Maliyat Journal (Iranian Tax Review)
No. 28, Summer 2000
English Section
IN THE NAME OF ALLAH
FROM THE PRESIDENT
An objective
study of the factors contributing to the efficiency of social, as well as
natural phenomena is a fundamental condition for arriving at desired
conclusions and taking proper actions in any and every fields. This journal has
always done its best to follow the same path in respect of the subject of
taxation, with the aim of finding and analyzing the determinant causes and
incentives, within which the operation of tax system takes place.
A study of this
type would draw, from the outset, our attention to the fact that taxation is a
two-sided and reciprocal issue. The tax administration with all its objectives
and responsibilities on one side, and taxpayers and their individual and group motivations
and reactions on the other side.
Our discussion
concerns the second party of this relationship, namely the taxpayers. There is
no doubt that the behavior of taxpayers may play a very eminent role in this
regard. Nobody in today's world would object to this undeniable fact.
But, what can be
done to affect behavior of taxpayers? Preaching and appealing to their
conscience is a good idea. But any measure of this kind would prove to be
useless, and even might leave negative impression, if it is not coincided with
appropriate preconditions and creation of a positive behavioral environment in
the tax system.
One has to take
account of the fact that we talk about payment of tax on a permanent basis, and
not about some occasional charitable donations and contributions.
For creating a
suitable atmosphere, the primary role is to be played by the tax
administration. The manner and behavior
of tax officials and taxpayers’ file treatment have serious effects in
this respect, and the administration has to make its best to leave a sound
impression on the conscience of taxpayers.
Several rulings
issued in recent periods by the tax administration are indicative of a new
positive trend adopted in this direction. Few examples of this type of rulings
are as follows:
- Some circular letters allowing the implementation of self-assessment system in respect of tax on rental income of
residential properties. According to these circulars, majority of tax returns
will be accepted without checking, and only a low percentage of files will be
selected in random for being checked in a careful manner.
This arrangement
is in common with most of developed countries. The Iranian tax law provides the
same as well, but it had scarcely been practiced before.
- Another circular obliges tax officials to fully observe a
special tax exemption envisaged under the law for Encouragement of Construction
and Supply of Rental Residential Units. Article 11 of this law provides for tax
exemption of rental income of certain residential dwellings.
Many other
circulars can also be mentioned here, which follow the same goal of observance
of taxpayers' rights. The subject matters dealt with in some of these rulings
are as follows:
- Serving of verdicts of the Supreme Council of Taxation to the
relevant taxpayers, on time and without delay.
- Complete and full implementation of the provisions of the Note
to the Article 149 of the Direct Taxes Act regarding the deductibility of the
cost of production of Iranian cinematographic films from the income of relevant
producers.
- Acceptance of petitions of taxpayers with regard to the notice
of tax assessment, in cases where such petitions are sent through the post
office.
- Observance of
the rule of the Article 90 of the Direct Taxes Act, which states that if the statutory
books and documents of taxpayers are rejected, but there are sufficient grounds
indicating that such books and documents may be used for determining the actual
income of taxpayers, then the officials are required to take account of them in
assessing the taxpayer's liability.
We hope that all
these measures would result in realization of the goals expected and planned.
We wish also they would attract the taxpayers' confidence on the tax system of
our country and sincerity of the tax administration in observing their legal
rights and privileges. Such state of affairs will enhance the integrity of the
tax machinery and possibility of optimum use of its potentialities as well.
Dr. Aliakbar
Arabmazar
An Introduction to the
Iranian Tax System
By: Dr. Mohammad
Tavakkol
(Part 8)
Different types of property taxes (annual tax on real property, tax
on unoccupied real estates, tax on idle lands, inheritance tax and stamp duty)
were reviewed in previous issues. Then we discussed about the tax on rental income,
which is dealt with under the first chapter of the title C of the Direct Taxes
Act. In this issue we will continue, and conclude, our discussion on the same
subject of the tax on rental income.
Exemptions
Before touching upon the
specific exemptions referred to under the Direct Taxes Act (DTA), we should
first make mention of a very significant exemption provided by a special law
enacted in June 1999. It is titled the " Law for Encouraging the
Construction and Supply of Rental Residential Units " (hereinafter
referred to as the law of June 1999).
The Article 11 of this law states:
“All
residential units having a useful substructure of not more than 120 square
meters, that are leased for dwelling, shall be exempt from the payment of 100%
of the tax on rental income".
The
following points are worth of mentioning in this regard:
1. These
days one can scarcely find a leased dwelling with a useful substructure of more
than 120 square meters. Most residential units are constructed as small or
moderate size apartments, and a dwelling of 120 square meters is
considered quite large. So, a tax
exemption of such magnitude means the exemption of at least 80% of all leased
dwellings.
2. The
exemption granted under the Law of June 1999 is very common and unrestricted.
No limitation is envisaged as regards the number of residential units leased
out by a single owner. Therefore, the major owners of residential properties
will enjoy the exemption, notwithstanding how large is the number of apartments
they may have leased to tenants.
3. Thus,
the other tax exemptions provided under the Direct Taxes Act (DTA), become
useless in respect of most of rented properties. But, they will continue to be
applied to the properties leased for purposes other than dwelling (businesses,
professions, etc.).
The most
visible defect of DTA in this regard is that it provides for quite negligible
amounts of tax exemption. During the long time that past from the date of
approval of the law (February 1988), the inflation eroded the purchase power of
money in a considerable manner. That is why the monetary figures mentioned in
DTA look so poor and negligible.
The most
important exemptions provided under DTA are as follows:
a) The
taxable rental income of individuals with no other source of income is exempt
from taxation up to an amount of 125,000 Iranian Rials per month, and the
balance is subject to taxation. For the purpose of this exemption, the
retirement pensions, annuities paid to surviving dependants, bonuses and
interests received on bank deposits shall not be deemed as income (Art. 57,
DTA).
b)
Taxpayers having disabled and backward children under their custody shall enjoy
a monthly tax exemption with regard to their taxable rental income up to IRR
10,000 for each of such children (Note 3 to Art. 57).
c) If the
owner leases a part of his residential place for purpose of dwelling, his
rental income shall be exempted from taxation up to an amount of IRR 30,000 per
month, and the balance of the rental income will be treated as taxable (Art. 56).
To have an
idea of how negligible are the amounts mentioned above, one has to take into
account that the average rental for a small and simple apartment in the capital
and other cities amounts to something around IRR 500,000 to 700,000 per month.
The Ministry
of Finance has drafted a new amendment to the Direct Taxes Act, which is under
review at the present stage. We hope it would take account of the defect just
mentioned, though the first draft of the amendment did not, most probably,
refer to this subject.
Assessment
of rental income
Two main
methods are envisaged by DTA for assessment of rental income for tax purposes.
The first one is to determine the income on basis of the official deed of lease
contract concluded between lessor and lessee. Official deed is a deed or
document registered by a notary public. Such documents are given a high degree
of validity and enforceability by the law.
The second
method is to assess the rental income by reference to the rent of similar
properties. This method is applicable in some specific cases, including:
1. Cases
where no official deed exists, or in case the taxpayer refrain from submission
of such deed.
2. If the
lessor receives extra payments in addition to the original rent, as deposit or
under any other title (Art. 54, DTA).
The
appraisal of the rent of similar properties is to be effected by the tax
assessor of the district where the leased property in question is situated. The
relevant chief assessor must confirm such appraisal as well. In case of disagreement,
the view of the chief assessor will be taken as valid (Note to Art. 54).
Our review concerning rental income
taxation comes to end at this point. In next issue, the tax on transfer of real
properties will be considered.
The text of the guidelines of the Tax Administration
regarding the salary tax of expatriate employees (circular letter No. 30/4/1616/52726 dated 26 January 1999)
was printed in the issue No. 25 of this journal. Now we provide the English
translation of another circular issued further to the said circular and in
respect of the same subject.
CIRCULAR LETTER NO. 30/4 – 9124/42176,
DATED 08/23/1378 [NOVEMBER 14,1999]
Further to circular
letters No. 4917, dated 02/21/77 [May 11, 1998] and No. 30/4-1616/52726, dated
11/06/77 [January 26, 1999] that were issued for the purpose of observance of
the policy of abiding by the law, securing tax equity and collection of the
salary tax of expatriate employees working in Iran in an appropriate and
correct manner, it is hereby declared that:
1. A considerable number of employers paid respect to the laws of
the Islamic Republic of Iran and submitted correct and complete information in
respect of salaries and fringe benefits of their expatriate employees.
2. A number of employers, including some foreign companies engaged
in agency, marketing and similar activities, tried at the beginning of
enforcement of the above circular, to avoid complying with the regulations of
the Islamic Republic of Iran by creating a negative atmosphere and resorting to
unfounded propaganda to the effect that collection of tax in this way would
prevent investment, whereby they succeeded in attracting support of some
authorities who were unaware of the reality and substance of tax-evasion attempts
of this type of taxpayers. Fortunately, when the relevant facts were explained,
the truth of the issue was revealed.
Now it is hereby announced that the execution of
the aforementioned circulars resulted in an overall desirable outcome and there
was a substantial growth in collection of tax from the above source, in
comparison with the previous years. It has been made known and clear to all
employers having expatriate salary receivers that the tax authorities of this
country would act seriously in fulfillment of the legal program of assessment
and collection of salary tax of income receivers.
Nonetheless, ambiguities have arisen and
enquiries have been made, orally and in written, by assessment officials and
those subject to the aforesaid circulars, as a result of diversity of
occupations, posts, nationalities and duration of employment of expatriate
salary receivers working in Iran, and also because of difference in their
personal status, as to having Iranian wife and children or not, and variation of
the position of employers in respect of their belonging to public or private
sector.
Hence, for removing such ambiguities and
answering the relevant questions, and also for the sake of establishing a
common procedure and determining the manner of issuance of the tax clearance
envisaged under the Article 89 of the Direct Taxes Act [DTA] in conformity with
the requirements of different cases, the existing records of the section of
salary tax of expatriate employees were studied and reviewed. Based on this study,
the employers, foreign citizens working for them, actions to be taken by
employers and the examples existing in the country were classified into eight
groups according to the enclosed table. The tax officials are required to take
measures, in respect of each group, in conformity with the respective
regulations and according to the following procedure:
A. The employers described under the numbers 1 to
6 [of the enclosed table] are required to insert in the table No. 1 attached to
the circular letter No. 30/4-1616/52726, dated 11/06/77 [January 26, 1999] all
the information regarding the total salary and fringe benefits paid, in foreign
currency and Iranian Rials, to their employees. The amounts of payments should
be mentioned under separate titles (including salary, job benefits, allowances
for working abroad, attraction allowance, etc.). They should submit, to the
relevant tax assessment office, the table so filled, together with the
photocopy of the respective employment documents showing the amount of salary
and benefits and other allowances subject to salary income tax, and also the
tax return filed by the salary receiver with the tax authorities of the country
of whom he/she is a citizen. The
photocopies so submitted should have been authenticated by the competent
authorities of the said country as being in conformity with the original
documents, which authentication must have been verified by the embassy of the
Islamic Republic of Iran. The tax assessment offices are, obviously, required
to determine a time limit for submission of the said documents. The time limit,
which must not be shorter than two months and longer than four months, should
be fixed by due regard to the distance of the relevant location and formalities
of consulate affairs in each country.
The salary tax of employees, whose employers
submit the aforesaid documents in the manner described above, shall be computed
and claimed on basis of the submitted documents. Should, however, some
evidence, indications and supportive documents be at hand, or found later,
which would demonstrate incorrectness of the amounts mentioned in the said
documents, then the difference of the accrued tax shall be claimable according
to the law.
B.
Should the tax clearance of the Article 89 [DTA] be needed for
renovation of work permit or for leaving the country, the issue of the
clearance will be allowed after collection of the tax on basis of the amount of
the salary declared by the employer. In case of necessity and if the situation
would require, a deposit or valid guarantee, up to the amount of the tax
applicable to the salary mentioned in the table of the estimation of the
foreign citizens’ salary and fringe benefits attached to the aforementioned
circular, shall be obtained.
C. In cases where the tax is
computed and collected on basis of the documents provided by the employer, as
described under the paragraph A above, the following sentence should be
inserted on the tax clearance so issued: “If it becomes evident that the actual
salary was more than the amount constituting the basis of the tax collected,
then the issue of the this clearance will not prevent further claiming of the
tax”.
D. In respect of those
employers who fail to submit the documents of the paragraph A, or whose
submitted documents are rejected for some demonstrative evidence – such as
failure to submit the tax return filed with the relevant tax office of the
respective country, deficiency of signature, or lack of confirmation of the
related authorities and verification of the [Iranian] embassy – the relevant
officials may employ the applicable part of the table enclosed to the circular
letter No. 30/4-1616/52726, dated 11/06/77 [January 26, 1999] for calculation
of the salary and its tax. They may do so, if they would consider that the
situation so requires and there is a necessity for this kind of treatment (i.
e. in case of non-availability of any documents, evidence or indications, on
basis of which the amount of the received salary could be ascertained).
E. Extension of the time
limit for presentation of the documents of the paragraph A by the employer is
allowed, provided that some justifiable evidence would support this measure and
a written request for that purpose is submitted by the employer.
F. As regards the disputed cases
that are referred to the Board of Settlement of Tax Disputes [BSTD], if the
employer applies for a respite for presentation of documents, a respite, of
three months at maximum, may be granted by issuance of a writ to that effect.
The session of the BSTD, however, shall be held not later than one month from
the submission of documents.
G. In case of the persons
described under the number 7 of the above-mentioned table, since such persons
usually declare that they do not receive their salary in foreign currency from
abroad, and this assertion has been found – in the light of studies undertaken
– to be correct, therefore, the tax assessment office should determine their
salaries and fringe benefits on basis of legal and acceptable documents and
books of accounts, after investigating the conditions of the company that is
the employer of the relevant expatriate salary receiver and becoming sure about
the correctness of the presented financial information. Otherwise, they should
determine the salaries and benefits by due regard to the records of the case
and level of the respective job, in comparison with similar occupations, and
also after obtaining the confirmation of the relevant assessor-general.
H. As for the individuals
referred to under the No. 8 of the enclosed table, who are usually citizens of
the countries mentioned therein, and have the same conditions as described in
relevant section of the table – namely they have been employed by the 100%
Iranian private companies and enterprises, or possibly by the Iranian public
and governmental organizations and foundations, because of their long residence
in Iran and marrying Iranian spouses – the following procedure shall be
implemented: those working for private sector, will be treated as provided
under the paragraph G above, and in respect of the others, the amount of the
salary declared by the public and governmental organizations and foundations,
as the case may be, will be taken into consideration.
3. Important points:
3-1. The sentence mentioned in paragraph C of this
circular shall be inserted on all tax clearances that will be issued.
3-2. The table No. 1 enclosed to the circular letter
No. 30/4-1616/52726, dated 11/06/77 [January 26, 1999] must be signed by the
relevant employer and expatriate salary receiver, and the copy of the valid tax
return submitted to tax office of the respective country should also be
attached.
3-3. In cases where the foreign company has a
contract in Iran, but commissions the needed employees from its own central office,
or from other companies affiliated therewith, the employment documents should
have envisaged salaries and benefits, payable in foreign currency and Iranian
Rial, and all benefits and allowances for working abroad. If in such cases a
special contract for an uncustomary amount (i.e. excessively different from
that of the table enclosed to the circular letter No. 30/4-1616/52726, dated
11/06/77 [January 26, 1999] is provided for working in Iran, it will be deemed
unjustifiable, unless the correctness and supportability thereof could be
ascertained under the provisions of the subparagraph A of paragraph 2 of the
present ruling.
3-4. Since foreign employers pay the salary of their
employees in currency of their own country, any employment documents issued from
the central office, principal company or a foreign affiliated company, in which
the salary for working in Iran is denominated in Iranian Rial, should be
rejected.
3-5. The employment of expatriates for working in
Iran is usually for full-time jobs, therefore, the employment documents, under
which the salaries and benefits fixed for half-time jobs, must be refused.
3-6. The term “tax return” means the tax return for
the fiscal year ending at 12/31/1998, or ending at the end of the latest fiscal
year in accordance with the tax regulations of the country, of whom the salary
receiver is a citizen. Meanwhile, it is recommended that the photocopy of the
tax return of each year be submitted to the tax assessment office up to four
months from the end of the fiscal year.
3-7. The salary income of foreign crew of aircraft
and ships chartered by Iranian companies according to agreements concluded with
alien corporations, shall be considered, irrespective of the charter agreement,
as being subject to salary income tax in accordance with the Article 84 [DTA]
for the reason of their working in Iran, and they shall be regarded as the
group 4 of the classification table.
3-8. Some employers who have concluded contracts
referred to in Articles 111 and 107 [DTA], allege that the tax applicable to
such agreements are undertaken by relevant government organizations and
therefore, the salary of their expatriate personnel is not subject to the
provisions of circular letters No. 4917, dated 02/21/77 [May 11, 1998] and No.
30/4-1616/52726, dated 11/06/77 [January 26, 1999]. This argument is absolutely
void of legal justification, and their expatriate employees are, irrespective
of contractual relationship between the parties to the agreement, subject to
Iranian taxation. Undertaking of tax by the respective government organization
would not mean tax exemption and the applicable taxes shall be claimable from
the employers of the expatriate salary receivers.
3-9. The provisions of this circular letter should be
notified to all employers and other persons subject to the regulations thereof.
3-10. Exceptional and ambiguous cases are to be
reported, through the channel of administrative hierarchy, to the office of the
Vice Minister for Taxation for reviewing and commenting.
The content of this circular letter has been
confirmed by the plenary session of the Supreme Tax Council.
Aliakbar
Arabmazar
Vice Minister for
Taxation
Abstract of Persian Articles
Editorial
Observance
of taxpayers’ rights has been the subject of several regulations adopted in
recent period by the tax administration. The editorial of the present issue
deals with this matter in both Persian and English sections of the journal.
TAX REGULATIONS OF THE BUDGET
LAW
Under the regulations of the budget law of
the Iranian year 1379 (2000-2001), several foundations are deprived from their
preferential status envisaged under the Direct Taxation Act, and have to pay
income tax as any other commercial entity. Certain indirect taxes are also
levied on a number of goods to be produced and imported during the budget year.
These and other tax regulations of the budget law are examined and commented on
by the author.
Tax Avoidance Tricks
This
article analyzes some rulings of the Finance Ministry in respect of several tax-avoidance
schemes adopted by taxpayers (Iranians and foreigners alike) in recent period.
A Comment on the Verdict of
the Administrative Justice Court (AJC)
AJC, which
is a judicial court, has recently examined a petition filed by a publisher
concerning two circular letters of the tax administration. The issue related to
the date of applicability of a tax exemption envisaged under the Note 6 of the
Article 132 of the Direct Tax. The petition and the verdict of AJC thereon is
analyzed and criticized by the author.
Tax Embargo
According
to the regulations of the U. S. tax law, credits for taxes paid abroad may not
be granted if the relevant transactions are made with certain categories of
countries (including those with whom the United States has no diplomatic
relations, etc.). The author has reviewed these regulations under the title of
tax embargo.
Inheritance and Gift Tax
Treaties
The study
undertaken by the author in respect of this type of tax treaties is continued
in this issue of the journal. The focus of the study is on the model of OECD.
Transfer Pricing
This is
also a continuation of the study undertaken in the field of transfer pricing.
The fourth part of the study is provided in the present issue of the journal.
TAX EXAMINATION ON BASIS OF SELECTION
The regulations of the Direct Taxation Act
regarding the cases of examination of tax files in random are reviewed by the
author and comparison is made with the procedures followed in the United States
with regard to the same manner of tax examination.
Rulings and Regulations
The text of new tax laws and regulations,
circular letters of the tax administration, rulings of the Supreme Tax Council
and verdicts of the Administrative Court of Justice are presented in the
Persian section of the journal. Some of these rulings and regulations are also
provided in the English section under the heading "Tax News".
Tax Glossary
Several tax terms and expressions are
presented and defined in each issue of Maliyat journal.