FROM THE PRESIDENT

IN THE NAME OF GOD

It is with great blessing of the Almighty that the first issue of this publication has been successfully completed, and with the help of my colleagues we will be bringing again this valuable publication to the vast audience of our readers; which are comprised of taxpayers, tax officials, academicians, researchers, students, and various other professionals such as lawyers and financial consultants.

It has been a great pleasure for our group to have embarked on such a project to serve the educational needs of the Iranian community in re-introduction the concept of taxation which is one of the most vital and widespread tasks of any government dealing with fiscal vigor and economic prosperity.

In the short interlude between the first issue of this magazine and the current one at hand, we have observed the ever increasing emphasis of the executive and legislative branches of the government on the role of "taxation" for meeting the fiscal and the economical needs of this nation. In the current budget of the Iranian year 1372 (March 21, 1993 through March 21, 1994) the forecasted tax revenues are much higher than the previous year, and it is estimated that tax revenues for the current year would amount to 5.4 trillion Rials, in comparison to3.6 trillion Rials for the same period last year, an increase of more than 50 percent. This is also indicative of the attentions paid in making the national budget rely more on taxes rather than on oil exports.

Concurrently there have been many changes in the global political environment as well. The solidification of the European Economic Community (EEC) and the convergence of political and economical boundaries have brought new demands for the re-evaluation of many of the existing national regulations. Among them taxation stands out prominently. As a result of formation of this community which has precipitated to a single common market in member countries, it is imperative for the tax base for individuals or companies in every sector alike to be subject to similar tax circumstances. Such undertakings have required re-evaluation of many existing tax laws and re-introduction of new regulations in order to effectively meet these new developments. The debates are far from over and there are continuous changes in the regulations.

Our intention is to keep abreast of these changes both in domestic and global settings, and hope that our publication will serve as a beacon for evaluating changes in the new tax laws in this forum, and to be instrumental in dispensing information in order to strengthen and improve the general tax knowledge within the country. Participation of our readers comprising of various taxpayers, regulatory staff, consultants, academicians, and other researchers, can play an active role in expanding the horizons of this publication, and their Reponses in raising issues for the improvement of the magazine is welcomed.

With the blessing of the Almighty we hope to never cease our endeavor, and in the future issues of this magazine to achieve a high standard of excellence such as to enjoy accumulated prominence among our readers. We further hope to gain higher acceptance as a source for capturing changes in taxation regulations pertinent to this nation.

 

A. Arabmazar

Special Interview with Dr. Mohsen Noorbakhshthe Minister of Economic Affairs and Finance

 

Through exclusive arrangement with this publication Dr.Noorbakhsh has agreed to provide the following interview concerning the major issues of taxation within the country.

 

Maliyat: In your opinion, what are the roles of taxation in the growth and economic development of a nation.

   Dr. Noorbakhsh: In the name of God, the merciful and compassionate. As you know success in economic development depends on resources, and economic development occurs only when there are investments carried out in the economy. Investments also nourished from two sources, firstly, through national savings of individual holdings in banks and other financial institutions and the facilities provided through such institutions in meeting the client's demands. Thereby, national savings through financial institutions provide a major share of necessary investments in the economy. But there is also another side to this scenario. There are certain activities that governments engage in the economic development plan, specifically in infrastructure projects which encourage private sector's involvement in investing within the society. In practice until basic infrastructures are not present in a society, like port facilities and communication systems, the private sector will not be motivated to utilize the financial services offered, or to engage in long term ventures such as manufacturing and production.

Many of the so called infrastructure formations are carried out by the governments. The critical question posed here is: what are the suitable resources for such investments. At this juncture is where the issue of taxation and its role in supporting the national goals become apparent. Governments by imposing, collecting and allocating taxes play a basic role informing the necessary foundations in economic development of the country, and in supplementing the private sector's needs to be able to embark on their economic activities.

Therefore, taxation could be considered as a vital link in providing the necessary resources for investments. Although there're other natural resources as well in meeting there financial investments such as oil and minerals, but the uses of such resources are finite. There are needs in balancing what governments spend in macro level with what they take from the society for financing such expenditures. If the issue is to justify the government's role in exchanging raw material for financial resources, we will be faced with the dilemma of inflation which is worrisome to every sector of the economy. Therefore in conclusion to your question, we feel that taxation is one of the most suitable resources for promoting economic development in a country.

 

Maliayt: What role did taxation play in the First Five Year Plan, and how do you see its role in the Second Five Year Plan.

   Dr. Noorbakhsh: In the First Five Year Plan we observed that the role of taxation was very limited. In using the country statistics, our nation was well below the scale for the ratio of taxation as a portion of the GDP (Gross Domestic Product). In another words, the government takes the least amount from the total GDP through taxation and spends it in those areas such as education, health, defense, etc., which fall within its responsibilities. Therefore, in the First Five Year Plan it was predicted that with an increase in tax revenue, the ratio of taxation as a portion of the GDP can be doubled from a figure of a little over four to eight, such as to create a healthier situation. In the Second Five Year Plan, we are now in the process of reviewing and planning this program, and there is a committee which is studying revenues, especially taxation revenues, in order to determine the role of taxation during the Second Five Year Plan. What is certain is that we have to fix the ratio of taxation as a portion of the GDP according to the standing of our country and as compared to tax revenues in other countries.

 

Maliyat: Considering the significance of taxation in the country's total budget, what plans does the Ministry of Economic Affairs and Finance have to reach budgetary objectives?

   Dr. Noorbakhsh: Budgetary objectives have many aspects. One is the question of the balance in the budget, that is to say making incomes grow in such a manner as to fully ekliminate the budget deficit. This was one of our main budetary objectives. Fortunately, our performance in the past four yearsshow that we have been able to make taxation revenues even surpass what was predicted in the program and what had been approved for the budget. For example, for the year 1370 it had been predicted by the plan that taxation revenues would reach a figure of about 2097 billion Rials, and a figure of about 2374 billion Rials had also been approved in the budget. But our actual revenues show a figure of about 2765 billion Rials, which is considerably higher than the estimated figures. For the year 1371, that is last year, it had again been estimated by the plan that taxation revenues would reach a figure of about 2593 billion Rials, and with the reconsideration of the budget about 3608 billion Rials was approved, but the actual revenues amounted to 3776 billion. This shows once again a considerable increase in comparison to the approved budget. The total efforts in the section of revenues, especially taxation revenues caused us to be able to move towards one of the main budgetary objectives, namely a gradual reduction of the deficit and to nullify it by 1372, such that every year the rate of deficit was either equal to what the Parliament had approved for the annual budget, or else the rate of deficit was less than what was approved. We think that this year we can - God willing - reach our objective regarding what has been predicted for the annual budget in order to balance the budget completely.

 

Maliyat: As the Minister of Economic Affairs and Finance, what is your evaluation of the current system of taxation in the country?

   Dr. Noorbakhsh: I think that our system of taxation is in a state that both the government officials and the public are slowly gaining a better understanding of it, and so the place and role of taxation in our economy is moving towards being properly settled. I am making this statement based on observations on the general policies and planning measures which demonstrate that on the one hand, different ranks of government executives have paid more attention to taxation, and on the other hand the Parliament has shown more appreciation for the significance of taxation. It was for this reason, that they showed the required intention and willingness to supply the Ministry of Economic Affairs and Finance with the tools to reach its objectives. And it was for the same reason that we ware able to take such measures as to meet our responsibilities, not only in absence of any shortcomings, but even in going beyond them. Another aspect of an understanding of taxation as a matter of national interest is through the public and their cooperation in this national matter. We have fortunately begun, in some sections, experiencing a favorable cooperation and coordination from taxpayers. More specifically, with regard to business taxes, we have started a communication with the unions so as to determine, with their help, real figures for taxation as much as it is possible. And in some provinces, including Tehran, we have experienced a very good response so as to have minimum problems. This is an indication that our taxation system is gaining acceptance as a matter of national interest, and people are responding well by fulfilling their obligations for utilizing public services through payment of taxes. Over all, I think that even though our taxation system is not complete, and that we have to perfect it by the integration of certain laws, especially new laws such as VAT so as to create a complete set of taxation laws, still, in the state it is now in, with a positive evaluation from the officials and the public, it has progresses so far.

 

Maliyat: What are the plans of the Ministry of Economic Affairs and Finance with regard to the computerization of the taxation information system?

   Dr. Noorbakhsh: The question of computerization of the taxation information system is the most urgent objective which I have considered as a foundational step form the moment I have accepted this position in the Ministry of Economic Affairs and Finance. The reason for this is that until we have fully access to information regarding taxpayers income, we can neither identify those who may - God forbid - consider non - compliance of their obligations nor can we be able to evaluate our own estimations. For this reason, we have planned for the general program of the computerization of the taxation information system, which amounts to developing checkpoints and controlling measures in different stages in order to follow the circulation of money and goods in the country. As a result everyone benefiting from this economic activity could be recognized, and his rate of benefit can be recorded, so that a fair estimation of taxes could be realized. What we have referred to as the circulation of money and goods is important because in our country incomes are determined by these two factors. On one hand trade among various people generates income, and on the other hand circulation of money, either through government activities such as salaries, wages and government contracts, or through facilities provided by the banking system, would create benefits for various people. If we can play an active role for checking this process of circulation of goods and money, then we can determine the correct tax brackets. Research and planning stages for this project have been completed, and we are moving to the implementation stages. One of the major takes has-been the determination of tax codes. The design of these codes have been completed, and declared to the taxpayers. In this fiscal year we hope to complete the final stages of this project.

 

Maliyat: In conclusion we would like to thank you for your support and recognition with regard to the role of training and research within the College of Economic Affairs, and we would be very glad if you could reflect your views to the administration of the college and the editorial staff of this publication.

   Dr. Noorbakhsh:In my opinion if we are to succeed in our goals we need to strengthen our resources through research.By training and education which the College has been very keen on, and in attracting a strong team of professionals in this field, either through the College or by this publication, we can succeeding our goals. Therefore from the outset when I was informed of this project, I fully supported it and we are seeing the fruits of this effort as well. The results show that we going in the right direction, and I encourage the staff of this publication, and the administration of the College to continue in their pursuit and to keep open the vital channel of communication between their respective organization and this ministry. I hope that by maintaining an exchange of data among various groups, and by encouraging a dialogue between the operational staff of this ministry, and the research activity within the College, we would help in enhancing the overall long term objectives of this organization. Finally I hope that our ministry would always be able to receive your full support and cooperation.

 

Maliyat: We would like to thank you for the opportunity you provided us in granting this interview, and wish you the best for your endeavors.

 

Contribution of Article

Comments and articles are welcomed. Written assurance must be given that the article has not been published elsewhere. The author will be notified of the acceptance, rejection or need for revision as soon as possible. Please submit a brief description of your educational and professional background and, if possible, a photograph.

Information Technology & Tax Administration

By Hormoz Goodarzy Tabrizi

 

Information gathering for the purpose of monitoring, controlling, and evaluation is not a novelty. The gathering of data for this purpose by itself is not new. Fiscal cadastres were created5000 years ago in ancient Egypt and Mesopotamia, and were primarily used for purposes of taxation on land. Later this information was developed for registration of ownership.

With the surge of popularity of desktop computers in the past decade and their increase of use in economical, social, and urban studies, there are new demands placed on managers of these information systems to meet the challenges brought about by this new and rapidly evolving technology. The evolution of the Computer Centers from a centrally controlled unit within an organization, to its transformation to desktops computing has been marked by changes both in the processing and analyzing of the applications. Today many of the programming skills needed for simple analytical modeling techniques can be done with a few keystroke commands from a desktop computer by using such popular spreadsheet programs like Lotus 123 or Excel. Likewise in the local tax assessors office a sophisticated taxpayer ID could be built using a fourth generation language data bases such as FoxPro or Paradox. Computers in general have tendencies to become tools for processing rather than tools for analysis. Processing of applications usually involve throughput of data and their tasks are fairly simple. In contrast analysis of data is complex and in addition to including data assembly, it utilizes sensitivity analysis for modeling. Analyzing applications requires more exhaustive levels of training and motivation than what is observed mainly in the top ranking bureaucracies, and usually less frequently used as a management tool by the lower ranking officials. Tax administration offices in most countries have usually benefited from computerization specially in keeping records of tax ID numbers for income tax purposes, parcel/land information for property tax, and customs and duty taxes. The benefits arise from the ability of the operators to accumulate, retrieve, and transfer data to other departments and to reduce duplication of work.

In a recent conference held at Harvard University in Cambridge, Massachusetts, on Information Technology and Fiscal Complicance, many of participants who were directly in charge of the information systems, described in detail the various methods of utilization of this new technology in their organization. The papers covered most of the activities of a tax department comprising of income tax, VAT/ consumption, customs, and property. In most of the papers it was concluded that the efficiency gained from the processing of forms has a two fold effect: (a) it reduces the amount of unnecessary duplication of work and paper trail with better controlling mechanism, and (b) the new reporting capability of the supervisors results in a more thorough analytical approach to solving the procedural and planning problems of their departments. In most of the presentations the content of the work was viewed from the point of view of applications in a developing country. Many of the applications had been developed by input from the staff with some training of the key positions in the Misadvising of the tax office. Tax administration offices are information intensive and can usually benefit from improved efficiency of their data gathering and retrieval, and the role of computers could easily enhance these activities. As it would not be possible to describe all of the topics presented in detail, however, I will briefly describe few of the key cases for the adoption of this technology in some organizations, and will demonstrate that by harnessing the existing pool of technical resources in this nation, similar applications could be adopted to enhance the effectiveness of our organizations here as well.

In the paper about Dominican Republic's customs, it was demonstrated that by installing local and wide area Network (LAN, & WAN) in the main ports of entry the immediate effects were in a) reduction of back log of goods entering the country, b) substantial reduction in the number of forms needed to clear goods from the customs, and c) a more systematic and less blessed means of assigning duty on goods with minimization of corruption of public officials. In conclusion, it was estimated that within a few days of operating the new system savings gained from the lost revenue paid for all the expenditures of computers purchased for the project.

In another case in a much more advanced system using Electronic Data Transfer (EDT) by Singapore Port Authority, it was demonstrated that it merely look six hours from the time a vessel arrived to the ports to clear the customs and then reloaded with outbound goods-hardly enough time for a shore leave. Whilst the vessels are no route, all shipping manifests are sent electronically to the customs office which is operational 24 hours a day, and once the duty is determined it could be arranged for funds to be transferred also electronically to a special account setup for the same purpose. Furthermore, outbound goods are also lined up to meet the vessel at the port to reduce the time wasted at the port of entry. Singapore is unique because it has recognized from the outset to be a major competitor in providing a first rate service in the global market. In order to meet their present demand for their customs administration many system engineers and computer programmers were trained well in advance.

Among other unique experiences were countries which followed privatization schemes, where state held title to all properties and land. A new system had to be developed in order to update property assessment for the local and regional tax offices in order to absorb the fluctuating market prices from one year to another. As annual survey of each property for valuation purposes would be very time consuming and labor intensive, a Computer Assisted Mass Appraisal program (CAMA) was developed using various indicators. In addition an electronic library of maps using Geographical Information system (GIS) was developed to better identify future changes associated with the ownership and location of the property.

Most of the projects were aimed at improving the existing system of operation within the tax administration offices. One of the significant features of most of the papers were the adoption of the Information Technology at substantially lower price than utilized in the past by most of the tax administration offices, and in all cases it was demonstrated that down sizing had tremendous benefits both in direct costs and personnel. In the case of both hardware and software, "Industry Standard Architecture" (ISA) was adopted. This helped in both keeping the cost of purchase and maintenance significantly down. The reduced costs of hardware and software in recent years gives the advantage of upgrading and/or introducing computers to an organization without depleting all of its financial resources. As a rule of thumb it is fair to estimate that the MIS division to be 5-10% of the total budget of that organization.

Training and education plays an even greater role in considering the rapid technological changes occurring in this field, and through some training of the existing staff who were familiar to the procedures, it was possible to enhance their operation more effectively. Another significant development is forming user groups of working committees within organization for the purpose of evaluating new products and procedures in order to maintain a dialogue between users when new technologies were introduced to their working environment. Finally, the other major factor in achieving a degree of success in all of the cases is the willingness of the higher management in initiating and adopting these changes.

TAX NEWS IN BRIEF

 

Regulations Concerning the Procedure of Inspecting and Checking the Books and Records of Taxpayers

Under the Article 181 of the Direct Taxation Act (DTA), the Ministry of Economic Affairs and Finance (MEAF) could assign the duty of inspecting and controlling the accounts and records of taxpayers MEAF for execution of the law. Members of the group will be appointed by the directors of taxation departments in Tehran and other regions. They must be proficient and to have enough knowledge and experience in the field of auditing. The group is vested with the power to inspect and check all the books, records and business documents of taxpayers, and, if needed, to transfer them to the tax office for moue careful examination. But they are not allowed to keep them for more then 15 days, and after examination all of the documents should be returned to the taxpayer. A copy of the group's report will also be handed over to the taxpayer after examination by the authorities.

 

Donations Are Deductible in Computing Taxable Income

Taxpayers who make donations, whether in cash or in other forms, for certain objectives are entitled to deduct it as a business expense. Those objectives include inter alia: Erecting, rebuilding or completing the construction of the government _ funded projects such as schools, universities, medical centers, libraries, cultural and art centers, etc. Any donations made to the Iranian Kidney Institute would also be treated as deductible expense. (Executive Regulations of Article 172, DTA)

 

Allocation of welfare fund

The payments to the welfare fund of the workers of the Ministry of Roads and Transportation is considered as business expenditure. The companies and organizations affiliated with the said ministry are allowed to deduct such payments in computing their income tax. (Cabinet decree issued on the basis of Article147, DTA)

 

Payment of salaries due

Salaries paid to employees against their claims for previous years should be treated as of they had been paid in respective years, says a circular issued recently by MEAF. It means that such payments will be added to the salaries received by the employees in the relevant years and the appropriate tax rates pertaining to each year will be applied.

 

Public Endowment (Wakf) and Medical Expense

According to the Article 2, ATA, proceeds of Public Wakf accrued for hygienic purposes is tax exempt. A question raised as to whether the phrase" hygienic purposes" does include medication and treatment as well. The point was debated by the Supreme Council of Taxation (SCT) in its plenary session, and a positive response was gives to the question. According to the opinion expressed by SCT, the said exemption is applicable to medical expenses as well.

 

No tax Exemption for Private Endowment (WAKF)

The SCT decided that the tax exemption stipulated by Article2 (3) of DTA in respect to public endowments is not applicable to private endowments, and hence the latter would be subject to the ordinary property tax.

 

Neutral and Objective Criterion for Assessment of Rented Income

If a property is rented under an ordinary contract, the rental income should be assessed by the tax assessor, notwithstanding the amount of rental payment mentioned in the contract. Ordinary contract means any contract concluded between the parties without being registered by a notary public. In making his assessment, the assessor has to take into consideration the rental of other "similar" properties. But the word "similarity" has a broad meaning, and doesn't provide a precise and fixed basis for judgment. To avoid obscurity, MEAF has recently issued special regulations in this respect. Certain percentage of "tradable price" of each property will be considered as rental income of the same for taxation purposes. The tradable prices of properties, which are considerably lower than the market prices, are fixed and published by MEAF each year.

The regulation would prevent the assessment of rental income of properties form being subject to personal judgment of the officials. Hence an objective and neutral criterion has been developed in this field.

 

ABSTRACTS of Persian Articles

Timely Changes in Tax Rates

Alteration of tax rates might be a useful and significant tool in every government's fiscal policy regime. The ordinary channel for realization of such changes is the parliament, and great details should be given before the necessary laws are enacted. This could prevent the fiscal policy from producing desired effects in due time. The author has proposed that the government (Council of Ministers) be vested with power to approve such alterations when acute economic necessities so require.

 

Registered Shares and Progressive Rates of Withholding Tax

Dividends attributable to nominative shares of joint stock companies; whether distributed, retained or kept as reserve, are subject to withholding tax at progressive rates, which are applied separately to the portion of each shareholder. This means that unequal amounts of reserves and retained profits should be allocated to different shares, a situation that might lead to certain difficulties and abnormalities. This topic is dealt with in this article, and in conclusion some amendments to the law are recommended by the author.

 

Tax in History

Excerpts from various primary sources on historical prospects of taxation and tax administration are gathered in each issue of this publication. The text quoted in this issue is from a chapter of the book by Mirza-Mehdi-Khan Astarabadi regarding the means of tax collection in the last years of reign of Nadir Shah Afshar (an Iranian King of 18th century). The author himself was the secretary of the King and an eyewitness to what was reported in his famous book, "The History of Nadir's Conquests".

 

Regulations, Rulings and Opinions

The text of the latest laws, regulations, decrees, circulars and the opinions of the Supreme Council of Taxation are reproduced in the Persian section of this publication. A summery of the same is provided in English section under the heading: "Tax News in Brief".

 

Tax Simplified

Most taxpayers are not well aware of their respective rights and duties under the current tax laws and regulations. To increase the tax knowledge of its readership, this publication has begun a series of articles under the heading: "Tax Simplified". The first of this series, appearing in this issue, is pertaining to the tax on rental income.