Maliyat Journal (Iranian Tax Review)
No. 19, Spring 1998
English Section
IN THE
NAME OF ALLAH
FROM THE PRESIDENT
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
SUBSTANCE OVER FORM DOCTRINE
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
INHERITANCE TAX AND BLOOD MONEY
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.
MINISTERIAL CIRCULAR AMENDED
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.
CASH INSTEAD OF STAMP
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.
INTERNATIONAL TRANSACTIONS
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.
EXPORTATION OF TECHNICAL SERVICES
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.
ASSESSMENT OF TAXABLE RENT
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.
ABSTRACTS OF PERSIAN ARTICLES
Editorial
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