Maliyat Journal (Iranian Tax Review)
No. 29, Autumn 2000
English Section
IN THE NAME OF ALLAH
FROM THE PRESIDENT
The tax appeal system
is a fundamental component of any viable tax system, and is one of the
recognized rights of taxpayers all around the world. The relationship between
taxpayers and tax authorities is based on certain legal principles and laws.
The same is true in respect of relations between ordinary people, which are
also based on law and customs. When a dispute arises between two persons, they
resort to competent forums for solving their cases. The disputes may arise
between taxpayers and tax officials in the same way, a fact that is recognized
all over the world and special fora are also created for resolving these
specific kinds of cases.
In many countries two
levels of appeal are available in respect of tax disputes: administrative and
judicial. A taxpayer dissatisfied with the decision of tax assessment officials
may appeal to the administrative forum inside the tax organization for review
of his case. After having received the decision of the administrative forum,
the taxpayer may, in case of being in disagreement with it, appeal at a court.
Certain points, however, are worth noting in this connection:
1. The ordinary courts usually
do not interfere with tax matters and such disputes are in most countries dealt
with by specialized tax courts, which are composed of judges and experts.
2. The administrative fora are
usually organized within the tax administration and no judges take part in
their composition.
3. The expenses attached to
the judicial appeal are usually substantial and the procedure of appeal is
relatively elaborate and complicated.
4. When an appeal is taken to
the court, the tax administration is allowed to demand immediate payment of the
full tax liability, and no appeal is usually allowed against such decision. The
reason behind such behavior is that the state budget is prepared and approved
on basis of revenue forecasting, and delays in collecting taxes would impair
the realization of budge goals and targets.
Now let us consider the Iranian appeal system in
taxation matters. This system is quite unique and different from what described
above. The foundation laid in Iran for this purpose is based on a mixed
composition. The forum for handling the tax appeal is called the Board for
Settlement of Tax Disputes (BSTD). The BSTD is composed of three members who
are representatives of different interests and considerations, while all of
them are bound by the duty of observing the law and legal principles in
discharging their responsibilities. The first member is selected and appointed
by the Finance Ministry according to certain legal criteria prescribed by the
tax law. The second member is the representative of associations and
organizations established for defending and regulating the interests of the
private sector and taxpayers. The third one is a judge selected and introduced
by the judiciary. So, a BSTD is fundamentally different from administrative
fora organized in other countries for reviewing tax disputes. The BSTD has to
deliver its verdict by majority, and the judge appointed by the judiciary could
and should play a significant role in securing judicial justice.
Therefore, the administrative and judicial appeal are both merged and manifested in the composition of BSTDs, and participation of the representative of taxpayers can assure more safeguard for protection of taxpayers against probable ignorance of their legal rights. As far as the structure and legal framework is concerned, the system in question is sound and reasonable. The failure and shortcoming felt in some occasions is not due to the legal framework of the system, but we must search for defects in the practice of the people in charge of securing the goals of the law. More attention is to be paid when choosing the members of the BSTDs, not only by the Finance Ministry, but also by the justice administration and the organizations representing the interests and rights of taxpayers.
An Introduction to the
Iranian Tax System
(Part 9)
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.
Transfer of real property and goodwill
According to the Art. 59, DTA, the final
transfer of real properties, as well as the transfer of goodwill, are subject
to taxation on basis of their taxable value. The concept of taxable value and
the procedure of its determination will be examined later. The term final
transfer means unconditional transfer, that is a transfer which may not be
cancelled by either the seller or purchaser of the property. There are special
types of transfer contracts that are based on specific conditions, the
realization of which would give rise to right of cancellation or withdrawal of
the contract by one of the parties. An example of such conditional contracts is
the "optional sale", according to which the parties make condition
that if the seller gives the price back to the purchaser, within a specified
period, he may cancel the contract and take the property back (for more
explanation see Maliyat, No 26, PP 7 and 8).
Before touching upon detailed provisions
of DTA in respect of the tax on transfer of real property, it is worth noting
that no separate capital gains tax is envisaged under the Iranian tax system,
and most of such gains are dealt with under the general heading of income tax.
The gains derived from transfer of real
property and goodwill are also considered as taxable income.
A delicate point is that under the Iranian
tax law, the tax on transfer of real property or goodwill has the same meaning
as the tax on income derived from disposal of such properties, and no other
separate tax on this type of income does exist.
As far as the European countries are
concerned, the tax on transfer of immovable property is something separate
from, and in addition to, the tax on gains derived from such type of
transferring.
It should also be taken into consideration
that while the tax on transfer of real property is assumed to be a kind of
income tax, but not all cases of such transferring evidence the realization of
profit. The base of taxation is taxable value of the property, whether the
transaction produces loss or profit.
The term goodwill is defined as the right
of making business, the right of possession of a place, or the right arising
from the market position of the place of business (Note 4 to the Article 59,
DTA).
Rates
The rates of taxation that are applicable
on the taxable value of real property or goodwill are as follows:
up to IRR 20,000,000 4%
up to IRR 60,000,000 8% of
the excess over IRR 20,000,000
over IRR 60,000,000 12% of the
excess over IRR 60,000,000
Aggregation
If a taxpayer sells more than one
immovable property or goodwill during a single year, he will become liable to
taxation with regard to the aggregate of such transactions at the above rates.
The frequency of similar transactions can be considered as a badge of trade.
The persons who frequently buy and sell one type of property are more likely to
be trading than those doing so only once, and that is why a heavier tax burden
is imposed on them by the law.
Special cases
As it was mentioned earlier, the
transaction subject to the Article 59, DTA is the final transfer of real
property. There are, however, some other kinds of transferring of real property
that might not be categorized under the heading of "final transfer"
as is understood under the Iranian legal jargon. The expression "final
transfer of real property" in a context like the one used in the Article
59, DTA, conveys the idea of unconditional selling and purchasing of the
property.
Nevertheless, those other types of
transactions are also subject to the rule of the Article 59, DTA. Such cases
include:
1. where the transfer of the property takes place under
arrangements other than those of the sale contract (Article 63). One common
example of such non-sale transferring is the contract of agency. The owner may
appoint a person as his agent or proxy and empower him to transfer the property
in question to whom he may chose, including himself. Transfer of a property
under such arrangement shall also be subject to the ruling of the said Article
59, DTA.
Another case of non-sale transfer is the
exchange of real properties. In these cases, each of the parties has to pay the
tax of the Article 59, DTA, applicable to his own transferred property.
However, the case of gratuitous transfer
of real properties is not subject to the Article 59 or any other part of the
chapter under review. Previsions of a separate chapter of DTA (related to the
tax on incidental income) are applicable in such cases. It will be examined in
a later stage.
2. Sometimes the people, who are not legal owners of real
properties, possess and exploit them by virtue of special rights recognized
under local customary law. The right in question is somehow similar to the
notion of beneficial ownership in some European countries.
Transfer of this type of rights is
considered to have the same result and effect as the transfer of real properties,
and thus is subject to the taxation of the Article 59, DTA (Art. 74).
Exemptions
Several cases of transfer of real
properties are exempted from taxation. They are as follows:
1. Transfer of real properties to banks in connection with the
banking facilities granted through civil partnership (Note 4 to the Article
59). Those in need of finance for buying houses or other real properties may
borrow money from banks. In such cases a partnership contract may be concluded
between the bank and the borrower, according to which the borrower becomes the
co-owner of the property. When the loan is totally repaid, the property is
relinquished and transferred to the borrower. Such transferring is exempt from
the tax on transfer of real properties.
2. Transfer of real properties to people on basis of land reform
laws and regulations is also exempt from taxation (Article 65, DTA).
3. Housing cooperative companies enjoy a number of incentives,
including tax exemption in respect of transferring of the houses built by them
to their members.
4. When a transaction on real property is terminated or cancelled,
the property is relinquished and given back to the former owner. This process
might be considered as a new transferring of the property and thus be taxed for
the second time. To prevent such interpretation, the Article 67, DTA, provides:
Article 67. Termination of final
transactions on real properties that takes place on basis of judicial
authorities' decisions, shall not, as a general rule, be considered as a new
transaction, and thus shall not be subject to the taxation of this chapter. The
same rule shall apply to cancellation of final transactions on real properties
by mutual consent of the parties, or termination of the same in other cases,
provided that such actions take place not later than two months from the date
of the original transaction.
As it can be understood from the above
text, the exemption granted in this case is conditioned on the requirement that
the interval between the original transferring and its termination would not
exceed a period of two months. Otherwise, the event of termination shall be
considered as a new transaction, and thus subject to further taxation.
It is worth nothing that even within the
said interval, the tax paid for original transferring is not refundable,
although the transaction is cancelled and terminated. Refund of tax takes place
only when the tax is paid but the transaction is not effected. In such cases:
the relevant tax assessment office shall,
upon request of the taxpayer and confirmation of the notary public about
non-registration of the transaction, refund the collected tax pertaining to
such aborted transaction out of the current collections within 15 days from the
notary public's announcement and in conformity with the regulations of the
present Act. The rule of this Article shall apply to the rebate of taxes
pertaining to goodwill... as well (Article 72, DTA).
Reference in the above article to the
notary public is due to the common practice that transfer of real properties is
usually registered by a notary public, and only in this way its validity as an
official transaction is secured.
5. Article 69, DTA, pertains to the low and medium price
residential units that are built within ten years from the date of approval of
the law (DTA) in accordance with certain criteria, and are transferred to
buyers within one year thereafter. The first transfer of such residential units
shall be exempted from the tax on transfer of real properties, provided that
all the relevant criteria and aforesaid timing are observed.
Since the exemption can be applied only
for the first transfer of the property, and about 13 years has passed from the
approval date of DTA, the exemption provided under the said article has no more
opportunity of application at the present.
6. Some government organizations and municipalities are authorized
under the law to buy or take lands and other real properties for public
utilities, such as construction or extension of roads and streets, pipelining
of water, oil and gas, etc. The price of taken properties is to be paid or
allocated to the original owners. This type of transferring of real properties
is also exempt from taxation (first part of the Article 70).
7. When the real properties that are registered in the list of
national monuments, are transferred to the State Organization of Cultural
Heritage, such transferring shall be exempt from the applicable transfer tax
(second part of the Article 70, DTA).
The regulations concerning the taxable
value and its determination will be examined in the next issue.
An English translation of the circular letter No.
30/4/1616/52726 dated 11/06/1377 [January 26, 1999] of the Iranian Tax
Administration was printed in Maliyat journal No. 25, pp. 7 to 14. Certain
guidelines were included in the circular letter regarding the salary income tax
of expatriate employees working in Iran. It had been pointed out in paragraph 2
of the part A of the circular that such expatriates are, as a result of working
in Iran, liable to taxation on the amounts received by them as salary and
fringe benefits. The tax authorities were also instructed to observe the
regulations of the tax law regarding salary tax exemptions and abatements, and
to take into account the relevant provisions of double taxation agreements
concluded between the Iranian government and governments of respective
countries. Later the tax administration issued another circular letter to
clarify the above ruling in respect of double taxation treaties. English
translation of the latter circular is given below.
CIRCULAR LETTER NO. 30/4 - 9533/49524
DATED 10/04/1378 [DECEMBER 25, 1999]
For the purpose of implementation of the paragraph 2 of the part
A of the circular letter No. 30/4/1616/52726, dated 11/06/1377 [January 26,
1999] with regard to the salary tax of residents of the states that have
concluded double taxation agreements with the Iranian government, and the
relevant agreements have become enforceable, it is hereby declared that:
The exemption from salary tax provided under the paragraph 2 of
the Article 15 of the said agreements, is conditioned exclusively on
realization of all requirements of the subparagraphs of the same paragraph,
namely:
A. the period or periods of presence of the recipient of salary
in the Islamic Republic of Iran for one or more occasions, should not exceed in
the aggregate 183 days in the fiscal year concerned*, and
B. the remuneration is paid by, or on behalf of, an employer who
is not a resident of the Islamic Republic of Iran, and
C. the remuneration is not borne by a permanent establishment or
a fixed base, which the payer of remuneration has in the Islamic Republic of
Iran.
Since verification of fulfillment of the above conditions requires
that certain valid and certified records and documents be examined and
investigated, therefore, and before the realization of the aforesaid
conditions, the tax applicable to the salary of such persons should be
calculated and collected according to the relevant regulations. If thereafter
it becomes clear that the case had not been subject to the tax of the
government of the Islamic Republic of Iran, then the tax deducted for this
purpose shall be refundable in accordance with the Article 242 of the Direct
Taxes Act, without observance of the legal time limit envisaged under the
Article 87 of the same Act.
Aliakbar Arabmazar
Vice Minister for Taxation
* The first condition agrees with the text of some double
taxation treaties concluded before the amendment of subparagraph a) of the
paragraph 2, Article 15 of the OECD Model Convention. Therefore, the first
condition of the circular letter refers to "the fiscal year
concerned". More recent tax treaties of Iran are based on the amended text
of the OECD Model, and refer to "any twelve month period commencing or
ending in the fiscal year concerned".
Abstracts of Persian Articles
Editorial
In many countries
two levels of appeal are available in respect of tax disputes: administrative
and judicial. In Iran, however, these stages are merged in one and the same
forum. The editorial touches upon this subject in both the Persian and English
sections of the journal.
Tax Regulations of the Law on Third Development Plan
Third development plan was approved by the parliament few months
ago. Taxation is one of the main problems dealt with in the plan. A separate
chapter of the relevant law is devoted to taxation and budget and many other
parts of the law also contain one or more provisions with regard to taxes. But the plan does not provide
forecasting about the amounts of tax revenue collectible during the relevant
years (March 2000 to March 2005).
These and other aspects of tax regulations of the third development plan
are examined in the article.
Taxation in the 20th Century
This is a Persian translation of the article printed in the IBFD
Bulletin regarding the developments in the field of taxation during the last
century with prospects for 21st century. First part of the translation was
provided in the last issue of this journal and the second and last part is
given in the present issue.
Iranian International Tax Regulations
The author comments on a circular letter of the tax
administration regarding the taxation of salary income of expatriate employees
working in Iran. The circular deals with the citizens of the countries that
have concluded double taxation treaties with the Iranian government. It
emphasizes on the conditions mentioned under the paragraph 2 of the Article 15
of tax treaties, which is similar to the relevant part of the OECD Model
Convention. A translation of the
same circular letter is printed in the English section of the journal (under
the heading “Tax News”).
Tax Avoidance Trick of
Article 138
Article 138 of the Direct Taxes Act rules that any part of the
profit of companies derived from industrial and mining activities and reserved
for development and completion of the units engaged in the same activities, is
exempted from taxation. The funds allocated to such reserves must be used for
those purpose , otherwise, the applicable tax plus a fine equal to 20% of the
same shall be collected from the failing companies. This provision has created
an opportunity for companies to use such reserves for purposes other than
industrial and mining activities, which produces much more profits for them.
The cost they have to pay for their failure is only 20% of the amount of the
reserved taxes after expiry of 5 years. This is a very cheap price in
comparison with the much higher rates of interest they would otherwise pay in
free market for securing needed finances. This subject and measures taken in
this regard are reviewed in the article. .
Inheritance and Gift Tax Treaties
The 6th part of this series of articles is provided in the
present issue. The regulations of the OECD Model regarding the methods of
elimination of double taxation (Articles 9A and 9B) are examined.
Transfer Pricing
This is also a continuation of the study undertaken in the field
of transfer pricing. The fourth part of the study, which is provided in this
issue, pertains to “cost plus method”.
Tax Exemption of Booksellers and Publishing Houses for the Sake
of Writers
A bill of law has been submitted to the parliament for approval.
In the course of debate in the parliament it has been said that the bill is
prepared with the aim of assisting the writers and authors. But, the exemption
envisaged is solely pertaining to publishing houses and booksellers. The
authors and writers will remain subject to taxation as before. This matter is
examined and criticized in the article.
Tax Penalties around the World
A new study is undertaken by this journal in respect of
penalties applicable to tax offences in different countries. In this issue the
regulations of France concerning administrative and criminal tax offences and
penalties are reviewed.
Appeal in Tax System of Selected Countries
The system of appeal against decisions of tax authorities is
studied in this article. The study is focused on four countries, namely
Germany, Canada, Mexico and
People’s Republic of China.