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In the Name of Allah

 

FROM THE PRESIDENT

 

By the publication of this issue of Maliyat journal, we have begun the tenth year of our journalistic activity. Our colleagues are proud of being able to publish for nine continuous years a specialized magazine that is confined to a restricted domain like taxation. Our resources have always been limited and we had to work in conditions with shortages in various areas. Nonetheless, we did our best and managed to minimize the effects of all these restraints on quality and the results of our work.

We were also required to observe several characteristics with regard to the content of the journal. First of all, as a specialized publication, the articles of the journal had to be confined to the subject of taxation. We were always mindful of keeping this feature of the journal well adhered. On the other hand, the journal had to represent an academic institution, a condition that was to be reflected in the substance and quality of its content. With regard to this aspect too, we inserted our utmost endeavor and managed to fulfill the job. Even the internal and international tax news of the journal have mostly been presented with analyses and interpretations. Another factor having its effect on the structure of the journal was the interval of its publication. A magazine published on a quarterly basis, has its own limitations in respect of the kind and extent of the articles and subject matters that it can contain.

Despite the above considerations and limitations, we think the Maliyat journal succeeded in fulfillment of its duties, while paying due attention to the observance of all aforesaid characteristics. Our surveys show that the journal has achieved its prime purpose of offering an eminent work to the press and academic world.

The study and deliberation on internal tax issues constitute a main aspect of the work of this journal. This part of our work comprises analysis of tax laws and regulations, examination of the verdicts and decisions of main tax fora, commenting on new double taxation treaties, tax circulars and other similar topics.

At the same time, we have always taken into consideration the fact that the task of promotion of tax knowledge cannot be duly achieved without paying attention to the contemporary international tax problems. As a result of the rapid development of economic relationships and swift evolution of globalization phenomenon, a series of tax problems have arisen and extended beyond the national boundaries and assumed international character. Ignorance of these types of developments may lead to weakening of ability of a tax system in coping with the challenges of today’s economic and trade atmosphere, a situation that most probably would entail a disadvantageous stance. Even the industrialized countries are always after the improvement of their tax systems for enabling it to respond to the demands of rapidly changing developments of economic relations, and requirements of communications and scientific advancements.

Based on the above considerations, this journal has always endeavored to reflect, beside the internal tax issues, on developments of tax systems of other countries and activities of international tax organizations. Numerous studies have been offered to our readership in these areas, while taking benefit from the same in deliberation of internal tax issues. In this regard we can refer to transfer pricing, tax havens, e-commerce, ecological taxes, tax competition, international tax forums, and many other similar topics.

The English section of the journal has also developed into a medium for providing useful information on tax provisions and issues of this country to its interested readership.

We aim at continuous improvement and more diversity of the content of this journal, hoping that it could serve the purpose of contribution to the tax system of our country.

I take this opportunity to thank all of our readership who helped us to achieve this stage by their articles, comments and continuous support.

 

Dr. Aliakbar Arabmazar

 

Highlights of tax treaties ratified by the Iranian parliament

 

By:  Dr. Mohammad Tavakkol

 

On 11 and 17 of last June, six tax treaties were approved by the Islamic Consultative Assembly (Iranian parliament) and notified to the Ministry of Economic Affairs and Finance for implementation. Titles and dates of ratification of the treaties were as follows:

Agreement between the government of the Islamic Republic of Iran and the government of the Democratic Socialist Republic of Sri Lanka for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Date of ratification: 11 June 2001.

Agreement between the government of the Islamic Republic of Iran and the government of the Islamic Republic of Pakistan for the avoidance of double taxation and exchange of information with respect to taxes on income. Date of ratification: 11 June 2001.

Agreement between the government of the Islamic Republic of Iran and the government of the Syrian Arab Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Date of ratification: 11 June 2001.

Agreement between the government of the Islamic Republic of Iran and the government of Ukraine for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. Date of ratification: 11 June 2001.

Agreement between the government of the Islamic Republic of Iran and the government of the State of Qatar for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. Date of ratification: 11 June 2001.

Agreement between the government of the Islamic Republic of Iran and the government of the Russian Federation for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital. Date of ratification: 17 June 2001.

The Persian texts of all six tax treaties were published in the Official Gazette of the Islamic Republic of Iran (editions of 7, 8 and 12 of July 2001). The treaties follow, like most of the tax treaties concluded by this country, the pattern of the OECD Model Convention, but they also adopt a number of specific provisions not envisaged under the said model. The following aspects of the treaties are worth of mentioning:

 

A. As it can be seen from the above list, in three cases (out of six) the treaties cover income tax only, and the tax on capital is omitted. This can be regarded as an innovation, since majority of previous Iranian tax treaties refer to both taxes on income and on capital.

 

B. The article 2 of treaties refer to the existing taxes of each of the contracting states, to which the respective treaty shall apply. In treaties covering income tax solely, reference is made – in respect of Iran – to the tax on income. But in treaties covering both the tax on income and on capital, reference is made to income tax and property tax. Both these taxes are described under the Direct Taxes Act. Thus, one may conclude that the property tax in the Iranian tax law corresponds to the tax on capital in the tax law of other countries. But this would not be an exact conclusion. While some kinds of taxes on capital are dealt with under the general title of  “property tax” in the Direct Taxes Act, but more important taxes covered by this title are inheritance tax and stamp duty, which hardly can be categorized as taxes on capital (as is understood under the current double taxation treaties).

 

C. The latest amendments made by OECD in its model convention, as can be read in the text of 29 April 2000, are not reflected in the above treaties. For instance the Article 14 about “independent personal services” is not deleted and continues to be present in all six treaties. In the same way, the alterations made in the title of some articles have not been taken into consideration. For instance, the title of the article 15 is “dependent personal services” as before, while in the new version of the convention the phrase “income from employment” is used.

 

D. As a result of maintaining the text of the article 14, the concept of  fixed base” has also been retained in the treaties, to which references are made in several other articles of the agreements. Such references can be found in: paragraph 4 of the article 10 (dividends), paragraphs 5 and 6 of the article 11 (interest), paragraph 4 of the article 12 (royalties), paragraph 2 of the article 15 (dependent personal services), paragraph 2 of the article 21 (other income), etc.

 

E. In all parts of the treaties dealing with the income from international traffic, railway and road vehicles are added to aircrafts and ships. No mention is made of the boats engaged in internal waterways (tax revenue from this business is not considerable in this country).

 

F. In respect of the article 11, the following points are worth of notice:

a) The treaties in question contain a special paragraph concerning the interests raised in one of the contracting states and paid to the government organizations and entities of the other contracting state. Such payments are exempted from the tax of the first state (residence of the payer of the interest). This could be considered as an incentive for the financial institutions of one contracting state lending money to borrowers of the other contracting state.

b) According to the Iranian constitution, all enactments of the parliament – including tax treaties – must be approved by the Guardian Council of the Constitution, before becoming valid and effective. The duty of the Guardian Council is to prevent enactment of laws contrary either to the religious law (Feqh or Islamic canon law) or to the constitution itself. In respect of the article 11 of the treaties in question, the Guardian Council considered that the interest accrued in other countries to bonds and debentures could be problematic from religious point of view. To solve the problem, a Note was added to the text of relevant single articles. (When international agreements are approved by the parliament, a law consisting of one article is introduced at the beginning of each treaty, whereby the respective treaty would be declared legal and effective. Thus, the treaty itself would become an attachment of the single article)

The Note so added to the relevant single articles, can be translated as follows:

“In execution of this agreement, the income arising in the other contracting state from bonds and debentures of the Iranian nationals residing in the same other state, shall not be subject to tax regulations of the Islamic Republic of Iran”

As it can be understood from the above text, no negative effect from this added Note would result for the foreign parties of these treaties. Beside that, even without this addition, Iranian nationals who reside abroad and derive income from securities there, never would become liable to Iranian taxation. Nor the Iranian tax law, neither the tax treaties in question would justify imposition of the Iranian tax on such earnings. What added here is a cautious measure from the canonic point of view.

 

G. Under the article 24, the contracting parties are obligated to observe the duty of non-discrimination, as suggested by the OECD model convention. But unlike the OECD convention, the issue of stateless persons is not dealt with and the treaties are silent about them (except the treaty with Ukraine).

 

H. The article 27 of the treaty concluded with Russia is devoted to the subject of mutual assistance for collection of taxes. Contracting parties have undertaken to assist each other for collection of escaped taxes in their respective territories.

 

 

 

A new bill of law for correcting the process of

 

enactment of levies in Iran

 

By: M. Alvandkouhee

 

The term “avarez” in Persian language is usually translated to duties. But the coverage of this word is much wider than the term “duty” in English. A vast range of payments levied by the legislature, certain government organizations, municipalities, local councils, etc. can be categorized as “avarez”. Any payments other than direct taxes described under the Direct Taxes Act (consisting of property tax and income tax) and certain indirect taxes collected by the Ministry of Economic Affairs and Finance, can be called “avarez”. That’s why this  author has translated it to “levies” instead of “duties”.

The number of levies has grown in last years. According to the press, their number is estimated between 54 to 120 (for example, see “Ettela’at  - a famous daily paper -  July 3, 2001, page 5).

The harmful effects of this situation, especially on production of goods and services, induced the government to prepare a bill of law for controlling the process of imposition of levies and annulling majority of the existing ones. Main points of this bill, which has been submitted to the parliament for its approval, are as follows:

 

A. Creation of a legal frame for enactment of levies

To terminate the undesired situation described above, and also for setting up a legal basis and frame for imposition of levies in the future, the first paragraph of the bill provides:

“As from the date of approval of this law, the imposition and collection of all kinds of levies and payments, whether at local or national level, shall be subject to the provisions and criteria of the present Act”

The bill does not give any definition for the term levies” (“avarez” in Farsi) and it has combined it with the more general term of “other payments”. The reason behind this approach is the very fact to which we referred above. The levies and payments in question are so different and scattered that makes it quite difficult to render a common definition for all of them.

The only way that the bill opens for identification of the levies in question, is the enumeration of exceptions. According to the same article 1 of the bill, the following payments would not be subject to the law under discussion:

1. Tax. By the word “tax”, the bill means the income taxes and property taxes subject to the Direct Taxes Act (DTA), and also certain types of indirect taxes. The common feature of these taxes is that all of them are under the responsibility of the tax administration that discharges its duties under the Minister of Economic Affairs and Finance.

2. The fee paid for registration of letters of credit.

3. Customs duties.

4. Commercial benefits. This term, in spite of its wording, should be considered a kind of import tax (or import tariff) received in addition to the customs duties.

5. Fees and expenses paid against services rendered by public entities and institutions.

6. Penalties.

7. Certain payments received in connection with the consumption of water (usually paid in addition to the price of water for discouraging wasteful consumption)

 

B. Annulment of existing levies

Another important provision of the bill is the annulment of all various levies currently in force in the country (except those excluded at the end of the part “A” above). The bill has divided the current levies into three groups and annulled them one by one.

  a) The  first group of levies are those related to foreign trade, namely the import and export of goods and services. The article 15 of the bill refers to this types of levies and enumerates some examples of them, such as: duties of municipalities, cooperation levy, Red Crescent duty, asphalt levy, air levy, port duty, hygiene duty, a series of duties collected by the Customs Department, and any other levies collected in connection with importation and exportation of goods and services. All these levies and duties shall be cancelled and annulled from the date of enforcement of the bill in question.

 b) The second group of levies are those imposed by municipalities on producers of goods and services. Article 4 of the bill deals with this type of duties and annuls all of them. Two specific categories of levies are excepted from this rule:

1. Local levies and duties. The local levies are the payments imposed on consumer goods and services at the level of a city, town or county (Note 1 of the article 1).

 2. The duties envisaged by the “Law on Urban Development and Renovation”. This latter law provides for certain duties imposed by municipalities on urban lands and buildings.

c). Other levies imposed on production of goods and provision of services in favor of government organizations and public entities. These levies would also be annulled by the article 5 of the bill in question.

 

C. The organ competent for enactment of levies

As it was mentioned at the beginning of this article, the bill aims at providing a suitable basis and frame for the enactment of levies in the future. So, we have to find which organization would have competence, under the bill, for approval of new levies. The bill is silent in this respect, but at the same time it would terminate the competence of all organs and organizations who are presently powered to impose new levies. The article 11 of the bill reads:

“All the powers of the government, ministries, government institutions, public companies, municipalities, governors of provinces, various councils – including the Council of Economy, High Council of Harmonization of Transport  -  and other organs for enactment and imposition of levies, shall be cancelled as from the date of enforcement of the present Act”

A general rule like that would deprive all and any public institution and organization from the power and right of levying new imposts. Then, only the parliament would remain and thus, we may conclude that in case of approval of the bill in question, the right of enactment of any type of levies and duties would be limited to the parliament solely. This would be a brake to the upward trend of proliferation of levies and duties.

 

D. Compensating for the loss of revenue

By cancellation of existing levies, the revenue of relevant public organizations from those sources would be lost. To compensate for it, the bill has provided the following remedies:

a) The last paragraph of the article 3 has obligated the government to compensate for the loss arising from abolition of levies on foreign trade (import and export) by increasing the “commercial benefits tax” of imported goods to a level sufficient for such compensation. (For the meaning of the “commercial benefits tax” see the explanation given in part “A” of this article)

b) The article 12 of the bill has envisaged another device for compensation of the losses sustainable in case of abolition of levies on goods and services. The device would consist of a consumption tax applicable to selling price of relevant goods and services at the stage they are sold by the producers of goods and providers of services. The rate of the tax applicable to the sale price, would be equal to the percentage of the sum of the existing levies to the sale price of relevant goods and services at the date of approval of the bill in question.

A point worth of mentioning in this regard, is that the Ministry of Economic Affairs and Finance and the government are after the enactment of a more general law for introduction of the value added tax into the Iranian tax system. Thus, one may ask if it would be advisable to have value added tax and consumption tax at the same time? As far as this author is aware, the draft of the bill of law on value added tax has also provided for abolition of all other kinds of indirect taxes, so that only VAT would apply on relevant goods and services.

c) In addition to the devices explained above, the article 13 of the bill provides for a third remedy. It obligates the Interior Ministry to estimate, each year, the amount of the losses of relevant organizations and municipalities, and to forecast in its annual budget a figure equal to that amount. This amount would be paid to relevant organizations to compensate them against their losses from abolition of respective levies.

 

E. Applicable rules and criteria

The new bill of law provides for a number of rules and guides with regard to adoption and enforcement of levies. Some of these rules and directives are as follows:

a) Enactment and imposition of new levies on importation and exportation of goods is wholly prohibited (Note of the article 5).

b) No levies may be imposed on sources that are subject to other taxes.

c) Dividends of companies and participation bonds (special government bonds published recently) would not be subjected to levies.

d) Agricultural consumption of water, consumption of electricity, oil, gas and their products shall not be subjected to levies.

e) Imposition of more than one kind of levies on producers of goods and providers of services would be prohibited.

f) Free trade and industrial zones would not be subjected to the provisions of this law.

g) The rate of local levies shall not exceed a maximum rate that would be proposed by a council of the Minister of Interior, Minister of Economic Affairs and Finance and the Head of the Plan and Budget Organization. The maximum rate so proposed, will be approved by the Council of Ministers.

h) A moratorium not less than six months would be provided before a new levy is enforced.

i) The Interior Ministry would be responsible for enforcement of the bill in case of local levies.

 

An introduction to

the Iranian tax system

 

By: M.T. Hamadani

(part 15)

 

In last issue of the journal we began our study on taxation of juridical persons. The treatment envisaged under the Article 105 of the Direct Taxes Act concerning the principal types of juridical persons was examined first, and now we will begin our discussion on 3 categories of foreign entities that are dealt with in a special way.

 

1. Foreign insurance companies

Foreign insurance companies earning income by accepting reinsurance from Iranian insurance entities are taxable at a flat rate of 2% on their premium income and also on any interest accrued to their deposits in Iran. The Iranian partners of such foreign companies are required to withhold the said 2% tax from the relevant payments and remit the withheld tax of each month to the respective tax assessment office within 30 days.

An exemption is granted from the above 2% taxation on reciprocity basis. In cases where the Iranian insurance companies are engaged in the same business in the country of their foreign reinsurers and enjoy tax exemption in that country on their own reinsurance operations, the relevant foreign reinsurers shall also be exempted from taxation in Iran (Note 5 to the Article 109, DTA).

 

2. Foreign airline and shipping companies

The tax chargeable on theses companies is 5% of all amounts received by them for carriage of passengers, freight, etc. from Iran, whether such amounts are received in Iran, at destination or en route (Article 113, DTA). This is the only tax payable by these companies.

The branch or representative of the company should submit, up to the twentieth day of each month, a statement to the local tax assessment office in respect of the amounts received during the preceding month, and to pay the applicable tax thereon. In case of failure, the applicable tax shall be assessed ex officio (based on number of passengers or volume of freight) (Article 113, DTA).

Countermeasure. Should the tax applicable to the Iranian airline or shipping companies in a foreign country be more than 5%, the Finance Ministry shall increase the tax of similar entities of such country on par with the rates so applied to the Iranian companies (Note to the Article 113, DTA).

 

Foreign contractors

The taxable income of foreign contractors engaged in certain types of activities in Iran, consists of 12% of their total annual contract receipts. This rule is applicable to foreign contractors performing any type of civil, technical and installation and transportation works, and preparation of plans of buildings and installations, cartography, draughtsmanship, supervision and technical calculations (Article 111, DTA). There are no deductions available in respect of this 12% taxable income.

 

Examination and assessment

As it was mentioned earlier (Maliyat journal, No. 34, p.10), the taxable corporate income consists of the income derived from different taxable sources envisaged under the DTA, minus the losses resulting from non-exempt sources, and also minus the exemptions provided in the same law.

The taxable income so defined, is principally assessed through examination of statutory books of accounts of the company. Books of accounts in respect of juridical persons are the same as stipulated in case of business income (for details see Maliyat, No. 33, p. 11).

In certain cases the taxable income of companies and other juridical persons is assessed through ex officio procedure. Such cases are exactly those envisaged in respect of business income taxation. We have already studied these cases, for which you can see page 13, No. 33 of this journal.

 

Foreign corporations

The various types of taxable income of foreign entities were explained in previous issue of this journal (p. 12). It was also mentioned that these taxable incomes are subject to the rates of the Article 131 of the Direct Taxes Act. Now, let us see how the taxable income of foreign companies is assessed under the Iranian tax law.

The income of foreign entities subject to Iranian taxation can be divided into two categories for assessment purposes:

The first category includes the income earned for granting of licenses and similar rights, or for the provision of training and technical assistance, and also for transfer of cinematographic films. In all these cases, the taxable income shall consist of 20% to 90% of all payments received by the relevant foreign companies during a tax year. Application of coefficients between 20% and 90% takes place on basis of a special decree of the Council of Ministers.

Those making the said payments are required to withhold from each payment the applicable tax and remit it to the relevant tax office. In case of failure, both the payer and receiver shall be jointly and separately responsible for the payment of the tax and the accrued penalty.

The second category comprises the income derived from operating of capital or from activities performed, directly or through agencies, in Iran. These second types of income are assessed by examination of statutory books of accounts of respective entities.

 

Filing requirements

The juridical persons are required to submit their tax return, balance sheet and profit and loss account (all supported by statutory account books) to the related tax assessment office. The filing of these documents and payment of the tax should take place not later than four months after the expiry of each tax year. A company has to discharge the duty of submission of the said documents even in the period of a tax holiday (Article 110, DTA).

 

Taxation and dissolution of juridical persons

The following points are worth of notice in this regard:

a) When a juridical person is at the verge of dissolution, it should prepare a statement containing the list of the companys existing assets and liabilities, and submit the same to the relevant tax assessment office. The value of the assets minus liabilities, paid up capital and the reserves already taxed, shall constitute the basis of computation of the tax applicable to the last term of operation of the juridical person.

b) The liquidators of the dissolved company should prepare (within six months from the date of the juridical persons dissolution) a tax return for the last term of the entitys operations, and submit it to the relevant tax assessment office, together with the payment of the applicable tax. The tax assessor is required to examine the tax return out of turn.

c) Distribution of the dissolved juridical persons assets is authorized only after obtaining tax clearance or giving a security equal to the amount of taxation.

(Our discussion on taxation of juridical persons comes to an end at this point. Taxation of incidental income will be dealt with in the coming issue of the journal).

 

Abstracts of Persian Articles

 

Editorial

Since the Maliyat journal has begun its tenth year of publication, the editorial of both, Persian and English, sections of the journal is devoted to this subject

 

Tax aspects of Iranian oil and gas

Arthur Andersen, a famous international firm, has published a report regarding the taxation of petroleum industry in Iran. The main parts of this paper are reviewed in the article. The author does not agree with the method of determination of taxable income of relevant foreign companies as mentioned in the report, and provides his own view in this regard.

 

Globalization, tax rules and national sovereignty

The second part of Persian translation of this interesting article is printed in this edition of the journal. The article itself was written by Charles McClure Jr. in the IBFD Bulletin of August 2001.

 

A comment on six tax treaties approved by the parliament

In last June the Iranian parliament approved six tax treaties concluded with the governments of Pakistan, Qatar, Russia, Sri Lanka, Syria and Ukraine. These agreements passed the parliament by addition of a special stipulation regarding the taxation of interest payable on bonds and debentures. The author examines the relevant tax treaties and comments on the said stipulation. Highlights of the agreements are also reviewed in the English section of the journal.

 

Offshore centers or tax havens

Characteristics and activities of offshore centers are described in the article. Reactions of different states, especially those of OECD, against tax havens are also commented on by the author.

 

 

 

Extra payments in lease agreements and the case of mortgage

It has become a common practice in recent years that the owners of real estates demand their tenants to deposit an extra payment in addition to the principal rent. This combination of rent plus the interest calculated on such deposits is wrongly called by laymen as mortgage. This incorrect usage has found its way into official documents, tax circulars, verdicts of tax forums, etc. The author examines and reflects on the same subject.

 

Organizational aspects of taxation of oil and gas

Under the previous tax law of 1966, a separate body of officials consisting of specialized employees and auditors examined the oil and gas companies’ taxes. Tax disputes were also handled by high-level officials and experts. The author maintains that the same idea of referring oil and gas files to a specialized organization should be adhered to again.

 

Taxes on capital in double taxation treaties

Iranian tax treaties contain – like similar treaties of other countries – the taxes on capital. The term “tax on capital” in those treaties is meant to cover the property taxes envisaged under the Iranian tax law. The author examines this subject and reflects on how far these two types of taxes coincide with each other.

 

International case law on VAT

The idea of introduction of value added tax into the Iranian tax system is presently followed in this country and studies are going on. These studies cover, inter alia, the VAT laws of some other countries. To furnish more material to such studies, this journal would provide a number of verdicts of international tax forums on value added tax. A case examined by the European Court of Justice is reviewed in the present issue of the journal.

 

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.

 

a a a a a

 

In the Name of Allah

 

From the President

 

The Iranian year of 1381 (2002-2003) is of special significance from taxation point of view. This is the year in which the execution of most extensive amendment of the Direct Taxes Act (DTA) takes place. The new amendment would certainly involve many changes and developments in various aspects of rights and duties of both the taxpayers and tax administration, and would entail considerable effects on the trend of relevant affairs in the future.

Meanwhile, the adoption of the amendment in question was coincided with the approval of the budget law of the current year. The latter has always and traditionally contained some tax regulations beside provisions pertaining to other budgetary issues. In addition, a new law called the Law on Regulation of some Public Financial Provisions was also approved just at the same time as the budget law and the amendment of DTA. Certain tax regulations are contained in that new law as well.

Quite important points are to be mentioned with regard to the aforesaid laws. One noticeable aspect of the new amendment of DTA is the canceling of tax exemption of the public sector in several cases. The aim of this measure has been the strengthening of competitive position of private and cooperative sectors against the public sector, which benefited in the past from vast privileges.

Extensive changes have also been occurred in connection with tax rates and tax burden resulting from them. Some of these changes are of special importance. Among them one can refer to the introduction of periodical adjustment mechanism into the tax law. This mechanism has been in use in other countries for a long time, but it is the first time that it finds its way into the Iranian tax system. For the adjustment, the inflationary trend of the economy will be taken into account and it would apply to both schedular tables and single monetary amounts scattered all around the tax law. Proper and on time execution of the mechanism would hopefully prevent the effects of inflation on relevant cases in the future.

The second important step taken in the same direction was the adoption of a single and flat rate of corporate taxation. Application of progressive rates on corporate income tax has been abandoned and thus a major step taken forward towards harmonization with other tax systems in this regard.

The rates have also been reduced in many cases and the tax burden resulting from them is ameliorated both in case of individuals and companies. Reduction of corporate tax rate has been very sizeable. Though it has been a common trend in most countries over the last decade to reduce corporate tax rate gradually, but in the case of Iran the new amendment of DTA has accomplished the job abruptly and gone some steps ahead from the others.

Some specific taxes are removed wholly from the tax law, among which the abolition of the tax on aggregate income is of special significance. Several new concepts and categories are also introduced into the Iranian tax law.

Another critically important change effected by the new amendment has been the conversion of the previous organization of the tax administration to a new institution with legal identity and more autonomous status recognizes by the law. The skeleton and structure of the tax administration have been subjected to fundamental changes.

Considerable changes are also visible in the budget law of the current year. The number and extent of tax regulations of the budget law are noticeably reduced. Some tax provisions that used to be repeatedly included in the budget law every year, are now transferred to the newly adopted Law on Regulation of some Public Financial Provisions referred to earlier. Moreover, various exemptions and abatements were usually included in the annual budget law. Those cases have also been left aside and are no more visible in the budget law.

What mentioned above was a very short reference to some aspects of the afore-mentioned laws. These and other features of the said regulations should be properly studied and reflected on.  No doubt, some organizations and competent persons will embark on such studies. This publication has already begun its work in this regard, so that the most parts of the present issue of the journal are dedicated to the same purpose and we will continue our study in the future as well.

 

DR. Aliakbar Arabmazar

 

 

 

An introduction to

the Iranian tax system

 

By: M.T. Hamadani

(part 16)

 

Up to now we have dealt with all types of taxes envisaged by the Direct Taxes Act, except the tax on incidental income, which will be examined in the present issue. Then these series of article will come to an end, not only for the reason that the study of the main body of substantial regulations of the tax law would thereby completed, but also because the Direct Taxes Act has been recently subjected to vast and sizeable changes by a new amendment. A relatively long article will be printed in the present and coming issues of the journal that would provide a general and overall picture of the alterations introduced into the tax law by that amendment. It should also be pointed out that the tax on aggregate income, which constituted the last type of taxes subject to DTA, is now wholly cancelled by the amendment and therefore there is no need to examine it any more.

 

 

A cash or non-cash income earned gratuitously as a matter of grace, favor and the like, or as an award, or under any other title of the same nature, is subject to tax on incidental income at the rates of the schedular table of the Article 131, DTA.

The income so earned is wholly taxable and in case of non-cash income valuation should take place at current market prices. But in respect of real properties the taxable value (which we had described in previous parts of these series of articles) shall constitute the basis of tax computation.

 

Compromise and gift

Compromise and gift are two important cases of application of the incidental income tax. The word compromise is a translation of the term “sulh”, which is one of the several types of contract referred to in the Iranian civil law. Compromise is a contract whereby the parties to disputed transactions, etc. settle their dispute by mutual, or sometimes unilateral, concession. As a result of compromise some money or properties may be transferred to one of the parties or both of them. In other words, compromise can be with or without consideration.

Gift (a translation for the term “hebeh”) is another type of civil law contracts, whereby a person gives some money or property to another parson gratis. Sometimes the gift can be reciprocal, so that one of the parties gives away something against another gift from the receiver.

In respect of compromise and gift against consideration, the taxable income shall consist of the difference between the values of the objects of relevant reciprocal contracts. Such difference shall be assessed and attributed to the party benefiting from it.

Compromise and gift can be revocable and with the option of cancellation. As far as taxation is concerned, both transactions are considered final, but if cancellation takes place not later than six months, the collected taxes shall become refundable.

 

Transfer of proceeds of properties

Where the proceeds of a property are provisionally or permanently transferred to a person gratuitously, the transferee (recipient of the proceeds) should pay the accrued tax of each year in subsequent year.

 

Disposition of property by will

In case of disposition of properties in favor of other persons under a will, two situations are conceivable:

1. The beneficiaries are heirs of the testator. In this case the bequeathed property shall be added (after the death of the testator) to the inheritance share of each of the relevant heirs and as such shall become subject to inheritance tax.

2. In case of beneficiaries other than the heirs, the total amount of the willed property shall be taxed as incidental income.

 

Exceptions

The incidental income shall not apply in the following cases:

1. Gratuitous donation to individuals by charities, public-service institutions, government organizations, municipalities and foundations of Islamic revolution.

2. Donations to the people suffered from war, earthquake, flood, fire and other unexpected disasters.

3. Government bonuses for promotion of production, export or purchase of agricultural products.

 

Tax return

Those deriving incidental income should submit their tax return to the respective tax offices and pay applicable taxes within thirty days. In case of transfer of proceeds of properties (as described above), an annual tax return should be submitted up to the end of the month Ordibehesht (May 21) of the subsequent year. The same deadline applies to payment of the applicable tax.

Where the relevant transaction is registered by a notary public and taxes are already paid, the task of submission of tax return shall be discarded.

The juridical persons too are not required to prepare and submit a separate return for their incidental income, and any income from that source shall be assessed by reference to their books of accounts. Any taxes withheld at source from incidental income of juridical persons shall be considered as advance payment of their final taxes.

In respect of government companies, the said at source payment of incidental income was not applicable before the recent amendment of the tax law. But this exception has been cancelled by the new amendment.

 

The End

 

New Amendment of the Iranian Tax Law

 

 
By: Dr. Mohammad Tavakkol

 

In last February the Iranian parliament approved a new draft of law containing vast amendments to the Direct Taxes Act, the principal tax law of the country. In this article a short history of the amendment will be provided first, then changes of the law will be examined under different headings.

The work on the amendment began few years ago by the office of the undersecretary of the Finance Ministry for tax revenues. When the first version of the draft was prepared, it was signed by the Minister of Economic Affairs and Finance and sent to the Council of Ministers for their approval. The council too accepted the draft after deliberations and introducing some changes thereto. Finally the draft was signed by the President of the country and submitted to the parliament to be approved and become an executable law.

The parliament after a general review of the draft sent it, for more careful consideration, to its Economic Committee. The committee (composed of several members of the parliament specialized in the field of various economic affairs) set up a group consisted of people of different discipline and interests (experts, researchers, representatives of public and private sectors, etc.). This group began its work not on the draft, but on the previous text of the Direct Taxes Act itself. After several meetings and deliberations, a wholly new draft was prepared and submitted again to the plenary session of the parliament by the Economic Committee. The parliament approved the new draft in 5 sessions (during the second half of January and first half of February 2002).

Then the approved text of the draft was sent to the Guardian Council to check it and find out whether some contradictions existed between the draft and the Constitution or between the draft and the religious law (Feqh or Islamic canon law). Few such cases were found by the Guardian Council in the draft and it was sent back to the parliament for necessary correction. The draft was corrected accordingly and passed the parliament in a final way. On February 25 the law was notified to the President for execution.

 

Classification of the amendments

The approved amendment consists of 133 articles, each article amending one or more articles of the Direct Taxes Act, or adding new regulations to it. Thus the changes introduced to the law are quite considerable, and giving an exact classification of them is not an easy job, though we shall try to provide a general picture in this regard. The most important alterations of the law can be classified under the following headings.

 

Part 1. Amendment of tax rates

The rates are in most cases reduced, so that some people are concerned that these reductions combined with exemptions granted under the amendment may lead to a sharp decline in tax revenue. Both the schedular tax tables and scattered single rates of DTA (Direct Taxes Act) have been subjected to those alterations. The changes in question include:

A) Tax table of the Article 20, DTA (on inheritance tax) is amended. Both the rates and monetary figures of relevant brackets are changed.

B) The rate of the Article 45, DTA - regarding the stamp duty of the bills of exchange, promissory notes and other similar documents – is also reduced.

C) The schedular tax table of the Article 59, DTA (for taxation on transfer of real properties and good will) is deleted and two lower flat rates are provided for those transactions.

D) The pecuniary figures of the tax table of the paragraph “d” of the Article 103 are increased for 10 times. The table pertains to the stamp duty collectible from attorneys-at-law in certain cases. Since the rates of taxation are degressive in this exceptional case, the amendment would result in considerable increase of tax amount.

E) The most important part of the amendment relates to changes occurred in respect of the rates of corporate taxation. According to the previous law, companies and other juridical persons were subject to the schedular rate table of the Article 131, DTA. Now, for the first time companies are subjected to a single flat rate of 25% in respect of their overall taxation. Introduction of the flat rate of 25% means a sharp decrease of corporate tax liability. The new rate covers all types of juridical persons, including foreign companies and enterprises that may become subject to Iranian taxation.

F) Beside the rates of the tax table of the Article 131, the Iranian companies were subject to an overall corporate tax rate of 10%, which had to be deducted from their taxable income, and the rest of the income was taxed according to the rates of the Article 131. Thus the total tax of Iranian companies could reach, in most cases, to the very high level of 64%. This shows the importance of the change effected by the new amendment that reduced the rate of 64% abruptly to 25%. (Because of importance of this part of the amendment, for foreign entities in particular, a separate article will be provided soon by the author in this respect.)

G) The schedular rate table of the Article 131, DTA has been changed in some regards:

1. Companies and other juridical persons, and also most of salary receivers, are excluded from the application of this table.

2. Number of income brackets is reduced from 9 to 5.

3. The rates are drastically reduced, so that the highest rate of the table has dropped from 54% to 35%.

4. Monetary amounts of the income brackets are sharply increased (from 3.3 times in respect of the highest bracket to 30 times for the lowest one.

H) Salary income has been subjected to a flat rate of 10%, which substitutes for the progressive rates of the tax table of the Article 131. This amendment applies to the employees of public sector. As far as the private sector is concerned, the same flat rate would apply in case of salaries not exceeding the amount of 42 million Iranian Rials per year (800 IRR equals to 1 US $ approximately). In respect of the salaries exceeding that amount, the schedular rates of the Article 131 (as amended) shall be taken into account. 

I) According to Notes 1 and 2 of the Article 143 (before the amendment) the transfer of joint-stock companies’ shares, and also transfer of priority rights of such shares in stock exchange were subject to flat rates of 0.5% and 1% respectively. The new amendment has introduced the following changes in this regard:

1. Both kinds of transfers (of shares and priority rights of shares) will be taxed at the same rate of 0.5%.

2. Transfer of other types of securities in stock market has been also subjected to the same 0.5% taxation.

3. A new tax of 4% has been envisaged for transfer of shares and priority rights of shares (either of joint-stock companies or partnerships) outside the stock exchange.

4. In respect of a special reserve of joint-stock companies that is set aside to be added to the capital of the company, a new tax of 0.5% has been imposed. It shall be collected at the time of registration of capital increase.

 

Part 2. Cancellation of some taxes

A number of taxes of DTA are deleted by the new amendment. Such cases include:

A) Annual tax on real property (Articles 3 to 9, DTA).

B) Tax on unoccupied residential properties (Articles 10 and 11, DTA).

C) Tax on undeveloped lands (Articles 12 to 16, DTA).

(The above taxes were categorized as three types of property tax under the second part of DTA. The reasons provided for removing these taxes from the tax law were as follows: The actual amount of taxes collected from these sources has always been small and negligible, enforcement of them requires annoying and socially unpleasant investigations, and the taxes in question are of a nature more similar to duties collected by municipalities rather than the Finance Ministry. It has been stated (during the relevant deliberations) that municipalities would undertake collection and handling of these taxes.

D. According to the Article 77 of the previous text of DTA, the activity of the people who engage (several times in a year) in building and selling of houses and other real properties, was considered to be a business by itself and was subject to annual examination and taxation. The new amendment has cancelled taxation of the said business. Instead of that an extra tax of 10% has been imposed on transfer of any newly built properties, whether or not the building and selling of properties is the ordinary business of the seller. That 10% tax is to be collected on basis of taxable value of the property and is payable in addition to the usual tax on transfer of real properties.

E. Tax on aggregate income has also been wholly removed from the Iranian tax system. It was a category of tax similar to personal or individual tax in other countries. The reason provided for abolishment of this particular tax is that it had never been enforced in the past.

(This subject has certain relevance to the change of corporate income tax rate, which will be dealt with in the author’s new article mentioned above).

 

Part 3. New concepts and taxes

The amendment has introduced new categories of taxpayers, subject matters, etc. into the Direct Taxes Act. Some examples are given below:

 

A. Agencies without the right of making transactions

Note 3 to the amended Article 107, DTA refers to the branches of foreign banks and companies who are engaged solely in collecting information and finding market for their parent enterprises, without having the right to make transactions in Iran. Such branches and agencies shall be exempt from taxation on remuneration they receive from their parent enterprises.

Those are new categories of persons becoming subjects of the taxation law. The exemption in question is provided, most probably, after the example of the paragraph 4, Article 5 of the OECD Model Tax Convention on Income and Capital.

 

B. Merger of companies

The amended Article 111, DTA has dealt with taxation aspects of the merger of companies for the first time. If as a result of merger a new company is created, or a company is absorbed by the other one, the resulted increase in the capital of absorbing company, or establishment of a new company, shall be exempt from the stamp duty envisaged under the Article 48, DTA for such cases. Any transfer of assets from one company to another one shall also be exempt from the tax on transfer of properties. Termination of companies resulted from merger has also been exempted from the tax applicable to the cases of liquidation of companies. But, any income accrued to shareholders as a result of merger, will be taxed according to the relevant regulations.

 

C. Non-bank credit institutions

Wherever in the Direct Taxes Act some duties and rights are envisaged for banks, the new amendment has added the phrase: “non-bank credit institutions” and thus extended the same duties and rights to the latter category of institutions as well. In addition to that, a Note to the amended Article 145, DTA provides for the same rule in a general way:

“In cases where reference is made in the Direct Taxes Act to banks, any privileges, facilities, priorities and duties envisaged for them, shall apply to non-bank credit institutions that are established, or will be established, according to the law or by the authorization of the Central Bank of the Islamic Republic of Iran”

 

D. Participation bonds

These are special bonds published by some government organizations and entities in recent years. The amendment has, for the first time, dealt with this new kind of securities in some articles and provided certain exemptions for them.

 

E. New stamp duties

A Note added by the amendment to the Article 46, DTA has listed several types of documents and levied certain stamp duties on each of them. The list include certificate of exemption from military service, a number of educational certificates and documents, various permissions and licenses, and the like.

 

F. Periodical adjustment mechanism

The new amendment of the tax law provides for this type of adjustment in respect of monetary amounts of different rate brackets of tax tables, stated amounts of exemptions, duties, etc. Such monetary amounts have become, for the first time, adjustable every two years on basis of the proposal of the Ministry of Economic Affairs and Finance and approval of the Council of Ministers. The adjustment shall be effected by reference to the rate of inflation.

 

G. Direct withdrawal from the bank account of certain taxpayers

According to the amended Article 104, DTA, the government organizations, municipalities, companies and owners of certain businesses are required to withhold a tax of 5% from their payments against a number of services. The tax so withheld should be remitted to relevant tax offices within a specified period. The new amendment has introduced two new rules in this connection:

1. The Organization of Tax Affairs (new title for the tax administration) is authorized to revise annually the list of sources subject to the said withholding tax and publish the new list in the press (without being required to obtain approval of the parliament or the Council of Ministers).

2. If the withholding agent is a government organization or a public entity receiving money from the state budget, and such agent fails to comply with the aforesaid duties in spite of demand of the tax administration, then the latter would have the right to withdraw from any bank account of the failing organization an amount equal to the applicable withholding tax. This is also a wholly new phenomenon in the tax law.

 

H. Indemnification of taxpayers

The previous Article 242, DTA permitted the refund of extra taxes collected as a result of miscalculation. Now, this article has been amended in two ways. First, the extra tax is refundable whatsoever its reason might be. Second, the taxpayer has become entitled to receive the interest accrued to the extra tax as well. The rate of interest is 1.5% per month.

 

I. Role of official accountants

An important role is recognized for official accountants under the recent amendment of the tax law. The auditing report prepared by official accountants on the taxpayer’s return and records, will be accepted by tax authorities, even in cases where the report is prepared on basis of the request of the taxpayer himself.

Similar regulations had been inserted in tax law many years ago, but the consequences were discouraging and the relevant regulations were changed and acceptability of auditing reports became limited to certain special cases.

 

J. Joint tax returns

Unincorporated bodies of persons are referred to in DTA as civil partnerships. These partnerships have no separate legal identity and each of the partners has to pay the tax applicable to his own income. The new amendment has permitted the partners to submit a joint tax return. This is also an innovation of the new amendment.

(In the second part of this article, which will be presented in the next issue of the journal, we will discuss about the changes introduce by the new amendment with regard to tax exemptions, deductible expenses, deprecations and organization of the tax administration)

 

 

 

Abstracts of Persian Articles

Editorial

Since the Maliyat journal has begun its tenth year of publication, the editorial of both, Persian and English, sections of the journal is devoted to this subject

 

Tax aspects of Iranian oil and gas

Arthur Andersen, a famous international firm, has published a report regarding the taxation of petroleum industry in Iran. The main parts of this paper are reviewed in the article. The author does not agree with the method of determination of taxable income of relevant foreign companies as mentioned in the report, and provides his own view in this regard.

 

Globalization, tax rules and national sovereignty

The second part of Persian translation of this interesting article is printed in this edition of the journal. The article itself was written by Charles McClure Jr. in the IBFD Bulletin of August 2001.

 

A comment on six tax treaties approved by the parliament

In last June the Iranian parliament approved six tax treaties concluded with the governments of Pakistan, Qatar, Russia, Sri Lanka, Syria and Ukraine. These agreements passed the parliament by addition of a special stipulation regarding the taxation of interest payable on bonds and debentures. The author examines the relevant tax treaties and comments on the said stipulation. Highlights of the agreements are also reviewed in the English section of the journal.

 

Offshore centers or tax havens

Characteristics and activities of offshore centers are described in the article. Reactions of different states, especially those of OECD, against tax havens are also commented on by the author.

 

 

 

Extra payments in lease agreements and the case of mortgage

It has become a common practice in recent years that the owners of real estates demand their tenants to deposit an extra payment in addition to the principal rent. This combination of rent plus the interest calculated on such deposits is wrongly called by laymen as mortgage. This incorrect usage has found its way into official documents, tax circulars, verdicts of tax forums, etc. The author examines and reflects on the same subject.

 

Organizational aspects of taxation of oil and gas

Under the previous tax law of 1966, a separate body of officials consisting of specialized employees and auditors examined the oil and gas companies’ taxes. Tax disputes were also handled by high-level officials and experts. The author maintains that the same idea of referring oil and gas files to a specialized organization should be adhered to again.

 

Taxes on capital in double taxation treaties

Iranian tax treaties contain – like similar treaties of other countries – the taxes on capital. The term “tax on capital” in those treaties is meant to cover the property taxes envisaged under the Iranian tax law. The author examines this subject and reflects on how far these two types of taxes coincide with each other.

 

International case law on VAT

The idea of introduction of value added tax into the Iranian tax system is presently followed in this country and studies are going on. These studies cover, inter alia, the VAT laws of some other countries. To furnish more material to such studies, this journal would provide a number of verdicts of international tax forums on value added tax. A case examined by the European Court of Justice is reviewed in the present issue of the journal.

 

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.

 

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