Maliyat Journal, No. 36
Summer
and Autumn 2002 and Winter 2003
In
the Name of God
Editorial
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
promotion of investment and economic development.
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 has been removed totally 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
independent legal identity whose autonomous status is recognized 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 above-mentioned laws.
These and other features of the said regulations should be properly studied and
reflected on. No doubt, some
organizations, researchers and professionals will embark on such studies. Maliyat journal 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
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 presented first, then changes of the law will be examined under different
headings.
Legislative
History
The Finance Ministry’s Office of the
Undersecretary for Tax Revenues began work on the amendment a few years ago.
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 accepted the draft after deliberations and introducing
some changes to it. 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 some 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. After several meetings and
deliberations, an entirely new draft was prepared and resubmitted 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 determine whether contradictions existed
between the draft and the Constitution or between the draft and the religious
law (Feqh or Islamic canon law). Few
contradictions were found in the draft, and the Guardian Council sent it back
to the Parliament for the necessary corrections. The Parliament approved the
corrected draft, and on 25 February, the law was sent to the President for
execution.
Classification
of the amendment
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 amendments to the DTA can be classified under the
following headings:
Part 1. Amendment of tax rates
In most cases, tax rates have been
reduced, so that some commentators are concerned that the reductions, combined
with exemptions granted under the amendment, may lead to decline in tax
revenue. Both the scheduler tax tables and the scattered single DTA rates have
been amended. The changes in question include:
A) The revision of the
inheritance tax table under article 20 to change the rates and the monetary
figures of the relevant tax brackets.
B) A reduction of the stamp duty on bills of exchange,
promissory notes, and similar documents under article 45.
C) Deletion of the scheduler tax table of the
article 59 regarding the tax on real property and good will transfers, and
provision of two lower flat rates for such transactions.
D) A tenfold increase in the pecuniary figures
of the tax table in article 103, paragraph D; the table pertains to the stamp
duty collectible from attorneys in certain cases. The amendment will result in
a considerable increase in tax amount because the rates are degressive
in this particular case.
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%.
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 (8000 IRR equals to 1
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 also been 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 (of either 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
amendment 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.
Part 3. Novelties
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
to make 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
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 tax law. The exemption likely follows the example of
article 5, paragraph 4 of the OECD Model Tax Convention on Income and Capital.
B. Company Mergers
Amended article 111 of the DTA
deals with the tax aspects of company mergers for the first time. If, as a
result of a merger, a new company is created, or a company is absorbed by
another one, the resulting increase in the capital of the absorbing or new
company will be exempt from the stamp duty of the article 48 of DTA. Any
transfer of assets from one company to another will also be exempt from the tax
on transfer of properties, and termination of companies that results from a
merger is exempt from the tax applicable to company liquidation. However, any
income accrued to shareholders as a result of a merger will be taxed according
to the relevant regulations.
C. Non-bank credit
institutions
The phrase "non-bank
credit institutions" has been added to every section of the DTA that
addresses duties and rights for banks, thus extending the same duties and
rights to non-bank credit institutions. In addition, a note to amended article
145 provides the same rule in a general way. It says:
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
Participation bonds
are special bonds issued by some government organizations and entities in
recent years. The amendments deal with this new kind of securities for the
first time, providing 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 includes certificate of
exemption from military service, a number of educational certificates and
documents, various permits 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 will be tied
to the inflation rate.
G. Direct Withdrawal From
Certain Taxpayers' Bank Accounts
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
at the request of the taxpayer. 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 personal
income. The new amendment has permitted the partners to submit a joint tax
return. This is also an innovation of the new amendment.
Part 4. Exemptions
Most important changes of DTA provisions in
respect of tax exemptions are outlined below.
A. Changes of the Article 2
The Article 2 of the Direct Taxes Act is of a
general nature. It has been positioned at the beginning of the law for
determining the organizations and entities that are excluded from the
application of taxes imposed by the law.
Five categories of
institutions previously were excluded from tax, under certain conditions and
requirements:
1. government
organizations and municipalities;
2.
certain special institutions -- the Red Crescent Society, Social Security
Organization, pensionary saving funds, and a few
others;
3.
public endowments whose income is used for certain
charity purposes;
4.
registered public service institutions whose income is
used for the same charitable purposes; and
5.
religious societies and missions of recognized
religious minorities.
The new amendment has retained the first
category of those institutions (government organizations and municipalities)
and deleted all other four categories. The reason declared for this
considerable change was the necessity of removing the cases of tax
discrimination and having a wider tax base. But what actually has taken place
is the transfer of the abatement of the Article 2 to another part of the law
(new Article 139, DTA), though the title of the abatement is changed and some
modifications have also been introduced.
B. Changes related to the
inheritance tax
Tax exemptions are considerably increased in
this section of the law, though some minor exemptions are cancelled. Main cases
of changes are as follows:
1. The minimum exempted inheritance share of
the first class heirs is considerably increased (15 times).
2.
The exemption already was higher for immediate heirs who are under age 20, are
wards, or are disabled and unable to work. Under the amendment, that higher
exemption has been increased more than 16 times. However, a lesser exemption
granted to second-tier heirs who were in the same condition has been canceled.
3.
The exemption provided previously to first- and second-tier heirs under the age
of 25 who are full-time students has been withdrawn.
4.
Certain salary benefits and employment claims of the deceased person have been
added to a list of similar items that are exempt from inheritance tax.
5. Before the amendment, the tax law had
exempted from inheritance tax any properties endowed for some of the
organizations and institutions referred to earlier in connection with the
changes of the Article 2, DTA (see section A, Part 4 above). Now this abatement
has been retained for the first category (government organizations and
municipalities) only and other groups have become deprived from it.
6. 100% of the decedent’s deposits in
Iranian banks and their branches abroad were exempted from inheritance tax
before the amendment. Now, this percentage is decreased to 80%, but it has
become applicable to authorized non-bank credit institutions as well.
7. 40% of the value of the decedent’s
shares in industrial and mining joint-stock companies was exempted from
inheritance tax before the amendment. The amendment has extended that exemption
to the shares of all companies of any nature. Beside that, 40% of the net value
of the assets belonging to the deceased person in industrial, mining and
agricultural companies is exempted also from inheritance tax.
C. Changes connected with the
real estates income tax
Changes effected by the new amendment in
respect of the exemptions related to this part of the law are as follows:
1.
100% of rental income of the owners of apartment buildings that are built
according to an official model is exempted from taxation, provided that no
fewer than three building units are leased.
2. Owners of residential units leased for
dwelling will be exempt from 100% of the tax on their rental income. This
exemption is applicable in proportion to certain acreage of the useful
substructure of the leased dwelling units. The acreage subject to exemption is
up to 150 square meters in
3. The minimum tax exemption of rental income
provided before the amendment to the individuals having no other sources of
income has been considerably increased.
4. The residential units occupied by the
owner’s father, mother, spouse, children, grand parents and other persons
dependent on him were not considered as leasehold (and thus were not subject to
taxation) according to the Note 1 of the Article 53, DTA before the amendment.
The same Note ruled that in cases where several properties are allocated for
habitation of the aforesaid persons, only one of such dwelling units would be
exempted from taxation. The new amendment not only has retained the exemption
for such properties, but it has also permitted that several dwelling units
(each per one of the listed persons) be exempted from the above taxation.
On the other hand, the following exemptions and
abatements (with regard to the tax on rental income) are cancelled:
1. A special exemption provided previously for
the taxpayers having disabled and backward children under their custody.
2. Exemption of the joint owners of a leased
property in cases where the share of each of them in the rental income was
small and negligible.
3. The previous Note 2 of the Article 53, DTA
ruled that any real property that is put free of charge at the disposal of the
organizations and institutions mentioned in some paragraphs of the Article 2
would not be considered as leaseholds (and thus excluded from taxation). The
organizations and institutions in question are those whom we described before
(see Part 4, A above). The amendment has retained that
abatement for the first group of the said institutions, namely government
organizations and municipalities. Other groups (public-service institutions,
religious societies and missions and certain specific organizations) are
excluded from the same abatement.
The rest of the Part 4 (other
tax exemptions) and remaining parts of this article will be printed in the next
issue of the journal.
An introduction to the Iranian tax system
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.
Tax on incidental income
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 (sulh) and gift (hebeh)
Compromise and gift are two
important cases of application of the incidental income tax. The word
compromise is a
Gift (a
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