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Maliyat Journal, No. 33, Autumn 2001

English section


In the Name of Allah



We have always emphasized the need for the tax system to keep pace with rapid changes of the modern time. The speed of the changes is, however, so dramatic that has made it difficult, even for most advanced systems, to encounter successfully the exigencies of new circumstances. All the same, there is no escape from endeavoring to match the requirements of this overall contest.

This is true in respect of all countries, whether developed or developing, since developments in the field of trade and technology are not confined to certain parts of the world, but spread throughout the world in a swift manner.

A new phenomenon of the type described above, is the electronic commerce, which is going to conquer majority of the world markets. Few years ago, the terms "e-mail", "world wide web", "web site" and "Internet" were largely unknown to the general public, even in industrialized countries. Today, these words and terms represent the daily lexicon of most people around the world. These developments have been accompanied, by the breathtaking improvement of microprocessors, software and fiber-optic connections.

The dynamic forces of the world trade have been eagerly attempting to take benefit of all these facilities for gaining access to vast markets in most unrestricted and practical manner. The Internet and innumerable web sites that are attempting to attract viewers around the world, are serving the interests of trade and economy more than any other field. Huge financial resources at the disposal of these forces, give them power to get most and best of the said facilities. According to the forecast of the World Trade Organization, the world wide value of Internet e-commerce will be about $300 billion for the year 2001, the most of which would belong to industrialized countries. As an start, this is a sizeable amount, and we should look for astronomical figures to appear in the near future.

For the time being, the e-commerce is conducted mainly in the form of advertising and selling of tangible products, services and digital products (including software). In the future, we may witness its expansion to other fields of economic activities and transactions as well. All these cases may have impact on taxation in one or another way, and are apt to raise various ambiguities and problems.

Even now, at the beginning of the road, tax authorities are confronted with many questions and dilemmas. Characterization of the amounts paid for downloading a software is an example. How we should treat it? is it the price of goods sold and purchased through e-commerce? Or else, it is a royalty paid to the owner of an intangible asset for exploiting it under certain conditions?

What should be done in respect of transborder transactions? For instance, can a web site, through which certain goods are sold, be treated as a permanent establishment under the light of double-taxation treaties, so that the local state may claim the tax accruable to it under the tax treaty? If that would not be the case, then what about the relevant server or Internet Service Provider? Are we allowed to consider them as permanent establishments?

What are the arrangements that can be adopted with regard to the collection of sales tax or value added tax on e-commerce transactions? What kind of cooperation between tax authorities of different jurisdictions is possible for prevention of tax evasion through e-commerce; and many other similar questions.

So far, e-commerce has not sufficiently developed in countries like Iran, so that to absorb a noticeable share of tax resources. Nonetheless, one may not ignore the speed of developments in this field, which may expand to the economic arena of our country much sooner than we may conceive.

The first step for preparedness to cope with the future requirements, would probably be research and study in the field of e-commerce and its repercussion on taxation. Maliyat journal may take an appropriate part in this connection and will do so by presenting special studies on the subject to its readership. Other research centers and academic institutions, as well as the tax authorities and practitioners may also play their due role with regard to the same issue.


Dr. Aliakbar Arabmazar


Introduction of

Periodical Adjustment Mechanism

into the Iranian Tax System


By:  Dr. Mohammad Tavakkol



The inflation adjustment mechanism is an expedient adopted by many countries to modify taxable income brackets, tax allowances, etc., so that taxation is, as far as possible, assessed on real profits and gains. But in spite of approaching the centennial of establishment of modern tax system in this country, it is for the first time that this issue is touched upon by the government.

The bill of the new amendment of the tax law (Direct Taxes Act) submitted to the parliament provides, inter alia, for this type of adjustment in respect of monetary amounts of different rate brackets, stated amounts of exemptions, duties and the like.

The wording of the phrase employed in such cases, can be translated as follows:

“The monetary amounts of this chapter will be adjustable every three years in harmony with the economic conditions. The adjustment will be effected on basis of the proposal of the Ministry of Economic Affairs and Finance and approval of the Council of Ministers”

So, the adjustment in question is to be effected by reference to the “economic conditions”. But this latter term covers not only the inflation, but several other factors and elements as well. Using a general term of this type may result in ambiguity and lead to different interpretations.

The interval between adjustments (three years) is also different from that of the countries who bring about this mechanism every year.

The Persian expression in the above sentence meaning “will be adjustable” (and not: “shall be adjusted”) may also be construed to the effect that as if the adjustment is not compulsory and depends not only on requirements of economic conditions, but on the discretion of the Ministry of Economic Affairs and Finance as well.

The cases of adjustment envisaged under the bill of the amendment can be divided into the following three categories:


Part A. Adjustment of Monetary Amounts of Rate Brackets


Three sets of rate brackets have become subject to adjustment in the new amendment:


1. Progressive rate brackets of inheritance tax

The number of brackets of inheritance tax is decreased from 5 to 4 and monetary amounts of all of them are increased very considerably. The increment is between 620 to 1000 percent (6.2 to 10 times). This measure can be considered a compensation for the inflationary trend of past years. Nearly a decade has passed from the date the current monetary amounts of the brackets were enacted.

Then, a Note is added to the relevant article of the Direct Taxes Act (Article 20) with respect to the adjustment mechanism. The text and content of this Note is the same as was translated above.


2. Rate brackets of the tax of juridical persons

The term “juridical person” encompasses all types of companies and also other entities incorporated under the Iranian law.

First, it should be stated that the provisions of the Direct Taxes Act with regard to juridical persons are considerably changed by the bill of amendment. A significant change is introduction of a special set of rate brackets for the taxable income of juridical persons. Currently they are subject to a common table of rates envisaged under the Article 131 of the Direct Taxes Act (to which we shall refer later).

Seven slices of taxable income (from IRR – Iranian Rials   20 million to IRR 1 billion) are provided under the Note 2 of the amended Article 105, DTA. The monetary slices of the Article 131 (presently applicable to the juridical persons) are much smaller (between IRR one million to 300 million). This considerable increase is obviously introduced to compensate for the accumulated inflation of the years passed from the date of enactment of the current figures.

The rates of the brackets are 20%, 32%, 36%, 40%, 42%, 44% and 45% respectively. The current Article 131 has 9 rates between 12 and 54 percent.

It should be noticed, however, that the new table of rates is applicable to cases where single flat rates are not stipulated for corporate income tax.

In addition to the increment of monetary amounts of income slices, a Note has also been added to the Article 105, DTA, which provides for periodical adjustment of such monetary amounts. The Note has the same text and content as described above in respect of the inheritance tax. The comment presented there is applicable to the Note of the Article 105 as well.


3. Rate brackets of the Article 131

The Article 131 of the Direct Taxes Act provides for common taxable income slices and rate brackets that are currently applicable to all taxpayers, whether individuals or corporations, except the cases where single flat rates or special rate tables are envisaged.

Now, the bill of amendment has introduced separate rate brackets for juridical persons. Therefore, the rates of Article 131 would apply to individuals (natural persons) solely.

The rate brackets and taxable income slices of the Article 131 are changed by the bill of amendment. Two rate brackets are added, and thus the number of brackets are increased from 9 to 11. They are better arranged, so that the difference between consecutive rates is always 4 percent. The rates begin from 12% and end at 52%.

The monetary amounts of taxable income slices are also raised in a considerable way. They are currently between IRR one million to 300 million. The slices inserted in the amendment are between IRR 4 million to IRR 1 billion. Beside this measure, which is for compensation of past years’ inflation, again a Note (similar to those mentioned in respect of inheritance and corporate taxes) is added to the Article 131. It provides for periodical adjustment of monetary amounts of income tax slices (exactly like the procedure described above).


Part B – Other Monetary Amounts


A considerable number of monetary amounts ( in addition to those of the income slices of  progressive rate tables) can be found in different parts of the Direct Taxes Act. These are either amounts of certain taxes collectible according to some provisions of the law, or the amounts of exemptions granted to certain qualified taxpayers.

The adjustment mechanism described above applies to the majority (all but one) of these scattered monetary amounts as well. Here too the adjustment is not directly linked to inflation, but reference is made to the general term of economic conditions, instead. The adjustment (like all other relevant cases) will take place once per each period of 3 years.

The permission of adjustment is given in a way that makes it applicable to the current and future provisions of the relevant chapters of the Direct Taxes Act alike. For instance, if a new article providing exemption in certain monetary amount is added to the chapter of inheritance tax in the future, then the same adjustment mechanism would apply to such new monetary amount as well.

Beside the permission of future adjustment, each of the current monetary amounts are also increased noticeably, so that to compensate for the accumulated inflation of the past.

The cases of the monetary amounts in question are as follows:


a) Cases relevant to inheritance tax

1. The last paragraph of the Article 20, DTA states that “an allowance of IRR 2 million shall be deducted from the inheritance share of each of the first class heirs as an exemption”. The new amendment has increased this exemption to IRR 20 million.

2. The Notes 1 and 2 of the current Article 20 have raised the amount of the said exemption to IRR 3 million and 1.5 million for two special categories of heirs. These two monetary amounts are also increased by the new amendment to IRR 30 million and 10 million respectively.

3. A deductible amount up to IRR 20 million has been envisaged under the current Note 3 of the Article 20, which applies to cases where certain conditions do exist in connection with the family of the deceased person and the estate left by him. This latter amount has also been increased to IRR 50 million.

The adjustment mechanism described above is wholly applicable to all these monetary amounts as well.


b) Cases related to stamp duty

The chapter 5 of the Title B of the Direct Taxes Act regarding the stamp duty has been completely revised by the new amendment. Several new duties (in monetary amounts) are also added by the same amendment.

By this revision, the current monetary amounts of duties are raised considerably, so that the negative effects of the past years’ inflation could be compensated.

Then, the revised Article 51 states that all the monetary amounts of the aforesaid chapter will be adjustable once per three years according to the procedure defined earlier. The rule of this article applies to all monetary amounts of the chapter in question, even if such amounts would be added in the future.

To have a general idea of the stamp duty in the Iranian tax law, some examples are given below:

Stamp duty is levied on each sheet of check printed by banks, bills of exchange, promissory notes, negotiable commercial instruments, bills of lading, certain agreements and instruments exchanged between banks and their clients, shares of joint stock companies and partnerships, and the like.

The new duties added by the amendment pertain to driving license, certain certificates and business licenses.


 c) Cases related to the tax on income from real estates

The following points are worth of mentioning with regard to the chapter 1, title C of the Direct Taxes Act, which deals with the tax on income from real properties:

I. The new amendment has raised the monetary amounts of tax exemptions granted under the Articles 56 and 58 of the Direct Taxes Act in connection with the rental income of certain owners of real properties. The monetary amounts have been increased from IRR 30000 and 5000 to IRR 300000 and 50000 respectively.

Another exemption of rental income envisaged under the current Article 57, DTA (for the owners who have no other sources of income), has been changed from IRR 125000 per month to an annual exemption equal to the level of exemption provided for salary receivers under the amended Article 84, DTA (shortly, we will discuss about this new level of exemption).

II. But, the amendment has ignored a similar exempted amount referred to in the Note 3 of the Article 57, DTA. The taxpayers having disabled or backward children under their custody are granted an extra exemption of IRR 10000 per month with regard to their taxable rental income. Nothing is mentioned in the bill of amendment in respect of this particular monetary amount. This failure of the amendment cannot be justified according to the author, since no difference can be found between this specific amount and similar amounts envisaged under the law. Meanwhile, the amount of IRR 10000 is so negligible that makes this part of the law meaningless (it is equal to the price of one kilo of rice).


III. The amendment has also failed to recognize the application of adjustment mechanism to this particular chapter. Nor the above monetary amounts, neither the progressive rate table of the Article 59 (of the same chapter) are being subjected to the said mechanism by the amendment.

The Article 59 provides a special progressive rate table, which applies to cases of transfer of real properties and goodwill. Three tax rates of 4%, 8% and 12% are included in this table for the amounts up to IRR 20 million, amounts between 20 to 60 million and amounts above 60 million. This is a progressive rate table with taxable monetary slices, like other rate tables of the Direct Taxes Act, and it is not clear why this special table has been overlooked.


 d) Cases related to salary tax

1. The annual income of salary receivers has been exempted by the current Article 84, DTA up to a threshold equal to sixty times of the base minimum salary of a special schedule envisaged in the Article 1 of the Law of 1991 concerning the Harmonized System of Payments to Civil Servants. The amendment under discussion has increased this threshold to 120 times of the same base minimum salary. It means doubling of tax exemption of salary receivers.

The minimum salary referred to above is adjusted from time to time by the Civil Employment Organization to ameliorate the effects of the inflation on purchasing power of employees. Thus, the amount of the threshold will also be changed. (The latest available amount of the threshold is IRR 4 million per year)

So, one may conclude that this particular adjustment (which takes place outside the tax administration) is a substitute for the tax-related adjustment mechanism, which is not envisaged by the bill of the amendment with regard to the chapter of salary tax. This reasoning is correct in some degree, since the adjustment effected through the Civil Employment Organization has always been short of compensating for the effects of inflation. That is why the new amendment of the tax law has not considered this specific adjustment enough and has doubled it.

2. Paragraphs “g” and “j” of the Article 91, DTA provide for exemption of some kinds of fringe benefits of employees up to certain amounts. These amounts have also been increased by the bill of amendment. This increment is also for compensation of the accumulated inflation of past years. But here too, the amendment has overlooked the application of the adjustment mechanism to these figures.


 e) Cases related to the business income

To comprehend the concept of business tax in the Iranian tax system,

One has to take into account the following points:

- The business tax applies to individual only. Corporations and other juridical persons are subject to another type of taxation (tax on income of juridical persons).

- Any income derived by individuals under any title (except the income from real estates, agriculture, salary income and certain incidental incomes) can be treated as business income for taxation purposes.

Thus, innumerable persons may become subject to this chapter of the tax law. All people engaged in buying and selling of goods and services are potential subjects of the tax on business income, whether they are wholesalers or retailers, large or small.

Article 101 of the DTA has exempted the taxable income of this category of taxpayers up to an annual amount of IRR 1500000. The bill of amendment has changed these provisions and linked the exemption in question to the annual exemption of salary receivers, which was described earlier. The exemption envisaged for business income will always be 50% of the annual exemption of salary income. (This amendment has been criticized by some members of the parliament and it may be altered to equalize the businesses with salary receivers in this respect).

No provisions are stipulated by the amendment for applying the adjustment mechanism to the taxpayers subject to the tax on business income.


f) Case of the Article 202

This Article allows the Ministry of Economic Affairs and Finance to prevent the exit of the taxpayers whose tax liability exceeds IRR 1 million from the country. The bill of amendment has increased this minimum amount to IRR 10 million, and provided for application of adjustment mechanism (as defined earlier) in respect of this particular monetary amount in the future.



Part C – Periodical Adjustment of Rates


As far as the author of this article is aware, the adjustment mechanism in most cases applies to monetary amounts and it scarcely deals with the rates applicable to taxable amounts. The bill of amendment, however, has ruled for application of the same mechanism in case of certain single and flat rates of the chapter pertaining to the tax on the income of juridical persons. The rates in question are the following ones:

1. According to the amended version of the Article 105 (d) (i) (A) (3), DTA, any part of the taxable income of the joint stock companies that is allocated for distribution among the holders of bearer shares, shall be totally subject to taxation at the flat rate of 50%.

2. The next paragraph of the same article provides that the remaining undistributed income of the company is also subject to the flat rate of 50%.

3. The Note 7 of the same article 105 has provided an exemption equal to 50% for the taxable dividends paid or allocated to small shareholders of the companies that are accepted by the stock exchange.

Then the Note 10 of the Article 105 stipulates that in all these cases, the rate of 50% “shall be adjustable every three years in harmony with the economic conditions. The adjustment will be effected on basis of the proposal of the Ministry of Economic Affairs and Finance and approval of the Council of Ministers.





An introduction to

the Iranian tax system

By: M.T. Hamadani


Our study on the Iranian Tax system arrived, in previous issues, at the Chapter 4 of the Title C of the Direct Taxes Act dealing with the tax on business income. We defined the categories of taxpayers subject to this kind of income tax in last edition of the journal, and now the rest our discussion:



Statutory Books and Forms


Journal and ledger are most common books of accounts. The Ministry of Economic Affairs and Finance may also prepare and supply other special books of accounts called the "business books or books of income and expenditure".

There exists a detailed statute called the "Regulations concerning the Manner of drawing, registering and keeping the Books of Accounts, Records and Documents". The failure to observe these regulations would cause imposition of fine and possibility of rejection of books of accounts.

Taxpayers may also become obligated to use special forms in their transactions, etc. Note 2 of the Article 95, DTA refers to "taxpayers whose business requires, for tax purposes, use of special forms such as invoices for the sale of goods and services, vouchers, warehouse orders and the like". If the Finance Ministry considers that use of such forms would help the assessment and collection of taxes, then it will prepare samples of the forms and publish them in the press. "The taxpayers maintaining statutory books of accounts are required to use these forms, the examples of which so advertised, in their transactions and in registration thereof in their books of accounts, as from the year subsequent to the date of advertising".

According to the Note 3 of the same Article 95, The Ministry may also "agree to the maintaining of alternative forms of books and other means of keeping the accounts". The use of electronic means for keeping accounts and records of business may also be allowed under the provisions of this latter Note.

Earlier we presented a list of taxpayers who are required to keep statutory books of accounts.

Other taxpayers (those who are not under such obligation) may voluntarily undertake the same duty of maintaining statutory books of accounts. By doing so, they should follow the same procedure as the first group is obligated to perform.


Submission of Tax Return


The taxpayers keeping books of accounts should file their annual tax returns with relevant tax offices not later than the end of the Iranian month of Tir (July 20), of the following year. The applicable tax, as assessed by the taxpayer, should also be paid at the same time.

Other taxpayers (those who do not keep books of accounts) should perform the same duty (submission of tax return and payment of the tax) up to the end of the month Ordibehesht (May 20) of the following year.

The tax return should be drawn up on a form to be supplied by The Finance Ministry. In case of the taxpayers who keep statutory books of account, the forms of balance sheet and profit and loss account should also be completed and filed.

If a taxpayer fails to file the tax return, a fine equal to 5% of the applicable tax shall be imposed on him. In case of the taxpayers who keep books of accounts, the relevant fine will be 20% of the tax.

The tax return should also be filed during the period of tax exemption, and the failure shall result in deprivation from the tax exemption with regard to the relevant year.

Meanwhile, any taxes paid after the time limit shall result in application of a fine equal to 2.5% of the relevant tax per each month.

(In respect of the fines see articles 190, 192 and 193, DTA).


Examination and Assessment

Taxable income of the taxpayers who keep statutory books of accounts, and their books are not rejected, equals to: aggregate sale of goods and services plus other incomes (those not handled in other chapters of DTA), minus the acceptable expenses and depreciation.

The latter items (acceptable expenditures and depreciation) are defined in a separate section of the law, upon which we will touch in a later stage).

But if the books of accounts are rejected, then different procedures will be followed in respect of two categories of taxpayers: those who have duty to keep statutory books of accounts, and others who do so voluntarily.

The first group will become subject to ex officio assessment, and the second category will be treated according to the procedure described under the Note 5 of the Article 100 of the Direct Taxes Act (DTA).


Ex Officio Assessment

This term denotes the right of tax authorities to issue a tax assessment (by virtue of their office or position) on a taxpayer where one of the following situations takes place:

1. if the tax return is not submitted before the expiry of the relevant time limit,

2. when the taxpayer refrains from presenting his books or documents in spite of written application of the relevant tax officer, and

3. where according to the tax assessor, whose view is confirmed by the chief assessor, the books of accounts and documents presented by the taxpayer, are considered to be inappropriate for examination, or they are rejected due to non-observance of legal criteria and relevant regulations. (Article 97, DTA)


Subsequent Procedure

In cases described above, the issue shall be notified to the taxpayer and the file of the case will be referred to a board consisting of three auditors for consideration. The taxpayer may defend his case before the board and take actions for elimination of problems hindered the examination of the file. The opinion of the board, when rendered by the majority, will be valid and conclusive.

If the Board confirms the view of the tax authority regarding the ex–officio assessment, then the procedure described under the Article 98, DTA for this type of assessment will be followed. The Article 98 reads:

“In cases of ex-officio assessment, the tax assessment officer must, in first place, perform necessary investigations and studies, and obtain needed information from different sources, whether public or private. Then he should select, from among the indicia set forth in the present Act, one or more indications that conform to the conditions of the taxpayer and object of his business. He should mention the reasons of choosing the relevant type of indication or indications and their amounts, with sufficient justification, in his report of examination. The tax assessment officer should, then, apply the pertinent stipulated coefficient or coefficients to the selected indication or indications for determining the taxable income of the taxpayer. In case of applying coefficients to more than one indication, the average of products so calculated, shall constitute the taxable income.

The tax indicia (or indications) referred to above “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” (Article 152, DTA). Annual purchase, turnover and gross income of the business are examples of such indicia.

Tax coefficients are defined by the Article 153 and its Note:

“Article 153: Tax coefficients are certain figures that when multiplied by the tax indications, the product will constitute the taxable income in cases of ex officio assessment.

Note:  When coefficients are applied to several indications, the average product will constitute the taxable income.


Note 5 of the Article 100

The procedure of the Note 5 principally relates to the taxpayers who do not keep books of accounts and are not legally bound to do so. As it was mentioned above, these taxpayers may opt for keeping statutory books of accounts, in which case their tax liability will be assessed on basis of the facts registered in their books. But if their books are rejected, they also will become subject to the procedure of the Note 5 (of course, that part of the Note, which relates to rejection of tax return).

According to the Note 5, the tax assessor will examine the files of relevant taxpayers through investigation and information gathering, whether the relevant tax returns are submitted on time or not. He shall determine the taxable income of the taxpayer and shall prepare a report thereon, which shall be sent, together with the file of the case, to the relevant chief assessor.

The chief assessor should examine the case and take appropriate measures in each of the following cases:

If a tax return is filed on time and is acceptable to both the tax assessor and chief assessor, and also where only the chief assessor is in favor of acceptance of the tax return, "the taxable income as stated in the tax return shall become final and the tax assessor shall issue the final assessment notice" (Paragraph (a) of Note 5).

But if the tax return is not filed on time, the chief assessor will render his own opinion, (which may or may not agree with the view of the tax assessor). The final assessment notice will be issued on basis of chief assessor's opinion.

There remains another situation where the tax return and the income tax mentioned therein is not accepted. In this case the amount of tax will be assessed and declared to a guild or syndicate whose domain of activity covers the business of the taxpayer. The guild will give its own estimation of the income tax.

"Should the difference between the taxable income assessed by the guild and the amount assessed by the chief assessor, be not more than 20%, the tax assessment notice shall be issued on basis of the guild's estimation... In case the difference is in excess of 20%, or no answer is received from the guild within one month, the assessment notice will be issued on basis of the chief assessor's estimation" (ii, b, Note 5, Article 100, DTA).


Mass Assessment

The Finance Ministry may decide from time to time to refer the assessment of income tax of one or more groups of businesses to their relevant guilds or syndicates. In this case the estimation of the guilds will be taken into account for assessment of tax liability of respective businesses (Note 6, Article 100).


Threshold and Rates

Up to IRR 1,500,000 of the annual income of taxpayers is exempt from taxation and the rest of it is subject to the rates of the Article 131 (which was listed earlier in connection with the salary income tax).

According to a new bill of amendment submitted to the parliament, certain changes are proposed to the above threshold, and also to the structure of the rate table of the Article 131. For details see the article: “Introduction of periodical adjustment mechanism into the Iranian tax system”, printed in this very edition of the journal (pages 3-10)


Special cases and provisions



1. Attorneys - at - law

"The attorneys - at - law and those trying before specialized courts are required to mention in their power of attorney the amount of their fees, and to affix and cancel tax stamps equal to 5% thereof on the instruments of their power of attorney as an on account payment of the applicable taxes" (Article 103, DTA).

This on account payment should not be less than certain minimum percentages to be applied to the attorney's fees. Depending on the type of lawsuits and cases, different percentages would apply (detailed percentages are given under the Article 103, DTA).



2. Withholdings

The Article 104, DTA rules that all government agencies and corporations, private companies, and also individual business owners who are legally bound to keep statutory books of accounts, should withhold 5% of the money they pay as consideration for certain services and transactions, and remit the same to the relevant tax offices within 30 days. Some of these cases are as follows:

Fees paid for medical, legal, consulting and accounting services, consideration for art and literary works, music composition, dramatic play and the like, cost of computer services, maintenance of buildings, transportation, etc.


Our study on business income ends at this point. In the next issue of the journal the corporate income tax under the Iranian tax law will be dealt with.


The End