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Maliyat Journal (Iranian Tax Review)

No. 19, Spring 1998

English Section









The experiences derived from the operation of tax systems of many countries have shown that the

success of any tax administration depends, more than anything else, on its ability to induce the

taxpayers to comply voluntarily with their legal duties. Among the motives contributing to the cause of tax compliance, one can particularly refer to the strict adherence to the rule of law. Abiding by the law should be encouraged by the tax administration in all dimensions of its activities. The more the tax authorities abide by the legal requirements, the greater would be the preparedness of taxpayers to observe their obligations in return.

Different causes may give rise to the phenomenon of tax avoidance, but all of them would

undoubtedly become aggravated, when paralleled with disrespect for regulations on behalf of those who are responsible for enforcement of the law.

It could not be denied that the instinct of self-interest might persuade some people to refrain from discharging any kind of social responsibilities, including the payment of tax liability. There are people who can not look at the issues from a long-term prudential point of view. They are captives of their own short-term personal interests, without being able to understand that even their egoistic interests might be lost in a society reluctant to fulfill duties imposed by the necessities of social life.

In spite of existence of the above weakness in any society of the contemporary world, two main points are to be taken into consideration. First, the feeling of self-interest is not the only cause of failure of the tax administration. There are other determinants of equal importance and effects.

Absence of discipline and law-abidingness in the ranks of tax organization might have grave consequences for a tax system.

What we have in mind from the world 'discipline' is an extensive and broad meaning. It covers orderliness at every level of organization, legality of procedures, and observance of lawfulness with respect to the substance of tax issues. Most taxpayers are sensitive to the kind of treatment of the officials. In case of being sure that a logical and lawful conduct of tax authorities is waiting them, never they would bother to resort to tax-avoidance experts with all their tricky and vexing behaviors.

They would, certainly prefer to pay clear and free-from-doubt amounts of taxes, instead of taking

pain of going through the blind passageways of tax-avoidance labyrinth.

The principal prerequisite for such a mentality is of course the domination of law-abidingness over the behavior of the tax administration.

The second point worth of mentioning is the fact that even those accustomed to tax-avoidance tricks would encounter serious barriers under the conditions of legalism and rule of law prevailing over the behavior of the tax administration. They would also become influenced by the new atmosphere, which would have undoubtedly strong psychological impact on their own behavior.

The view expressed above is fortunately consistent with the principal priority of the current government's policy. They have precisely and frequently emphasized that the attachment to the law must govern all aspects of public administration. The tax administration, as a part of general machinery of the government, has also taken the first steps in this regard, for which we wish success and favorable results.


Dr. Aliakbar Arabmazar








Comment on a Verdict of the Court of Administrative Justice



By: M.T. Hamadani



Tax law has been developed in our time as a branch of the general science of law. It has undergone an independent course of development and has been influenced by the characteristics of the special atmosphere within which it has to operate. An interesting topic of the tax law is the subject of the interpretation of tax regulations. A question discussed upon in this connection, is whether the interpretation of tax law is subject to the same common criteria as concern any other branches of law, or else there are some specific rules that could be applied to tax regulations, in addition to other common rules of construing. The debate has been concluded in favor of the latter solution.

Based on that conclusion, some particular maxims and rules have been developed. The rule of substance over form is an interesting example of such specific criteria. It allows the tax officials to look into the actual substance of transactions and other taxable events in order to prevent artificial structures from being used for tax-avoidance purposes.

As far as the Iranian laws and regulations are concerned, the only explicit reference to the subject can be found

in Article 218 of Civil Law. It reads as follows:

"If it becomes evident that a transaction has been made with the aim of escaping a debt, such a transaction shall be considered invalid."

As it can be understood from the above text, it pertains to the domain of civil law relations between private persons and entities. It can, however, be construed so as to cover the cases where taxpayers resort to artificial transactions to escape their liabilities to the relevant tax offices.


Verdict of CAJ

Let us turn back to the rule of substance over form and study its application by the Iranian Court of Administrative Justice (CAJ). The relevant case was brought to CAJ by the Syndicate of Cooperative Companies of Workers, and the relief sought was the cancellation of a circular of the Ministry of Economic Affairs and Finance. This circular pertains to the Article 133 of the Direct Taxation Act (DTA), which provides:

"Hundred percent of the income of rural, tribal, agricultural, fishermen, labor, employees, students and public

cooperative companies and their unions is exempt from taxation."

If we look at the above article superficially, it would apparently lead us to conclude that any cooperative

company of types enumerated under the above regulations can enjoy exemption from taxation. In other

words, we may conclude that the income of such companies is tax exempted, notwithstanding the type of

income, and the source from which it has been derived.

The Ministry of Finance, however, took into consideration the substance of the issue and declared:

"It should be noted that the said exemption covers those kinds of income that are derived under the relevant regulations and statutes that are drawn according to the law of cooperatives, and such income should have been earned in conformity with the title of the related cooperative company. Thus, in cases where the activity of a cooperative company is in contradiction with its title, the income earned from such activity shall not be subject to tax exemption."

The view so expressed, can be considered as confirmation of the rule of substance over the form, since it requires that we have to ignore the superficial form of an arrangement, and instead to look to the actual substance of the issue.

CAJ also took the same position and declined to accept the argument of the claimant. It confirmed the view of the Finance Ministry by stating that:

"The intent of the Article 133 of DTA, as amended in the year 1992, is to grant exemption to those kinds of activity that are in harmony with the aims and statute of the said cooperative companies. The circular which confirms this very opinion, is therefore considered not to be in contradiction with the law."





Tax News




Under the Islamic Criminal Law, a person convicted of murder shall be subject to reprisal (qssas) and is to be executed, provided that the heirs of the murdered person would deposit certain amount of blood money, to be paid to the heirs of the murderer after he is executed.

As far as the inheritance tax of the murdered person is concerned, the question is that: could the blood money so paid be deducted from the value of his taxable estate or not. The question was referred to the Supreme Council of Taxation, which examined the case in its plenary session and rendered the following opinion:

Since the regulations of the Direct Taxation Act do not provide any rules for deduction of the blood money from the murdered person's estate, such payments are not deductible for the purpose of assessment of the inheritance tax.



As it was mentioned earlier in this journal (No 16, Autumn 1997), a circular issued by the Ministry of Economic Affairs and Finance ruled on some provisions of "The Law concerning the Payment of Service Bonus to, and a Part of the Urgent Expenditures of the Civil Servants". The circular differentiated between the various kinds of payments foreseen under the law, and considered some of them tax exempted, while the others were recognized as subject to taxation.

Later, the Supreme Council of Taxation (SCT) submitted a report on the same subject to the Finance Undersecretary for Revenue and observed that some amendment in the circular might be necessary. The Undersecretary referred the report to the Plenary Board of SCT for consideration. The Board reviewed the matter and decided that none of the payments listed under the aforementioned law are taxable, since they are in essence a kind of compensation for the urgent expenditures born by employees at occasions like marriage and death.



Regulations about the stamp duty are provided under the Chapter 5 of the first Section of the Direct Taxation Act (DTA). Article 50 of the same chapter stipulates that the Ministry of Economic Affairs and Finance can accept cash money instead of requiring affixation of stamps, if it finds such course of action appropriate.

In such cases, affixing stamps would not take place and the relevant tax office shall issue official receipt against the cash paid by the taxpayer. Attorneys-at-law and other agents who are authorized to plead the cause of people and entities before judicial or non-judicial tribunals, are among the taxpayers who have to pay stamp duty in the form of affixing stamps on instruments verifying their power of attorney.

Regulations concerning stamp duty of this particular category of taxpayers are arranged under the Article 103 of DTA. Paragraph 4 of the said article pertains to advocacy on financial disputes before non-judicial specialized tribunals. Among such financial non-judicial tribunals, one can refer to administrative tax tribunals and those responsible for disputes regarding charges imposed by the municipalities.

A new circular of the Finance Ministry deals with the aforesaid paragraph 4 of Article 103 of the Direct Taxation Act. Based on the power given to the Finance Ministry under the Article 50, DTA (as described earlier), it has been said in the circular that henceforward the relevant offices can accept cash (instead of affixing stamps) in case of disputes and claims raised by virtue of the said paragraph 4, Article 103. The authorization so given is restricted to cases of impossibility of affixing and canceling tax stamps on relevant instruments.



In case of international transactions, tax officials may not be able to determine relevant taxable income in ordinary way. Therefore they may be obliged to resort to ex officio assessment of related tax liabilities. A new ruling of the undersecretary for revenue, which deals with this subject, includes the following instructions:

1. With regard to imported goods, tax assessors may follow the destiny of such goods with the intention of finding the actual prices they are sold for, and use it as an indication for assessment of taxable income. For this purpose, the officials may refer to documents provided by the customhouse and any other available documents and information.

2. As far as the exportation is concerned, tax authorities may determine the actual cost price of exported goods and commodities by examining the books and documents of exporting persons. Otherwise, and in case of access to necessary information, they may ascertain the sale price of goods, either in foreign or internal markets, and take the same as an indication for estimation of taxable income of the taxpayer.

3. Notwithstanding the above solutions, if any tax assessor would have to determine the price of goods on basis of their declared foreign-exchange prices, then he should take into consideration the fluctuations of exchange rates during the recent years. The circular distinguishes between two periods, before and after the date of declaring, by the Central Bank, of the policy of single official rate of exchange. For the period before that date, the free market rate of exchange prevailing at each relevant interval should be taken into account, and with regard to the period subsequent to that date, the same single rate of exchange should be taken as basis of assessment.



Iranian technical and engineering entities are authorized to conclude agreements for rendering their services abroad. Such contracts may include use of materials and equipment to be exported from Iran. The Ministry of Finance has instructed tax officials to treat such items as ordinary exported goods and apply the same regulations that are applicable to usual exportations.

The rule applicable in this respect is stipulated under the Article 141 of the Direct Taxation Act. It provides 100% tax exemption for the income derived from export of industrial finished products and 50% in respect of other commodities. The Ministerial circular states at the end that any part of machinery and equipment returned to the country should not be considered exported items.



The level of rental payments has been growing during recent decades so greatly that it has always been disproportionate even with general rate of inflation. Parallel with that, a habit has developed among the landlords to conceal the real amount of rents from tax offices. This situation created a pessimistic atmosphere that gave rise to reaction of tax officials, which sometime exceeds the framework of the law.

According to Article 54 of the Direct Taxation Act, rental is to be assessed on basis of the lease agreement, if it is registered officially by a notary public. In case of absence of such registered agreement, tax assessors have to assess the rent with due regard to the rental of similar properties.

The frame of action, so determined by the law has been occasionally widened in two ways:

1. Since lease agreements are usually concluded for one year only, tax assessors consider it terminated after expiry of its term. The situation would consequently be regarded, according to them, as a case where no agreement does exist, and action has to be taken for assessment of rental in proportion to similar properties. This will, in most occasions, lead to assessing excessive rentals and imposition of considerable extra taxes.

This manner of action does not always reflect actual state of affairs. In most cases, the relationship between lessee and lessor would continue for several additional years on basis of what was going on before expiration of the original term of lease contract (of course with some moderate addition to the original rent).

2. The power of assessment of rental, where it is accorded to tax assessor, is sometimes operated in excessive manner. Occasionally it is exercised once - even twice - per year, for one and the same property.

A circular of the Finance Ministry touched upon this subject with the aim of adjusting immoderate treatment described above. The following are some important rulings of the circular:

1. Rental agreements are mostly containing a phrase indicating that after termination of the original duration of the contract, the rental payment will be equal to the same amount agreed upon in the agreement. Private agreements, on the other hand, are valid between contracting parties under the Article 10 of the Civil Law.

The same should, accordingly, be respected by tax authorities, while the property is under the lease of the same tenant and there is no sufficient evidence indicating the cancellation or change of the contract.

2. Although no hint can be found in the law to show the term of validity of tax assessment in case of absence of official contract, there must be a logical interval between the first and subsequent assessment of the rental of a property. The interval could not, according to the circular be shorter than 3 years.











Adherence of the tax administration to the rule of law and observance of requirements of lawfulness in all levels of organizational, procedural and substantial aspects of tax management, is considered in the editorial to be most significant prerequisite for inducing taxpayers to comply with their legal duties.


Tax Management and a New Approach

This article reflects on steps taken by the tax administration towards a law-abiding policy. Some new rulings of the Vice Minister for Tax Revenue are analyzed by the author. One of them refers to a custom followed by some tax authorities who refrain from registration of taxpayers' protests, unless they would pay all or a part of assessed tax liability. The ruling prohibits this behavior and warns that those offending the rule shall be subject to legal prosecution.

The Impact of Macroeconomic Policies on the Level of Taxation This is a Persian translation of an article written by Mr. Tanzi from the International Monetary Fund. The first part of translation was presented in previous issue of the journal, and this issue contains the second and last part of it.


Tax System and Official Accountants

History of activities of official accountants in Iran and abroad is reflected in the article. It deliberates also on the role of official accountants in development of any tax system. The position of this profession in Iranian tax regulations is also touched upon. The present issue of the journal presents the last part of this article, the part 1 of which was printed in the last issue.


Trends in Anti-Avoidance

As our readers may recall, the section one of this analytical essay was provided in last issue of

Maliyat journal. Now, the last part of the same is presented in the issue at hand. The author of the article was Dr. David Williams, a Persian translation of which is printed in this journal. Future trends in the field of anti-avoidance measures have been examined in the article.


Budgeting in the Era of Qajar Dynasty

The Qajar Dynasty ruled in this country from late seventeenth to early twentieth centuries. A brief history of budgeting at that time is quoted from an interesting book printed in the year 1925.


Regulations and Rulings

The texts of latest laws, regulations, and opinions of the Supreme Council of Taxation (as well as those of the Court of the Administrative Justice with regard to taxation cases) are reported in the Persian section of the Journal. A part of the same regulations and verdicts is presented in English section under the heading "Tax News".


Tax Glossary

Several tax terms and expressions are presented and defined in each issue of Maliyat journal.

Detailed explanations follow each term, with due consideration being paid to the connected laws and regulations.


The End