Maliyat Journal (Iranian Tax Review)
No. 32, Summer 2001
English Section
IN THE NAME OF ALLAH
FROM THE PRESIDENT
The tax
administration of today's world has to deal with issues much different from
these of the past. The origin of this difference and alternation is to be found
in rapid changes scale. New branches of business are evolving, the scope of
trade is broadening and a range of unheard-of sources of income and wealth are
coming into being. Side by side these developments, the tax system should
improve its capabilities and become ready to cope with exigencies of new circumstances.
An eminent feature
of the above developments having substantial bearing on taxation issue is the
proliferation of commercial, industrial and technical relationship between
various societies of the world. A country with no virtual interest in such type
of trade and economic links scarcely can be found in our time:
In this state of
affairs, the tax system should play its appropriate rule and its rules and
criteria must be clear and unambiguous. The fact that tax treaties are becoming
an inevitable element of tax legislation manifests the significance of the said
relationship in the economic life of the present-day societies.
An ever-increasing
number of tax treaties are included during last decade. The scope of treaties
has also been broadened. In the past, they used to cover arrangements for
preventing the occurrence of double tax solely. Even now, the laymen associate
it with the same restricted sphere.
At the present,
however, the tax treaties not only contain provisions for handling the problem
of double taxation, but they also provide for cooperation between contracting
states for prevention of tax evasion. Even the idea of co-assistance for
collection of taxes gradually finds its way into tax treaties.
As regards the
type of taxes, the treaties have taking place in social and economic life of
the contemporary world, a continuous process, which no end to it is
conceivable. Growth of population and diversification of human needs have
causes the expansion of commercial and economic activities in an unprecedented
extended to heritage and gift taxes as well. These now tax treaties have the
same scope and provide for the same provisions (as stated above) with regard to
the latter type of taxes.
We are also
witnessing emergence of similar treaties in relation to social security
contributions. These treaties envisage provisions for preventing double
payment, and also evasion and avoidance of payment, of such contributions.
All types of tax
treaties are constituents of the internal law of contraction states and are to
be observed by respective authorities.
They are commonly
ratified by the legislature, and thus have the power and effect of law, beside
the fact that abidance by agreement is a recognized principle of international
law.
The tax
administration should take into account all above considerations and prepares
itself for responding to demands and requirements thereof. A remarkable
manifestation of that can be noticed in cases where some aspects of
international trade and economic relations are to be dealt with. If a tax
question is put forward in connection with such issues, the regulations of
domestic international tax law, in addition to provisions of respective tax
treaties should certainly be considered and observed. A considerable part of
international tax law is usually included in domestic law of each country.
Alongside that, the provisions of tax treaties must also be fulfilled.
The authorities in
charge of deciding upon international tax matters, including tax assessment
officials, Boards for Settlement of Tax Disputes and the Supreme. Tax Council;
have to take the above observations into account. The ordinary tax laws and
regulations would not suffice, and we have to enhance our knowledge by careful
study of international tax treaties and the literature connected therewith.
This is a new and serious challenge, to which all of us have to confront and
respond in an appropriate manner. The scope of the work is extensive and calls
for endeavor and strive. This is an unavoidable fact, since even the traditional
legal duties oblige us to observe it. How we can ignore a tax treaty, while it
is a constituent of our domestic law? Should we do so, we should certainly
breach our own domestic law.
Beside that, by
disregarding the task of overall study of international tax law, one would
deprive him from the comprehension of the real substance of the issues and
relationships regulated by tax agreements.
Such a person
would not be able to render a correct decision upon the respective tax
questions.
Dr. Aliakbar
Arabmazar
Tax Provisions of the Budget Law
By: Dr. Mohammad Tavakkol
The Iranian annual budgets usually contain not only the figures,
but also a number of different provisions on revenues and expenditures, which
are termed as “Notes” (Tabsareh). There are 50 Notes appended to the budget of
the Iranian current year of 1380
(March 21, 2001 to March 20, 2002). Some of these “notes” provide for tax
regulations. These latter provisions can be divided into the following
categories:
- Notes envisaging tax exemptions,
- Notes on expensing of certain items in computation of some
entities’ tax liability,
- One case of relief in connection with tax coefficients,
- Notes re-imposing certain indirect taxes, and
- Provisions for assuring the collection of income tax from
public entities (one Note).
A. Exemptions
1. Section “O” of the
Note 2 of the Budget Law allows for refunding of a tax collectible from a
state-owned bank called “Bank-e San,at va Ma,dan (Industry and Mine Bank). The
tax is to be collected from the sale of the shares of some companies affiliated
with the Bank. All the tax will be
paid to the treasury first, and then will be added to the Bank’s capital (as an
addition to the capital share of the government).
Though the term tax exemption is not directly used in the above
“Note”, but the result will exactly be equal to granting of tax exemption in
respect of the transaction described above.
2. Section “I” of the
Note 10 of the Budget law authorizes the Social Security Organization to lend
(in the course of the budget year) an amount of IRR 50 billions, from its
income and reserves, to qualified persons for specific needs (housing,
marriage, etc.). The money will be administered through the Bank-e Refah-e
Kargaran (Bank for Welfare of Workers). The principal amount of the Loans,
together with interest accrued thereto, will be returned to the Social Security
Organization, and no taxes will apply either to the principal or to the
interest.
3. According to the
section “O” of the Note 10, the medicine and medical appliances imported for
the benefit of invalids (because of war or otherwise) shall be exempt from all
kinds of taxes and custom duties.
4. Section “B” of the
Note 14 provides for refunding of the consumption tax on the goods bought and
carried abroad by foreign passengers. The refund to the passenger will take
place at the exit terminal (airport or other departure points). This rule,
which is enacted to encourage tourism and exportation, would cover items such
as music and video tapes, cigarettes, etc.
5. Section “A” of the
Note 35 rules that the turnover of the National Iranian Steel Company and its
affiliates, as well as that of the Iranian Copper Industries Company, and the
Iranian Petrochemical Industries Company, and its affiliates, shall be subject
to the provisions of the Article 138 of the Direct Taxes Act (DTA) as amended.
Article 138, DTA, provides that any part of the declared profits
of the companies derived from industrial or mining operations, which the
companies reserve for the purpose of reconstruction, development or completion
of their existing industrial and mining plants, or for setting up new ones,
shall be exempt from taxation. The same exemption shall also be granted if the
profits of such companies are allocated to a reserve for construction of houses
for their employees.
Now, the last paragraph of the section A of the Note 35 of the
Budget Law grants the same exemption to the afore-mentioned three companies and
their subordinate entities. This implies not only tax exemption for the above
corporations, but it also requires them to invest all their profits for
purposes referred to under the Article 138, DTA.
6. The Note 40 allows
certain government organizations and enterprises to sell considerable volume of
a special kind of securities called “participation bonds”. The government is
obligated to allocate each year necessary amounts for repayment of the
principal and interest of the bonds, the maturity date of which has befallen.
The banking system is also required to guarantee such repayment. The tax aspect
of the issue is that all such bonds and the interest accrued to them have been
exempted from taxation (section “E” of the Note 10).
B. Expensing of Certain Expenditures
The Budget Law has also envisaged cases of acceptance of certain
expenditures as deductible items for computation of tax liability. These cases
are as follows:
1. According to the
section “N” of the Note 10, all manufacturers, either private or public, may
set up sanitary and therapeutic services under the supervision of the Health
Ministry, and spend for this purpose not less than half percent of the profit
of their entity for the preceding year. In this case, any amount expensed by
them to that end shall be deductible from their taxable income for tax purposes.
2. Note 24 of the Budget
Law allows the average price of oil and natural gas products, as well as the
price of electricity to be increased up to 10% in the budget year. (The
government controls the production and pricing of these items). The revenue
generated from this price increase will be remitted to certain accounts, and
then will be invested in projects such as optimization of energy consumption,
electrification of agricultural water wells of provinces and also for
employment schemes.
These projects are to be implemented by the same public
corporations that are responsible for production and distribution of the
above-mentioned products (such as the National Iranian Oil Company).
Section “E” of the Note 27 provides that by allocation of the
above revenue to the relevant companies, the investments made by them from
their total profits shall be accepted as deductible expenditures for tax
purposes. As figures of the budget show, all resources of these companies,
including their net income, are allocated to investment and repayment of debts.
Thus, no income tax and no dividends are forecast in the budget for these
important corporations.
3. Budgetary issues of
transportation are dealt with under the Note 33. Section “E” of the Note rules that
the shipment price of cargo by railway be increased for 5 Rials per
kilogram/kilometer. The Railway Organization should add to this amount another
5 Rials per kilogram/kilometer from its own revenue. The total amount (10 Rials
per kilogram/kilometer) will be given to an affiliate of the same organization
called Raja Company who is responsible for passenger service. Raja Company in
its turn shall invest the revenue so allocated, for development and
reconstruction of the railway passenger fleet. All the investment made by Raja
Company for this purpose, either from the said source or from its other
resources, shall be accepted as deductible for tax purposes.
Relief in connection with tax coefficients
Two interrelated terms are used in the Iranian tax law: tax
indicia and tax coefficients. Tax indicia are the factors employed (in respect
of each business line and with due regard to the conditions of each business)
for ex officio assessment of taxable income. Annual purchase, turnover, gross
income and production volume are some examples of tax indicia.
Tax coefficients are certain figures that when multiplied by tax
indicia, the product will constitute the taxable income of the taxpayers in
cases of ex officio assessment (see Articles 152, 153 and 154 of the Direct
Taxes Act).
After this brief explanation, let us return to the Budget Law.
Encouraging the set up and development of modern and more industrial bakeries
is the aim of the section “J” of the Note 5 of the Budget Law. The incentives
given for this purpose include a tax relief to the effect that tax coefficients
applicable to traditional bakeries shall apply to all bakeries around the
country in a uniform and consistent way. This means that the modern bakeries
with higher income will be subject to the same tax coefficients as is
applicable to old and traditional bakeries.
Indirect Taxes
Note 35 of the Budget Law has re-imposed certain indirect taxes
of the preceding year. These taxes are applicable to steel, copper and
petrochemical products; cars, mobile telephones and soft drinks. The taxes of
each month’s sales are to be remitted not later than 15 days from the end of
the relevant month. Any delay in payment will cause imposition of a fine equal
to 5% of the deferred tax per each month of delay. No sales tax will apply if
the goods subject to taxation are exported. Collection of the tax will be
effected in conformity with the procedure stipulated under the Direct Taxes
Act.
Safeguarding Tax Revenue
Section “A” of the Note 2 allows the government companies, banks and non-profit public enterprises to amend their annual budget by observing certain procedures and conditions, including the following:
The amendment should not cause
the amounts forecast in the budget as the income tax and dividends payable by
these entities to the government, to be decreased.
k j h f
An Introduction to the Iranian Tax System
By: M. T. Hamadani
(Part
12)
In last issue, we discussed about the tax on salary
income and defined the income subject to taxation, the way it is assessed and
also the cases of tax exemption. Now the provisions on threshold of taxable
income and other regulations regarding the salary tax will be examined.
Threshold
and Rates
The annual
income subject to salary tax is exempt from taxation up to a threshold equal to
sixty times of the base minimum
salary
envisaged in the Article 1 of a law titled the "Law of 1379 (1991-1992)
concerning the Coordinated System of Payments to the Civil Servants".
From time
to time, the minimum salary is adjusted (usually increased) to ameliorate the
effects of inflation on purchasing power of salary receivers. So, the amount of
the threshold too changes accordingly. The latest available amount for the
threshold is IRR 4800000 per year.
Besides
that, and in addition to all other exemptions provided under the Direct Taxes
Act (DTA), an amount equal to 25% of the applicable salary tax shall also be
spared in each year. The wiling for the amount so spared in 12 times of the
maximum salary determined under the law of 1979 on Minimum and Maximum Salary
of Employees. This amount is also subject to adjustment to take into account
the effects of inflation. The latest available figure is IRR 24000000 per year.
The
remaining part of the taxable salary is subject to taxation at the rates
stipulated under the Article 31, DTA.
These rates begin from 12% (applying to
taxable amounts up to IRR 1,000,000) and end at 54% (which is applicable to the
amounts over IRR 300,000,000. The rates between the minimum and maximum are:
18%, 25%, 35, 40%, 45%, 50%, and 52%. In a new amendment of the law submitted
for the approval of the parliament, the maximum rate of the article 131 has
been decreased to 52% and the income brackets are also adjusted to take into
account the effects of the inflationary trends of the recent years (10 brackets
beginning from IRR 4,000,000 and ending at IRR 1,000,000,000).
Method of
payment
The salary
tax is commonly a withholding tax and except in case of the salary received
from the persons residing abroad, the employer has to withhold the tax and
remit it to the relevant authorities. No tax return is to be
Taxpayers
Corporations
and other juridical persons are outside the scope of this chapter and it
applies to individuals only. For being subject to this type of tax, the income
itself should have earned "in Iran". So, any income derived abread
would not be dealt with under this heading.
The
Article 93, DTA specifies these two conditions and adds other specifications as
well:
"The
income derived in Iran by individuals through engagement in businesses or under
any other titles not specified in other chapters of the present Act, less the
exemptions provided in this Act, shall be subject to tax on business
income", (The income specified in other chapters include: real estate
income, income from agriculture, salary income and incidental income).
As it can
be observed innumerable persons may become subject to this chapter. People
engaged in buying and selling goods or services (other than those excluded by
the Article 93) are potential subjects of business income tax, whether they are
whole sellers or retailer, large a small.
Several
businesses subject to this type of tax are listed in the Article 96, DTA, which
rules that these categories of taxpayers should keep statutory books of
accounts and their income shall be assessed by reference to their books. The
list of this article would give us a general idea of the types of taxpayers
that are dealt with in this part of the tax law. The list includes:
(a) holders of commercial license and all
importers and exporters;
(b) owners of factories, workshops and
producing units, for whom the license of establishment or exploitation has been
issued or will be issued from the respective ministry;
(c) owners of construction firms,
enterprises of technical and industrial installations, technical and
engineering consultant bureaus and drawing, land surveying and supervision
institutions;
(d) owners of auditing and consulting
firms;
(e) owners of hotels and motels;
(f) owners of hospitals, maternity
hospitals, sanatoriums, the insane asylums and polyclinics;
(g) exploiters of mines;
(h) owners of land, sea or air motorized transportation
firms, whether for carriage of passengers or freight;
(i) owners of journals and newspapers,
publishers of books and owners of printing firms;
(j) owners of educational institutions that hold licenses
from the either Ministry of Education or Ministry of Culture and Higher
Education;
(k) owners of cinemas, theatres and filming
and dubbing studios;
(l) physicians, dentists who have clinics,
and veterinarians practicing veterinary medicine;
(m) owners of test laboratories,
laboratories and similar institutions, whether for medical or non-medical
purposes, and the owners of X-ray and physiotherapy clinics and hygiene
institutes;
(n) brokers and commission agents, except
the agents distributing oil products;
(o) representatives of commercial and
industrial enterprises, whether domestic or foreign;
(p) owners of authorized repair shops and
service stations;
(q) notaries public and registrars of
marriage and divorce; and
(r) attorneys-at-law, official experts and
translators of the Justice Administration.
Apart from
the above list, many small businesses and provides of services are also subject
to tax on business income.
Millions
of people around the country can be categorized as having business income
subject to the chapter in question.
The provisions
of the tax law regarding the statutory books of account, submission of tax
return, assessment of taxable
income and other provisions regarding the taxation of business income will be
studied in the next issue of the journal.
a d f g
Abstracts of Persian Articles
Editorial
Overall study of
international tax law is an urgent requirement for the modern tax
administration of today's world. This subject and the challenge it places before
the tax officials dealing with international tax issues, is reflected on in the
editorial of Persian and English sections of the journal.
Budget Law of
the Year 1380 (2002-2003)
The Iranian
annual budget contains not only the figures, but also various provisions on
revenue and expenditure. Some of these regulations pertain to tax matters, such
as tax exemption, deductibility of certain expenditures, imposition of excise
duties, and the like. The author examines and analyzes the tax provisions of the
budget law of the Iranian year 1380. (A similar article is presented in the
English section of the journal).
Tax Competition
and European Internal Market
This is the
first part of Persian translation of an article written by Frits Bolkestein, EU
Commissioner for tax affairs and internal market (pointed in the journal
European Taxation, Official Journal of the Confederation Fiscale Europeenne,
vol. 40, No. 9). Second part of the translation will be provided in the
following issue of Maliyat journal.
Comment on a
Verdict of the Supreme Tax Council
Article 58 of
the law on the third development plan had eliminated all types of tax
exemptions and abatements with regard to public organizations and entities. In
spite of that, some organizations try to maintain their previous exemptions by
resorting to legal argument.
A question of
this type was raised before the Supreme Tax Council. It was concerning the
stamp duty on securities of state-owned companies. The SCT ruled that the
abatement, which previously been envisaged in respect of the latter tax, is no
more applicable in light of the said Article 58 of the third development plan.
The SCT verdict and provisions of the said Article 58 are discussed and
reflected on by the author.
Tax Exemption of
Non-profit Organizations
A decision of
the Oregon tax court on the appeal of a non-profit entity is examined in
article. The decision is interesting because of the objective approach taken
towards the question and analysis given with regard to the requirements that
must be met by a non-profit organization for becoming entitled to tax
exemption.
Basic World Tax
Code (BWTC)
The
International Tax Program at Harvard University Sponsored the 1996 Edition of
BWTC, which is written by Ward M. Hussey and Donald C. Lubick (both higher
qualified international tax experts). The idea behind BWTC is to provide a
legislative framework for the use of developing and transitional countries. A
general description of BWTC and principles upon which it rests, are provided by
the author in two parts, the second of which will be presented in the next
issue.
A Tax Return
from the Internet
The tax return
of Alexander Ivanovich Lebed (famous Russian general and politician) for the
year 1994 is translated and introduced in this issue of the journal. In the
previous issue we introduced the tax Return of William J. Clinton, former U.S.
president and his wife.
Income Earned
"in" or "from" a Country
The Iranian tax
law distinguishes between the cases where an income derived "in" or
"from" a country (including Iran itself) and provides different
provision for these two situations. But it is not always easy to decide whether
one or another case has taken place. Interest on a loan sent by an Iranian
borrower to a foreign lender is an example of these ambiguous cases, which is
examined by the author in this article.
Exception Turned
into Rule
Facilities
provided by the tax law for certain exceptional case, may occasionally
developed into common and permanent rules. For instance, Note 1 of the Article
110, DTA allows the extension of the time limit for submission of tax return up
to 6 months. This permission may be given to government agencies and
corporations only, and is conditioned on rendering justification acceptable to
the Finance Ministry. This exceptional facility has grows into a common
practice and most of government agencies take benefit from it. A ruling from
the Finance Ministry prohibited this practice and orders the tax authorities to
restrict and confine it to cases where real justification does exist for the
facility.
The End