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:
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:
Agreement between
the government of the Islamic Republic of Iran and the government of the
Agreement between
the government of the Islamic Republic of Iran and the government of
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:
Agreement between
the government of the Islamic Republic of Iran and the government of the
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
C. The latest amendments made by OECD in its model
convention, as can be read in the text of
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
H. The article 27 of the treaty concluded with
A new bill of law for correcting the process of
enactment of levies in
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 -
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
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
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
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
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
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 company’s 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 person’s dissolution) a tax return for the last term of the
entity’s 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 person’s 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
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
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
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.
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.
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.
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.
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
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.
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.
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.
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).
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
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
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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