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Maliyat Journal, No. 15, Spring 1997

English section







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














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-Ukrainian agreement - are chosen as the bases of our discussion. Now the study will be continued by commenting on Article 5 of the agreement.


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.



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 Contracting State wholly or partly carries on the business in the other Contracting State."


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 Contracting State by an enterprise of the other Contracting State for carrying on the business of the enterprise, is a clear example of permanent establishment. The warehouse on the other hand, can hardly be regarded as a permanent establishment as such. A warehouse usually is not used as a "sales outlet". The main use of it is to store merchandise, commodities and similar objects. A structure used solely for such purposes, mistreated as an exception to the definition laid down in paragraph 1, by the agreement itself. Sub-paragraph "a" of paragraph 4 of Article 5 states that the facilities used solely for the purpose of storage or display of goods or merchandise, shall be deemed not to constitute a permanent establishment. So, we have to leave aside the idea of considering a warehouse as permanent establishment, if it is used solely for storage of merchandise and other objects. But if the warehouses used as a "sales outlet", this would be an exceptional case, which perhaps could be named by a different and more accurate word.


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.



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 Contracting State. Nevertheless, the paragraph 4 treats them as an exception to the general definition, and rules that such cases shall not be regarded as permanent establishments. The most eminent characteristic of these activities is that all of them are of preparatory or auxiliary nature. The items of such activities are as follows:

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 Contracting State.   ***        The maintenance of a place for the purpose of purchasing goods, or of collecting information for the main enterprise.

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 Contracting State.

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.











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 English sections. One of the circular letters is emphasized upon, in particular. It prohibits the officials from appealing against the verdicts of BSTDs (Boards for Settlement of Tax Disputes) if they find that there are no strong and justifiable grounds for protesting against those verdicts.


Economic and Taxation Issues in the Province of Fars


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 province of Fars. The interview contains a brief presentation of economic perspective of the Province, and then it reviews the taxation issues in detail. The first part of the interview is provided in this issue, and the second (and last) part will be printed in the coming issue.


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 Iran


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 Iran;

- 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.




The texts of latest laws, regulations, decrees, and opinions of the Supreme Council of Taxation are reported in the Persian section of the Journal.




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