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Maliyat Journal (Iranian Tax Review)

No. 31, Spring 2001

English Section







The increasing expansion and complexity of economic, political, technological and legal relations of today’s world have resulted in proliferation and development of cross-border transactions among different countries and involvement of transnational corporations in the economy and trade of developing countries. These enterprises try to shift the profits of their subsidiaries from one jurisdiction to another by exploiting the differences in tax, customs and currency policies of various countries, in order to minimize their global tax liabilities. The unavoidable result of such a course of action is the deprivation of some nations - especially those of the developing countries - from a considerable part of their revenue. The main device employed by those companies for achieving the above goal is the use of transfer pricing tricks, utilized in transactions among the members of these groups.

Such transactions and transferring include sales of raw materials, semi-finished and finished goods, machinery and equipment, intangible assets (like technical know-how, patents, trade marks, etc.) and different types of technical, legal, accounting and other services.

The extent of these intra-group transferring is increasingly rising, so that the aggregate effect of the tricks referred to above may deprive many countries from a large share of their tax revenue. Of course the consequences of unsound and artificial transfer pricing are not confined to taxation domain. The profit shifting through transfer pricing manipulation is also detrimental to a country’s economic development and interests the consequences of this process may hamper and harm the business competition as well. The false pricing methods can increase the profits of a group and place them in an advantageous position in comparison with their competitors.

A number of developing countries have not yet approached the issue seriously. This may be the result of either the unawareness of the true nature of the multinationals’ measures and maneuvers, or due to fear of discouraging foreign investment. Lack of adequate administrative infrastructure has also some bearing on reluctance of such countries to confront the matter seriously.

The situation, however, is wholly different in most jurisdictions, including a considerable number of developing countries. Tax authorities have, in general, become much more aggressive in the transfer-pricing arena, and special regulations are adopted in the tax code or other laws of the majority of nations in this regard. Comments and rulings are also systematically issued to supplement the law. The verdicts rendered by administrative and judicial appeal for a have also certain impacts on development of law in respect of transfer pricing issues.

Studies, analyses, initiatives and reactions in this field have led to a situation where not only the governments and tax authorities, but also the academic and research institutions have become interested in the subject of transfer pricing. A considerable number of courses, seminars, etc. are set up each year to provide education and training with regard to this issue, and many books, brochures and periodicals about this subject around the world.

A keen interest in the topic has been taken by certain international organizations such as the Organization for Economic Co-operation and Development (OECD) sand the United Nations Conference on Trade and Development (UNKTAD). These organizations, as well as the famous accounting and auditing institutes allocate substantial resources to studies in this respect, the outcome of which is presented to the world as reports, books, etc.

In 1997, the UNCTAD organized an intergovernmental working group of experts for studying the subject of transfer pricing. In the final report of the group we find the following statement:

“Developing countries and countries in transition are increasingly at risk until they adopt regulations which insure the equitable pricing of transferred goods and services. The economic consequences, most notably loss of tax revenue, of profit-shifting via transfer pricing manipulations are detrimental to a country’s continuing development”.

Under these conditions, which is properly described by the UN economic affiliate, and where the problem of transfer pricing has become the issue of majority of states, the excuses such as the attraction of foreign investment can not hinder the effective and serious measures of governments for challenging the tax-avoidance tricks referred to above.

The Maliyat journal considers itself bound by the duty to study and analyze the subject of transfer pricing and ways and means for eliminating the harmful effects of this process for the economy of the country. We have done so in the past, and will do our best in the future with the aim of familiarizing our readership with this issue of global significance.


Dr. Aliakbar Arabmazar


] ] ] ] ]


An Introduction to the

Iranian Tax System


 By: Dr. Mohammad Tavakkol

(Part 9)


In previous issues we studied the tax on properties first, then touched upon the income taxation, by examining the tax on real estate income. In this connection, the rental income taxation and the tax on transfer of real properties and good will were reviewed and it was stated that this latter kind of income tax is usually determined on basis of what is termed the “transactional value”. Now the concept of transactional value and the manner of its determination will be considered.


Transactional (taxable) value


As it was pointed out earlier, the term “transactional value” in the context of the Iranian tax law means in effect the “taxable value” and has nothing to do with the actual prices of the relevant transactions. The factors and elements that must be taken into consideration for determining the taxable (transactional) values are as follows:

1. As regards the goodwill, the type of business carried out in the relevant property and other factors effective on the value thereof (Note 1 to the Article 79, DTA);

2. In respect of urban lands, the specifications and particulars stated below:

- geographical position (landscape, type of soil, underground facilities, climate and altitude of the area),

- legal conditions (whether the property concerned has a single owner or is owned jointly by two or more persons, the ownership is based on an official title deed or not, the ownership thereof is based on an official deed or not, the property is leased out or there are no tenants, etc.),

- urban services (water, electricity, telephone, gas, hygienic and sanitary conditions, education, urban transportation and similar facilities),

- surface extent, and density of population and buildings,

the type of application of the land,

- accessibility of verdant area and shopping centers, and

the type of roads in terms of transportation and traffic (paragraph (a) of the Article 64, DTA);

3. In case of agricultural and rural lands, the taxable (transactional) value is determined by due regard not only to the considerations stated in the paragraph 2 above, but also to the following particulars:

- distance of the property to the town,

- type of the produce and its price,

- quality of the soil,

- quantity of available water,

capability for mechanical cultivation,

- natural conditions of the land,

existence of roads, their type and distance to the main road, and

whether the land, building or trees of a garden belong to different persons or not (paragraph (b) of the Article 64, DTA); and

4. The taxable value of buildings is determined by due regard to:

- the type of materials used (steel, or reinforced concrete structure, steel beam roof, etc.),

the age and density of buildings,

- the purposes for which they are allocated (residence, business, - professions, etc.), and

the kind of ownership of the land of the building and superstructure over it.


The body responsible for valuation

A body called The Real Estates Valuation Committee (REVC) consisting of 6 members is in charge of determining the taxable value of real properties. It comprises the representatives of The Finance Ministry and some other ministries and organizations referred to under the Article 64 of The Direct Taxes Act (DTA). Some local credible experts are also introduced by the councils of cities and towns to take part in the committee.

The taxable values appraised by the REVC remain valid until new values are determined. In cases where no taxable (transactional) value is determined for a property, the taxable value of the nearest similar location shall apply (Article 61, DTA).

The transactional values so determined, are usually published by the General Directorate of Tax Information and Services (Ministry of Finance), and those interested can refer to it for more information.


Business of erection and sale of buildings

Some individuals and corporations engage in the business of erection and sale of buildings. As far as the taxation is concerned, this is a twofold or two-sided activity. In first place, it involves the transfer of real properties and thus is subject to the tax of transfer of real property as described above. Besides that, those engaged in such activity carry out a business and have to pay the tax on their profits. So, they become subject to the provisions of the Chapter IV, Title C, regarding the tax on business income, if they are individuals, and subject to corporate tax (Chapter V, Title C) in case they are companies. The regulations concerning business and corporate income tax will be studied later, Few words, however, must be stated about the relationship of these two types of taxes at this stage. A property constructed by the persons in question comprises land and building. The taxable value is usually calculated for the land as well as for the building separately. The business of erection and sale concerns, in principle, the building and, therefore, the transfer tax related to the building is in essence a tax on the business of the seller. So, when calculating such persons’ business tax (under the provisions of the relevant chapter of the law), the transfer tax paid in respect of the building must be subtracted from the business tax of the same persons.

If no taxes are applicable in the case of erection and sale business, or if the applicable tax is below the transfer tax pertaining to the building, then the payment of the transfer tax will suffice (Article 77, DTA).

The Note of the Article 77 envisages a special case, where an individual whose ordinary business is not the construction and sale of real properties, sells during a single tax year, more than one residential unit or two business units that are built by himself. Such person shall be considered, for tax purposes, as being engaged in the erection and sale business.



Where a taxpayer transfers several properties during a single year, he shall be liable to taxation with respect to the aggregate of such transactions at the rates set forth in the Article 59, DTA (as mentioned earlier).

These taxpayers are required to draw up, with regard to the aggregate of their annual transactions, a tax return and file the same with the relevant tax office not later than the end of the month Ordibehesht (21st May) of the next year. The balance of the tax arising from the total transaction should also be paid at the same time.

In all other cases, the relevant taxpayers are required to file their tax returns and to pay the applicable taxes according to the procedure, and within the time limits, provided under the Article 80, DTA.

Our study with regard to the tax on real estate income (Chapter I, Title C) comes to an end at this point. The tax on income from agriculture and the tax on salary income will be examined in coming issues.


s s s s s


Comment on a verdict of the STC


The Supreme Tax Council (STC) is the highest forum inside the tax organization for reviewing final decisions of administrative appeal for a, in cases where the complaints submitted are based on, and related to the questions of law. The verdicts of the STC, when rendered by the Plenary Board, may not be cancelled or changed, unless by legislation or by a new verdict of the same Board.

In this issue we review an award of the Plenary of the STC regarding the taxation of the representative offices of foreign banks.

As it is understood from the introduction of the award, the representative offices in question are licensed by the Iranian Central Bank and can not engage in banking business (borrowing and lending money, opening bank accounts, etc.).

It has also been stated in the same part of the award, that there exist two different opinions in this regard.

Some officials are of the opinion that the said representative offices are not subject to taxation, since they engage in no banking activities, as stated above. According to the second view, however, such offices are to be taxed, because the relevant foreign banks earn income via their activities.


SCT’s decision

The award of the SCT’s Plenary Board reads as follows:

“The foreign banks are clear examples of foreign juridical persons. Therefore, if it is ascertained, on basis of evidence and documents, that they have earned income in Iran by setting up representative offices, they shall certainly become subject to taxation in respect of such income”.

In rendering the above opinion, the SCT relied on the following grounds and arguments:

1. Under the paragraph (c) of the Article1 of the Direct Taxes Act (DTA), non-Iranian persons (whether real or juridical) are subject to taxation with regard to their income derived in Iran, as well as in respect of their income from Iranian sources “for the granting of licenses and other rights, or for the provision of training and technical assistance, and also for the transfer of cinematographic films”.

According to the SCT, the said paragraph provides a common and general rule with regard to taxability of the income of non-Iranian persons derived in Iran, and also in respect of certain kinds of income earned from Iranian sources. This argument means that the taxability of these types of income of foreign persons and enterprises is a common (and not restricted) rule, and thus is extendable to foreign banks as well.

The paragraph (c) of the Article 105, DTA states that the foreign juridical persons and entities residing abroad are taxable in respect of their “aggregate taxable income derived from the operation of their investment in Iran or from the activities performed by them, directly or through the agencies like branches, representatives, agents and the like, in Iran, and also with regard to their income from Iran for granting of licenses and other rights, or for provision of training and technical assistance”. The said paragraph determines then the tax rates applicable to the income of such entities.

By referring to the above paragraph, the SCT aims again at presenting legal reasoning in connection with the taxability of income of foreign enterprises derived in Iran, and also from Iran in certain cases.

Paragraph (a) and (b) of the Article 107, DTA provide for the manner of assessment of the taxable income of the same taxpayers (foreign juridical persons and enterprises residing abroad), respectively for the income earned “from” Iran and the income derived “in Iran”.

These paragraphs too evidence, according to the STC, the liability of foreign entities to Iranian taxation, in cases where certain incomes are attributable to them.



“In Iran” and “From Iran”

Some points are worth noting in this regard:

To make the income of an enterprise residing in a country subject to taxation of another country, from which the income is derived, is contrary to recognized principles and, therefore must be restricted to exceptional and clearly defined cases. According to common practice, trading “with” a country should not be taxed in that country, otherwise, the aggregate between nations will become subject to taxation, a result which would harm the international commerce and development. Based on these considerations, the Iranian tax law has viewed the taxation of foreign entities derived from Iran as an exception treatment and therefore enumerated such cases one by one. They include the income derived for the granting of licenses and similar rights, provision of training any technical assistance, and transfer of cinematographic films. This enumeration is given in all provisions relied upon by the SCT, as referred to above.

The cases related to the income derived “from Iran”, however, are not pertaining to the subject under our review, namely the status of representative offices of foreign banks, So, we have to focus on the income derived “in Iran”, in case of which reference has also been made (in both articles 105 and 107, DTA) to the activity of the “representative” as well.


Representative office of foreign banks

Now let us see what in fact constitutes a representative office of foreign banks, and to what extent the attribution of income to such offices is accurate and measurable. The following definition (or description) is given in this regard by an author:

“A representative office located abroad is a foreign office of a bank employing one or more persons. A representative office does not lend or borrow funds independently, for its “own account”. The representative office serves as a contact point for the non-resident bank it represents, it gathers information for the head office and other offices and sometimes brings in new clients. A representative office may, moreover, maintain contacts with correspondent banks in the host country or in countries surrounding that country.

In view of the fact that the representative office dos not engage in the activities reserved for credit institutions, the presence of such an office in no way affects the existing (friendly) relations with the local banks. The representative office may also serve to explore the local market of the host country.

A disadvantage of the representative office is that it is prohibited from active banking activities in the host county. Also, any market research carried out by a representative office generally will not have the scope or depth of a study performed by a larger branch with more personnel and a deeper affinity with the local market because of its effective participation therein”.

As to the activities of a creature like the one described above, it might become quite difficult to attribute a clear and definite income, unless the representative office goes beyond its legal status and involves in operations more susceptible of earning some discernible and measurable income. Probably the SCT had the same consideration in view, when used a conditional tone in its award and stated:

“… if it is ascertained, on basis of evidence and documents, that they [foreign banks] have earned income by setting up representative offices, they shall certainly become subject to taxation in respect of such income”.


Tax treaties

The point the SCT remained silent about was the ruling of the Iranian double taxation treaties with regard to the issue of representative offices’ taxation. A considerable number of tax treaties are concluded, especially in recent years, between Iran and other countries. As far as the international tax relations of the country are concerned, the provisions of these agreements are to be taken into account in the first place. In other words, in case of contradiction between the tax agreements and domestic law, the priority should be given to tax treaties (which at the same time have become a part of the national law, after being approved by the parliament). So, we will also touch upon these treaties, without dealing with which our study will remain incomplete.

Iranian double taxation treaties are, like those of many other states, drawn on basis of the OECD Model Convention. The issue under our consideration is dealt with in that part of tax treaties, which pertains to the concept of permanent establishment. The article 7 of the OECD Model Convention, as well as that of the Iranian tax treaties, present a basic rule in this respect. As an example we quote this principle from the text of the Iran-France tax treaty:

“The profits of an enterprise of a Contracting State shall only be taxable in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment”.

The first question coming to mind is whether the representative office of foreign banks is a permanent establishment or not. At first glance, the answer might seem to be positive, since not only the text of the Article 7 can be construed in this way, but also the paragraph 2 of the Article 5 states that the term permanent establishment shall include certain places, one of them being “an office”.

Meanwhile, according to the definition given under the paragraph 1 of the Article 5, the basic characteristics of the permanent establishment are as follows:

-              the existence of a place of business, such as premises, etc;

-              this place must be established (fixed) at a distinct place with a certain degree of permanence; and

-              the carrying out of the business of the enterprise through this fixed place of business.

At least, the first and second conditions are true in respect of the representative office of foreign banks.

In spite of that, we have to take into account the content of the paragraph 3 of the same article as well. This paragraph lists a number of business activities which are treated as exceptions to the general definition laid down in paragraph 1 and which are not permanent establishments, even if the activity is carried on through a fixed place of business. The subparagraph “d” of that paragraph includes the fixed places of business maintained solely for collecting information for the principal enterprise. One of the main tasks of representative offices is also the collection of information for their principals, namely the relevant foreign banks.

Another exception is referred to under the sub-paragraph “e” of the said paragraph, which provides that a fixed place of business, through which the enterprise exercises solely an activity, which has for the enterprise a “preparatory or auxiliary character” is deemed not to be a permanent establishment. Such a place of business may somehow contribute to the productivity of the principal enterprise, but the services it performs are so remote from the actual realization of profits that it is difficult, and in some degrees illogical, to allocate any profit to the fixed place of business in question.

The activities of representative offices of foreign banks were described earlier. Majority of these activities have preparatory and auxiliary character in relation to the business of the foreign banks situated abroad.

That being the case, one can conclude that such representative offices may not be considered permanent establishments, under the provisions of double taxation treaties.

However, the above conclusion is conditioned on the assumption that the representative offices in question would not overstep the bounds determined for them by the law, contract, or by the very nature of their profession. Neglecting this requirement and engaging in other profit-producing activities would inevitably entail tax liability for them.


Case law

With regard to the preparatory and auxiliary nature of activities of representative offices, the view of the Swiss Supreme Court rendered on September 17, 1976 is of special interest. The following text with respect to the said opinion is quoted from a book concerning the international tax law of Switzerland:

“… the Swiss Supreme Court had the occasion to confirm the application of Article 5, paragraph 3 (e) of the Switzerland-Spain tax treaty. A Spanish bank had set up a representation office in Geneva. Its mission was to explain to banks and Swiss businesses the services that the Spanish bank can render, to establish contacts with Swiss businessmen in view of Spanish business, and to provide the Spanish head office with information concerning the Swiss economy. The representation office had not negotiated or signed any contracts on behalf of the Spanish bank. The question had been raised as to whether the Geneva operations constituted a permanent establishment. The Swiss Supreme Court concluded that the mere fact of having an office in Switzerland was not sufficient to constitute a permanent establishment. It was moreover necessary to analyze the activity in Switzerland. Based on the above mentioned facts, the Swiss Supreme Court concluded that the bank did not conduct any of its banking business through the Swiss office and that the activities of the Swiss office could only be characterized as being of a preparatory or auxiliary nature. It was therefore not considered as a permanent establishment.



Under the provisions of double taxation treaties, the representative offices of foreign banks may not be considered as permanent establishments, and thus, are not subject to taxation in host countries. No contradiction seems to exist in this regard under the provisions of Articles 105 and 107 of the Direct Taxes Act.

However, the conduct of representative office is important in this connection. If they involve in operations beyond the limitations described above, then they may become subject to taxation in accordance with legal provisions.




Abstracts of Persian Articles



The transfer pricing tricks of multinational and international groups and the negative effects of this process on tax revenue of developing countries is addressed in the editorial of this issue of Maliyat journal.


Tax Capitulation!

Tax officials in all countries are obligated to discharge their duties with regard to all taxpayers in equal manner and without discrimination.  This obvious and natural principle is sometimes challenged by certain people and agencies in a special way.  They argue that the foreign persons and enterprises engaged in economic activities inside the country should be treated differently in comparison with the citizens, and in particular they should be trusted much more, as far as their tax statements and declarations are concerned.  The reason, according to advocates of this thesis, is the need of the country for attraction of foreign investment and technology.  This subject is analyzed and criticized by the author.


Pursuing Greater Compliance and Less Burden

This is a Persian translation of an article written by Dr. Marsha Blumenthal concerning the compliance burden in the United States (printed in the IBFD Bulletin, volume 54, No. 7). Since the article is relatively long, it will be introduced  in two parts, respectively in the present and next issue.


Iranian International Tax Regulations

The author comments on a verdict delivered by the Supreme Tax Council (STC) on exemption of foreign embassies and consulates acting in Iran form certain indirect taxes levied as a percentage of the price of communication services. The STC based its opinion on Vienna Conventions of 1961 and 1963 (regarding the diplomatic and consular relations). This opinion is examined by the author. A similar article is presented in the English section of the journal.


Court of Administrative Justice and Supreme Tax Council

The author maintains that the Court of Administrative Justice  (CAJ) is not competent for annulling the verdicts of the Plenary Session of the Supreme Tax Council (STC). A recent judgment of the CAJ, by which a verdict of the said Plenary Session has been annulled, is criticized in this article not only for that reason, but also for the defects of legal argument as described by the author.


Inheritance and Gift Tax Treaties

The 7th part of this series of articles is provided in the present issue. The regulations of the OECD Model regarding non-discrimination (Article 10) and a part of the Article 11 concerning the mutual agreement procedure are examined.


Transfer Pricing

This is also a continuation of the study undertaken in the field of transfer pricing. The sixth part of the study concerning “Fourth Methods” (like CUP, profit-split method, rate of return method, etc.) is provided in this issue.


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.


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.

The End