Maliyat Journal, No. 34, Winter 2001-2002
In the Name of Allah
FROM THE PRESIDENT
The overwhelming
developments of the recent decades in the field of international trade and
communications, and also the advent of the
Nowadays, the double
taxation and tax evasion problems are remained in place with more implications
and higher complexity. In addition, a series of new dilemmas have been appeared
in the area of international tax relations whose dimensions are growing day by
day. As a result, the governments are confronted with increasing difficulties.
Tax systems of some
countries and the regions known as tax havens, have expanded their operations
in an extent that could threaten the interest of many countries. Existence of
vast legal and technical facilities in these jurisdictions would present most
favorable conditions for the taxpayers escaping from taxation. Beside that, the
modern tax havens offer money-laundering possibilities to those who have earned
riches from various illegal activities.
The circumstances
described above, would not only jeopardize the economic safety of other
countries and cause the breach of their criminal and social laws, but also
would entail the erosion of their tax bases and revenues. Formerly, tax havens
did not pose real threats to tax revenues of other countries. Today, they
exploit the latest advancements in technology and communications to attract
capital and income sources from around the world. The high mobility of capital
and almost instantaneous communications allow the offshore centers to act
freely and in an unprecedented proportion.
To offset the effects of the
said harmful activities, some countries have followed the pattern of the same
tax havens and introduced changes into their tax systems for preventing the
erosion of their tax bases and revenues on the one hand, and absorbing new
capital and income from abroad on the other hand. This exercise, together with
the maneuvers of tax havens, have accelerated destructive implications of the
situation explained above, and is on the verge of creating serious problems for
majority of other states. The world economy would also suffer from this process
and the free and healthy competition would be replaced by a destructive
competition in the field of taxation. Every government would endeavor to
safeguard its own interests through such mechanisms as more as possible.
Another new phenomenon
encroaching on tax resources of many countries is the advent of electronic
commerce. It is quite difficult to control e-commerce transactions by
traditional ways and means. Products of digital content (software, music,
videos, books and the like) are presently main subjects of these transactions.
Such products can not be checked at ordinary points like customs and post
offices. Therefore, it is difficult, even impossible, to use traditional
methods for collecting taxes on them. The problem will grow as the types of
digital products and commerce on them become more diversified and developed.
Overall economic effects
of the aforesaid practices, including their impact on tax bases and revenues,
have induced many countries to take remedial measures. The Organization for
Economic Co-operation and Development, in which the chief industrialized
countries are gathered, has assumed the leadership in these international
efforts. Many sessions of this organization were convened in recent years to find
suitable ways for confronting this situation. Some countries and organizations
outside the OECD have also taken considerable measures to coordinate their
policies with the OECD in this respect.
As regards our country, we
have to deliberate on an appropriate way to approach the problem in question.
Research and study play an undeniable role in this regard. Academic and
relevant government agencies, as well as the other interested persons, have to
participate in this type of studies for understanding the prevailing situation
of today’s world and the measures that can be taken by our country in this
regard. This journal will also do its best to undertake studies for presenting
articles in this connection to its readership. The scope of the work should, however,
go further and the general policy of the country is to be clarified. We have to
see whether our tax revenues are faced with the threats of the kind mentioned
above or not. What can be forecasted for the future? The result of such studies
and the kind of policy adopted, would determine the nature and scope of
measures that could be taken in this field.
Dr. Aliakbar Arabmazar
Foreign corporations
in the new bill of amendment of the Iranian tax law
By: Dr. Mohammad Tavakkol
A new
bill of amendment of the Iranian tax law (Direct Taxes Act) has been submitted
to the parliament for their approval. Its most
important part relates to the provisions applicable to the tax on juridical
persons, including foreign companies. The regulations on taxation of foreign
corporations are – like those of the Iranian companies – included in the fifth
chapter of the Title “C” of the Direct Taxes Act (DTA). (DTA is the backbone
and most significant constituent of the Iranian tax law) As regards the foreign
entities, section “c” of the article 105 and article 107, DTA are very
important and can be considered the core of the law in this regard. This study,
therefore, would concentrate on the same provisions more than any other part of
the law. The points worth of mentioning in this regard
can be examined under the following headings.
A - Foreign corporations subject to
taxation
Foreign
corporations or entities may become subject to taxation if they earn certain
incomes under specific conditions described in articles 105 and 107, DTA. Only
the following two categories of foreign entities are dealt with in other parts
of the same chapter 5 of the Title C:
1.
Foreign insurance enterprises earning income by accepting reinsurance from
Iranian insurance companies. They are subject to taxation at a single flat rate
of 2% on their income and on the interest accrued to their deposits in
2.
Foreign airline and shipping companies are also subject to a single flat rate
of 5% on amounts received by them for the carriage of passengers, freight, etc.
from
None of
the above provisions (Note 5 of the article 109 and article 113, DTA) are
changed by the bill of amendment.
B – Incomes subject to taxation
Under
the current text of the articles 105 and 107, DTA, foreign corporations are
subject to taxation on the following types of income.
1.
Income earned from the operation of capital in
2.
Income derived from the activities performed in
3.
Income earned from
4.
Income derived for provision of training and technical assistance.
5.
Income earned for transfer of cinematographic films (whether it is received as
the price, or fee for the screening of the film or
under any other title).
The bill of amendment has repeated the above 5
categories taxable incomes (of foreign corporations) and has added the
following ones.
6.
Income of foreign entities engaged as contractors in
7.
Receipts of representative offices of foreign banks in
8.
Income derived from transfer of technical know-how. This is also a new term
introduced by the bill of amendment into the section “c” of the article 105
(alongside with “granting of licenses and similar rights” listed above as item
3).
C – Assessment of taxable income
Different
types of income described in part B of this article can be divided into two
categories for the purpose of assessing their taxable part. First,
the incomes, in case of which the taxable part is assessable by multiplying the
gross income by certain coefficients. Second, the
incomes, in respect of which the taxable part is assessable through examination
of statutory books of accounts of relevant taxpayers.
a) Income subject to application of
coefficients
The
taxable part of incomes listed in the part B of this article under numbers 3, 4
and 5 is to be assessed by using coefficients determined by the law. Taxable
income of foreign corporations from these sources consists (under the current
provisions) of 20% to 90% of all payments received by them during a tax year.
Application of coefficients between 20 to 90 percent takes place on basis of
special regulations proposed by the Ministry of Economic Affairs and Finance
and approved by the Council of Ministers.
In
respect of one item of those three types of income, namely the income from
provision of training and technical assistance, the current text of the law has
envisaged the possibility of determining a coefficient even less than 20%. The
Ministry of Economic Affairs and Finance may grant such abatement if considers
it appropriate, and it is restricted to cases where the income is payable by
ministries or other government organizations.
The bill
of amendment has introduced the following changes in this regard.
1. The
maximum coefficient of 90% has been dramatically reduced to 40 percent. This
can be considered a positive step, since the net taxable income of an entity
scarcely reaches a high climax of 90 percent.
On the
other hand, the bill of amendment has terminated the abatement described above.
Therefore, in case of approval of the amendment, the minimum coefficient of 20%
could not be reduced any more.
2. The
income of foreign corporations from transfer of technical know-how (item 8 of
the incomes listed in part B) would also be subject to the same coefficients of
20% to 40% for assessment of taxable income.
3. The
taxable income of foreign contractors (item 6 of the part B of this article) is
currently equaled to 12% of all their annual receipts. This percentage would
remain unchanged under the bill of amendment (see also part “D” below).
b) Incomes subject to
examination
The
taxable part of the rest of incomes enumerated in part B of this article,
namely the income derived from operation of capital or from activities
performed, directly or through agencies, in
The bill
of amendment has not changed that part of the current law, which makes the
assessment of taxable income of the taxpayers subject to verification of books
of accounts. But it has cancelled another part of the law that provides for a
separate situation in respect of acceptable expenditures and keeping books of
accounts.
Under
the amendment, the companies in question would become subject to general
regulations of DTA in respect of keeping books of accounts, acceptable
expenditures, depreciation norms and similar provisions. The general provisions
in this regard can be found in the chapter 4, Title C of DTA (Articles 94, 95
and 97 in particular).
D – Foreign contractors
The
current article 111, DTA has listed a series of activities and ruled that if
such operations are performed by foreign contractors in
The
changes introduced by the bill of amendment in respect of foreign contractors
are as follows.
1. New
cases of operations are added to activities enumerated above. The new
operations are: provision of training and technical assistance, transfer of technical
know-how and “other services”. Thus, the scope of operations subject to this
type of tax would be considerably broadened, especially because of insertion of
the very general term of “other services”, which may cover any kind of
services.
Even cases
such as granting licenses and similar rights are referred to in the amendment
as the foreign contractors’ activities. With regard to the latter case, as well
as the case of transfer of technical know-how, the assumption of assigning such
actions to contractors seems ambiguous. How, for instance, licensing for a
chemical formula or computer software could become subject matter of a
contract? But if these types of transfers and assignments would constitute only
a part of wider operations assigned to contractors, then the ruling of the
amendment would become more understandable.
2. By
including the provisions related to foreign contractors in the article 107, the
article 111 would not be needed any more, and it had been deleted in the bill
of amendment.
3. The
current article 111, DTA has a Note, according to which a part of contract
price that is used for purchase of supplies and equipment from abroad, is
exempt from taxation, provided that the relevant employer is a ministry, a
government organization, a state company or a municipality. The bill of
amendment has moved the same provisions into the article 7 (as Note 1) by
making the exemption in question subject to a new requirement: “on the condition that the amount needed for
purchase of supplies and equipment produced abroad, is inserted as a separate
item in the original contract or its subsequent amendments”.
4.
According to a new Note added by the bill of amendment to the article 107 (Note
3), in cases where a foreign contractor assigns the operations of the contract,
wholly or partially, to Iranian juridical persons as second hand contractors,
any amounts paid for the supplies and equipment imported by such second hand
contractor, would also be exempt from taxation. But the exemption would be granted
to the first hand (foreign), and not the second hand, contractor.
E – Tax rates
One of the important changes effected
by the bill of amendment, is the introduction of a separate table of tax rates
for juridical persons, including foreign corporations subject to taxation in
Seven progressive
rates are envisaged in the bill of amendment: 20%, 32%, 36%, 40%, 42%, 44% and
45%. The income brackets against these rates begin from IRR 20 million and end
at IRR 1 Billion. The rates have been considerably moderated in comparison with
the current table of article 131.
An
interesting provision of the new bill of amendment is introduction of
periodical adjustment mechanism in respect of monetary amounts of the table in
question and similar rate tables of DTA (see the article: “Introduction of periodical
adjustment mechanism into the Iranian tax system“, Maliyat , No. 33, pages:
3-0).
An introduction to
the Iranian tax system
By: M.T. Hamadani
(part 14)
In
previous issues of this journal we studied the regulations of the Iranian tax
law in respect of taxes on certain types of properties and the income tax on
real estates, salaries and business income. Now we will begin our discussion on
the following subjects:
Tax on the Income of Juridical Persons
Before touching upon the main part of our study
regarding this type of taxation, some points are to be mentioned in brief:
1. The term “juridical person” as used in the Iranian
law comprises all kinds of companies and other entities and bodies of persons
that are registered under the law as juridical persons. For instance,
syndicates, trade unions and associations would be considered juridical persons
after being registered as such. The tax regulations, however, deal mostly with
the corporate taxation.
2. The Iranian government has submitted a new bill of
law for the amendment of the Direct Taxes Act (DTA), the country’s principal
tax law. The most important part of this amendment pertains to the Chapter 5 of
the Title “C” of the DTA, which deals with the tax on juridical persons. It is
not clear whether all amendments contained in the bill of law would be approved
by the parliament or not. Nevertheless, we will refer to some of the proposed
amendments in examining the rules governing corporate taxation.
3. A separate section of the Direct Taxes Act (Chapter
1, Title D) is assigned to tax exemptions provided for different types of
income, including the income of juridical persons. We will examine these tax
exemptions in the future.
Now, let
A. Taxable income
The taxable income of companies and other juridical
persons consists of the “aggregate” income derived by them during a tax year,
less the exemptions envisaged under the Direct Taxes Act (Article 105, DTA).
Aggregate income as used above means the balance of
income derived from different taxable sources enumerated under the DTA, minus
the losses resulting from non-exempt sources (Note 4, Article 105, DTA).
Thus, the juridical persons should pay income tax not
only for the income directly derived from their principal business, but any
other income derived from other sources (for instance from real estates) must
also be taken into account in computation of their overall taxable income. The
worldwide income of juridical persons is to be accounted for.
In respect of the juridical persons other than
companies, their profit-making activities shall constitute the basis of
calculation of their income tax.
B. Variation in
taxation
Various types of companies and juridical persons are
treated differently under the tax law. They are divided into the following
categories for purpose of taxation:
1. Companies whose total capital is owned, directly or
indirectly, by the government or municipalities. The tax base of these
companies shall be their aggregate income, minus two items:
a) agricultural exemptions
provided under the tax law, but unlike other categories of companies they may
not benefit from other kinds of exemptions set forth in DTA, and
b) an amount of 10% that
shall be computed and collected as the corporate tax. (The bill of law referred
to above has omitted this 10% corporate tax)
The
balance of the income shall be taxed at the rates of the Article 131, DTA. The
tax table of the Article 131 had been presented in part 4 of these series of
articles, which you can see in page 8, No. 24 of Maliyat journal. According to
the aforementioned bill of amendment, the rates of the article 131 would not
apply to the juridical persons and a new tax table has been provided for this
purpose. For details of the changes introduced in this connection by the bill
of amendment, see the article: “Introduction of periodical adjustment mechanism
into the Iranian tax system” in pages 3-10 of No. 33 of this journal.
In
cases where the company’s capital is partially owned by the government or
municipalities, the above rule shall apply only to that portion of income that
belongs to them. The balance of the taxable income shall be treated as
described below in respect of the fourth category of juridical persons. On the
other hand, the capital of the relevant companies may belong to several
shareholders (e.g. several ministries). In that case, the tax rates shall apply
separately to the shares of each of such shareholders. This would lower the tax
rates applicable to individual shareholders (paragraph “a” of the Article 105,
DTA).
2.
The Iranian non-commercial juridical persons that are not established for
distribution of profits in principle, but nevertheless engage in profit-making
activities and thus derive profits, such entities shall be subject to taxation
at the rates set forth in the same Article 131, DTA (which would be changed in
case of approval of the new bill of law referred to above). It should be noted
in respect of these juridical persons, that the profit so described is one that
is derived from the aggregate operations of the relevant entities. This means
that overall expenses of the entity shall be taken into account in calculation
of their profit.
3. The foreign juridical persons and entities
residing abroad constitute the third category enumerated in the Article 105,
DTA. (Foreign airline and shipping companies and also foreign insurance
companies accepting reinsurance from Iranian insurance companies are dealt with
separately under the Article 113 and Note 5 of the Article 109, to which we
will refer later).
The
following types of income of the above third category of juridical persons are
taxable according to the paragraph “c” of the Article 105, DTA:
i. Income derived
from the operation of their investment in
ii.
Income derived by the entities residing abroad from the activities
performed in
iii.
Income received by the said foreign entities from
The
tax rates of the Article 131, DTA are currently applicable in all these cases
(which may be changed by the new bill of law as stated above).
4. Joint stock companies, joint stock partnerships,
cooperative societies and their unions, comprise the fourth category of
juridical persons. The profits of these entities shall be treated as follows:
i.
Total profits attributable to bearer shares shall be taxed at the rates of the
tax table of the Article 131, DTA. This rule would entail higher tax on the
bearer shares than a hypothetical case in which the shares would be taxed in the hand of
each of the shareholders.
ii. Reserves attributable to each registered
shareholder, guarantor partner (of joint stock partnerships) and members (of
cooperative companies) will
be taxed at the rates of the Article 131, DTA (subject to
probable changes by the proposed bill of amendment).
iii. The balance of the taxable income of the
juridical persons in question, which is attributable to each registered
shareholder, guarantor partner or member will also be
individually taxed at the rates of the Article 131, DTA.
As it can be seen, the taxpayers referred to in
paragraphs ii and iii above (registered shareholders, etc.) are treated more
favorably than the owners of bearer shares. But this favorable treatment would
be ceased in case of failure of relevant entities to submit balance sheet and
other required statements and documents on time. In that case, the entire
taxable income of the company shall be taxed at the rates of the Article 131,
DTA.
5. In case of all other juridical persons (like
general and limited partnerships) the share of taxable profit that is
attributable to each of the owners of capital or members of the juridical
person (in accordance with the entity’s statute or articles of association)
shall be taxed at the rates of the Article 131, DTA.
(In the following issue of the
journal we will continue our discussion on corporate taxation.)
Abstracts of Persian Articles
Editorial
The editorial of
Foreign corporations in the new bill of amendment
The most important part of the new bill of
amendment submitted to the parliament relates to the provisions applicable to
the tax on juridical persons, including foreign companies. The latter aspect of
the bill is examined in both the Persian and
Periodical adjustment mechanism
The bill of
amendment referred to above has also provided for introduction of adjustment
mechanism into the Iranian tax law. This part of the new bill of amendment has
also been reviewed in a separate article.
Persian
A comment on the
statute of the State Tax Organization
The establishment
of a more autonomous organization for tax administration had been envisaged
under the law of third development plan of the country. Now the statute of this
organization has been approved by the Council of Ministers. The author reflects
on this newly adopted statute.
Enactment of levies
in
The growing number
of scattered duties and levies in recent years has induced the government to
prepare a bill of law for correcting this situation. The bill is commented on
in the article.