicate subject are dealt with by the author.
A brief Report on
Accountancy of the Foreign Exchange Transactions in
The first part of this article is provided in the present issue of the
journal, and the remaining will be presented in the next issue. The subjects
commented on in the first part are as follows:
- Information about the rate of exchange of foreign currencies in
- Accountancy of foreign exchange transactions, and the method of
allocation of the profit accrued
as a result of the pricing of foreign exchange stock;
- Procedure adopted by some countries vis-ـ-vis the transfer pricing in the field of the foreign exchange;
- The position of the profit and loss of the foreign exchange in the
regulations of the Iranian tax law; and
- Some proposals from the author for solution of the difficulties
encountered in this respect.
A Comment on the
Iranian Double Taxation Treaties
The first and second parts of this study were introduced in the previous
issue of the journal. The third, which is presented in the issue at hand, deals
with the subject of permanent establishment. As was mentioned earlier, this
series of articles presents an analysis of the new double taxation agreements
in comparison with the OECD Model Convention and several tax treaties of the
other countries.
The Legislature and
Tax Issues
Several excerpts from the debates of the Parliament are quoted in this
article, with the aim of familiarizing the readership with the opinions and
views of the law-makers about the tax problems and controversies.
REGULATIONS AND
RULINGS
The texts of latest laws, regulations, decrees, and opinions of the
Supreme Council of Taxation are reported in the Persian section of the Journal.
TAX GLOSSARY
Several tax terms and expressions are presented and defined in each
issue of Maliyat journal. Detailed explanations follow the definition of the
terms.
The End