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Maliyat Journal, No. 10, Autumn & Winter
1995-96
IN THE NAME OF GOD
FROM
THE PRESIDENT
We have never ceased our endeavor to play a
valuable role in re-introducing the issues that are of special significance for
improvement of the Iranian tax system. Taxation system is a multidimensional
concept, in which the taxpayers and their problems hold an outstanding
position. To assume a viable tax system, while ignoring the taxpayers' rights
and problems, is an absurd supposition.
The rights of taxpayers, on the other hand, depend
on the tax law and regulations, as well as the procedures and formalities
observed by the tax officials in day by day handling of their duties. Each of
these aspects comprises a series of delicacies and requires sophisticated
techniques, which are the outcomes of decades of action and performance.
Acquiring skill and dexterity in this domain needs certain level of education
and knowledge, and also sufficient practice and training. The layman would face
difficulties, and might lose his case, without turning for help to those
availed of such skills and expertness.
The founders of the Iranian modern justice
administration had in mind this obvious fact, the first day they embarked on
their significant project. The profession of advocacy in the field of civil and
criminal actions came into being about seventy years ago, and a contemporary
bar association was established at the same time. As far as the tax cases are
concerned, however, a different course of action has taken place. The tax
advocacy has had a fate apart from its twin, the juridical advocacy.
The first and foremost factor leading to this
abnormal destiny was, and yet is, the negative attitude of the tax
administration. They have not been ready to recognize the profession, or more
exactly speaking, they have ignored the very existence of it in most occasions.
One may find some transient hints in tax regulations to tax advisors. These
references, however, are mostly of blocking nature, and could be considered as
an indication of the same negative attitude.
Side by side the process referred to above, the
realities of the objective conditions have been taking effect, manifesting
their natural and unavoidable results. The need for tax consultation and
advocacy has led to appearance of tax advisors. In spite of reluctance of
authorities, people are referring to tax consultants, and consultants are
referring to tax organs for deliberation and adjudication of hundreds of tax
cases.
This situation has created a strange atmosphere,
in which the tax administration does not recognize tax advocates, and tax
advocates have to find their way - through maneuvers and tricks - to the scene
of relationship between the taxpayers and the fisc.
No need to say that such an abnormal state of affairs would not always attract
normal performers to the scene, and thus possibility would arise for the rights
of taxpayers, as well as that of the government, to be lost and ignored. The
time has come for the tax administration to pay attention to this very
important question, and put it into proper order.
Neither the taxpayers, nor their rights, are less
important than those of the parties to legal proceedings and their claims. The
latter enjoy a firmly established system of attorneyship,
and the attorneys are subject to a series of legal disciplines and controls.
Similar arrangements should be adopted in the case
of tax consultancy. After recognition of the idea in principle, comes the turn
of study and preparation. The totality of facts and events observed during the
performance of the profession must be taken into consideration. The practice of
attorneys-at-law should also be studied, and lessons be taken from their
weaknesses and malfunctions. Comparative study about the profession of tax
advocacy in other countries is a must for this purpose. It would avail us
useful ideas and appropriate courses of action.
This journal has always been mindful of putting
the profession into order. Special articles devoted to this purpose in the
past, and it will be dealt with in the future as well. We would like also to
declare our readiness to take part in studies suggested above, and to bear our
share in the endeavors to bring about this significant and unavoidable
task.
Dr.
Aliakbar Arabmazar
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TAXATION IN THE
An
Interview with the Director General of Finance and Economic Affairs Department
of the
Mr. Ali Latif
Golzar, the Director General of the Economic Affairs
and Finance of the
GENERAL
BACKGROUND
Khorasan
has an area of about 313000 square kilometers and an estimated population of
6.2 million. The population density is about 19 per square kilometer – around
half of that in the country on the whole. Of the economically active population
of the province over 31% engage in agriculture, and 15.9% in manufacturing.
The
gross domestic product figures are not produced regularly. According to some
estimations, the GDP at prices of 1370 (1991-92) was around 3946.3 billion
Iranian Rials (IR), giving a per caput figure of
about IR 636500. It is proportionately lower than the per capita GDP at the
national level; an indication of relative poverty in the province.
Khorasan
borders on
It
has brought about some positive effects as well. The shape and composition of
the provincial economy have been changed as a result of trade relationship with
the Central Asian republics of the former
Tourism
is a significant activity, and there were about 9 million visitors to the
province in the Iranian year of 1373 (1994-95). The most prominent attraction
of the province is the holy mausoleum of Imam Reza, the most sacred sanctuary
of the country, to which the city
Mineral
resources include principally coal, iron ore, chromites, feldspath,
kaolin, turquoise, as well as the natural gas, which has been the main reason
for erection of the Khangiran refinery.
TAX
REVENUE
Direct
tax revenue was IR 125 billion in 1373 (1994-95). The largest
component was corporation tax which contributed 40% of that figure, followed by
business tax on non-corporate persons (22.5%), tax on salary and wages (18.2%),
rental tax (4.7%), tax on transfer of goodwill (10%), inheritance tax (3.24%),
and miscellaneous others (1.36%).
Indirect
taxes totaled IR 13 billion. The main sources were different taxes imposed on
cars, and the sales tax on soft drinks (collected at the wholesale stage).
ACHIEVEMENTS
The
Directorate of Economic Affairs and Finance of the province (referred to
hereafter as the Department) has had successes in realization of some
corrective programs. Among them one can refer to the following:
-
Setting up of new tax offices (both common and specialized ones), and
additional bodies for settlement of tax disputes. This step was accompanied by
arrangements for increasing the efficiency and yield of the organization.
-
Measures are being adopted to give courage to employees and to arouse their
interest in doing their work to perfect. These measures include: observing
impartiality and fairness in dealing with promotional and compensation system
of the staff, regular inspection of tax offices across the province, and
organizing special training courses with a view to achieve higher standards of
job performance.
-
Improving the quality of tax assessment. Extensive efforts have been rendered
to draw the attention of tax assessors and other officials to the fact that the
assessment of tax liability must be based on objective evidence and
information. Respect for law and observance of legal principles and criteria
are always emphasized by the Department.
-
As far as the small businesses are concerned, the facility foreseen in the Note
6 to the Article 100 of the Direct Taxation Act is mostly applied. The taxable
income in such cases is fixed in consultation with the unions of relevant
businesses.
The
Department is always in contact with the business guilds, and does its best to
secure their cooperation in dealing with the taxation affairs of their member
business units.
The
cooperation is proved to be quite fruitful and productive. The number of tax
returns received from the business units in the current year (May 1995) totaled
8000, while it was 400 only in the previous year. This equals to an
unprecedented jump of 2000% over a short period of one year. The pattern is
advisable to be followed by the tax administration across the country.
-
Another worth mentioning achievement of the Department has been the actions
taken in the field of data gathering, and bringing new sources of income to the
net of taxation. This policy together with other steps enumerated above,
enabled the Department to realize considerable rise in tax revenue. Average
growth of direct taxes was 33.77% in 1372 (1993-94) and more than 45% in 1373
(1994-95). Some particular taxes have grown very rapidly. The rate of growth in
the previous year passed 88%, 86%, and 77% for undeveloped lands, inheritance,
and realty transfer taxes respectively.
STRUCTURAL
SHORTCOMINGS
The
interviewee expressed his opinion on some problems and deficiencies chronically
encountered by the tax organization. One is lack of a strong feeling of
adherence to the spirit of the law. The mentality of ignoring this important
requirement prevails not only among the taxpayers, but also - and unfortunately
- between some tax officials, as well. The ultimate result would be a common
tendency of tax evasion on the part of taxpayers, and resorting to arbitrary
actions by the tax officials.
A
real transformation in this regard should be considered an imperative need.
Adherence of tax authorities to the spirit of the law would undoubtedly improve
and raise the level of tax compliance on the side of taxpayers. Revision of
structure of tax revenues is, according to the interviewee, a must. At the
present, the revenue depends overwhelmingly on corporate and salary taxes.
Business tax occupies a position not comparable to the overall significance and
size of the relevant category of taxpayers. The sales taxes are so meager, that
nobody would bother himself to think about them. This country lacks the system
of value added tax, despite the outstanding role this very important tax plays
in majority of the world countries.
The
need for application of the modern electronic data processing technology in
domain of taxation is felt everywhere. Some steps have been taken, but they are
- in most cases - not followed up appropriately. Administration of taxation
under the present conditions would fail, if a definitive strategy of
computerization would not be adequately applied.
Extensive
tax exemptions granted under the present laws have deprived the country from
the revenue on more than 60% of the nation's GDP. The main objective of
adopting such vast exemptions is said to be the securing of economic
development, and - in some cases - social justice. No evidence is at hand, so
far, to verify the ascertaining of these aims as a result of implementation of
all those multicolor exemptions.
Cases
of underestimation of taxable income are not absent in the tax regulations. A
clear example is the method prescribed for evaluation of transactional prices
of real properties. Transactional – or more correctly, the taxable - prices of
realties are annually determined by a special committee. The prices so
determined are unbelievably (sometimes up to 20 times) lower than the real
value of properties. This and other unjustifiable discrepancies of the tax
system is advisable, and urgent, to be rectified appropriately.
The
last point concerns the order of motivations in our tax system. Those who abide
by the law are not rewarded, and tax evaders can manage to mitigate the onus of
punishment on them. The fines stipulated under the law are accompanied by
various possibilities of excuse and pardon. An evolution must take place in the
realm of compliance motivations, so that a higher degree of adherence to tax
duties could be ascertained.
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The
agreement consists of 18 articles, and comprises provisions in respect of using
- by motor vehicles of each of the contracting parties - of the highways and
roads belonging to the other party. Articles 12 and 13 of the agreement provide
for some reciprocal exemptions from taxes and customs duties. Under the Article
12, motor vehicles of one contracting country, which temporarily stay in, and
use the roads of another country for transportation of goods and passengers,
are exempt from any taxes and fees levied on ownership or passage of such
vehicles. The taxes and fees imposed on transit of vehicles through the land,
and on using the roads of contracting states, are also subject to the same
exemption.
According
to Article 13, temporary importation of motor vehicles is governed by the
domestic law of each contracting state. It provides also for the following
exemptions:
1.
The fuel in the fuel container of vehicles entering temporarily the territory
of contracting states is exempt from taxes and customs duties, and also from
any kind of export-import restrictions.
2.
Spare parts imported for repairing the vehicles shall also be exempted from the
taxes, duties, and restrictions referred to above.
A
similar agreement has been concluded between
EXTENDING
CREDITS CONDITIONED ON TAX CLEARANCE
The
Department in charge of Controlling the Affairs of Banks and Credit
Institutions instructed the banks to observe the following rules on making
loans to their customers:
-
Tax clearance certificate must be obtained by the corporations applying for bank
credits, if the sum of credit exceeds the amount of 250 million Iranian Rials during one calendar year.
-
The same certificate is needed for individuals whose total borrowing in a year
exceeds IR 50 million.
-
The banks and credit institutions are required to submit the loan applications
received from their customers to relevant tax offices. The information
contained in the applications shall be considered secret, and must not be
disclosed or used, except for tax assessment purposes.
-
The tax assessor shall decide, within 3 days, if the applicant owes taxes or
not, and would inform the bank accordingly.
-
The applicants who are liable for taxes, can receive tax clearance certificates
immediately after the payment (or arranging for payment) of the amount due.
-
Loans for buying or constructing houses, as well as the loans granted for
agricultural activities, are not subject to the said requirements.
INADEQUATE
TAX RECORDS
The
cases of ex officio assessment of a taxpayer's net income are enumerated under
the Article 97 of The Iranian Direct Taxation Act. Section 3 of the same
article describes a case where the books and other records of the taxpayer are
found inadequate or unconformable with the relevant tax regulations. The issue
in such cases must be referred to a board of 3 auditors designated by The
Finance Ministry. The Board should decide (within a period of 40 days) the case
and declare an opinion to the referring tax authority.
The
statute of limitations, on the other side, provides a period of one year only
for ex officio assessment of tax liability. That period begins from the date,
on which the taxpayers are obliged to file their returns. This period is
extendible for additional two months, where the case is referred to the Board
of auditors for verification.
This
subject - namely the case of referring the tax records to the bard of auditors - is
dealt with in a newly published circular of the Finance Ministry. Under the
circular, the maximum time limit for the tax assessor to review the case and
come to the conclusion that the tax records are unacceptable is one year from
the date, on which the tax return is filed. The case must be referred to the
Board of Auditors within the said time limit of one year, otherwise the statute
of limitation would apply, and the tax assessor could not resort to ex officio
assessment any
SMOKING
IN SERVICE OF SPORTING
The
council of Ministers levied new excise duties on all imported and
internally-manufactured cigarettes. The amount of the duty is 5 Rials per each single cigarette. The duty of collection of
the new tax is accorded to the Iranian Tobacco Company. It is a state-owned
enterprise vested with the exclusive right (monopoly) to manufacture cigarettes
and other tobacco products in the country. The company has to collect the new
duties on wholesaling cigarettes. A similar responsibility has been referred to
the customs department in respect of imported cigarettes.
Since
the smuggled cigarettes are to be delivered to the Iranian Tobacco Company for
selling, the company shall collect the new duties with regard to this category
of goods, as well. The duties so collected shall be allocated to the cause of
sporting in the country, through a mechanism provided for in the circular.
The
decree of the council of Ministers has created another source of revenue for
supporting the cause of sport. All industrial factories are obliged to pay - in
3 months intervals - a tax equal to of gross receipts from the sale of all
their products. The tax should be directly paid to the Organization of Physical
Education, a governmental body in charge of sport activities around the
country.
To
guarantee the enforcement of the said provisions, the decree prohibits tax
authorities from giving tax clearances to industrial factories, unless they
would ascertain the payment of new duties on time.
NOTE 2
(H) (3) TO THE BUDGET LAW OF THE YEAR 1373 (1994 - 95)
The
Iranian annual budget usually consists of two separate parts: budgetary
guidelines, and budgetary figures. The guidelines are presented as a single
article followed by many clauses, which are called: "Notes to the Budget
Law". These "Notes" deal with any subjects somehow relating to
or having effects on the budget. Some of these notes may pertain to the subject
of taxation as well.
The
Budget Law of the Iranian year 1373 (March 21, 1994 to March 20, 1995) contains
several "Notes" dealing with taxation matters. Among them one can
refer to the Note 2 (H) (3) which provides some provisions concerning the
non-governmental companies. Such companies are not, according the said
provisions, allowed to save more than 30% of their profits under the Article
138 of the Direct Taxation Act (DTA). That limitation covers the income earned
by the companies in the previous taxable year that is the Iranian year of 1372
(1993 - 94).
The
said Article 138 of DTA provides for the following tax exemptions:
1.
Up to 50% of the declared profits of companies earned through industrial or
mineral operations are exempted from taxation, should they be saved for reinvesting
in specific industrial or mining activities.
2.
The tax exemption would apply if the same reserves are saved for construction
of houses for the companies' employees.
QUESTION
PUT TO THE SUPREME COUNCIL OF TAXATION.
The
Technical Directorate of Taxation put the following question to the SCT for
ruling:
The
provisions of the note 2 (H) (3) of the 1373 Budget Law pertains to the income
of the taxable year of 1372. The budget Law, meanwhile, is enforceable from the
beginning of the year 1373, and it can not be implemented retroactively.
Now
suppose that a company's taxable year ends not and the end, but in the middle
of the normal calendar years. Such company might have saved, and even expended,
more than 30% of its taxable income, before the 1373 Budget Law became
enforceable. Since such a situation has not been foreseen under the Note 2 (H)
(3) to the Budget Law, the SCT is requested to rule on the subject.
The
SCT reviewed the matter in its plenary Board and delivered the following
opinion:
Budget
Law, like any other regulations, is prospective and it could not be interpreted
in a way to act on things that are past. Therefore, the provisions of the said
Note 2 (H) (3) are applicable only when the decision of the company - for
saving the net income of the taxable year ending during the calendar year of
1372 - has been taken after the beginning of the next year of 1373.
NON-OPERATING
INCOME
The
cooperative societies of farmers, fishermen, workers, employees, and students
are exempted from taxation. This exemption covers the total income of such
cooperative societies. Since a number of cooperatives engage in business
activities other than those they have been established for, the Supreme Council
of Taxation was asked to consider whether they could take benefit from the tax
exemption in respect of such extra activities.
The
SCT reviewed the matter and ruled as follows:
The
exemption provided for under the Article 133 of the Direct Taxation Act
concerns the operational income, that is the earnings arising from the
activities carried out within the framework of the cooperatives' statutory
objectives. Other earnings of cooperative societies derived in consequence of
the businesses carried on beyond the limits of such objectives, would not be
qualified for the said exemption, and should be taxed accordingly.
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ABSTRACT
OF PERSIAN ARTICLES
EDITORIAL
Problems
and abnormalities associated with the profession of tax advocacy in this country, are subject of the editorial in present issue of
the journal. The English editorial is also dealing with the same subject.
TAXATION
IN THE
We
had an interview with the Director General of Economic Affairs and Finance of Khorasan province. General information about the economy of
the province, and statistics on the tax revenue was provided by the
interviewee. He reflected also on achievements of his organization in
qualitative, as well as quantitative betterment of their taxation performance.
Several views on shortcomings of the tax system were also expressed, and
corrective proposals were suggested. The main article of the English section
deals with the major points raised in the same interview.
TAXATION
OF SOFTWARE TRANSACTIONS
This
field of business is relatively new in
A
SURVEY ON VALUE ADDED TAX
Second,
and the last, part of this analytical study is
featured in the present issue of Maliyat journal. The characteristics of the
value added tax are discussed in the article.
COMPARATIVE
STUDIES: CORPORATE TAX RATES
The
Asian countries on the verge of industrial development are studied in this
issue. Two countries, namely
AIR
POLLUTION AND TAX INCENTIVES
This
article examines a law that has been recently enacted for controlling the air
pollution. The law lacks any provisions regarding taxation, and is deprived of
financial tools for confronting the evil of pollution. The general tax law,
namely the Direct Taxation Act, is also devoid of such kind of provisions.
The
author reviews briefly the system of antipollution tax incentives in the laws
of some European and Asian countries. Then he invites the authorities to pay
due attention to this important subject. A clear and comprehensive strategy
should - according to the author - be drawn for this purpose.
TAX
GLOSSARY
Several
tax terms and expressions are presented and defined in each issue of the journal. Detail
explanations follow the definition of the terms.
READERS
INQUIRIES
We
take care of tax inquiries of our readership. Questions are reviewed by high
quality tax experts, and answered with utmost accuracy. The readers in other countries
are also invited to address their tax inquiries to us. Space permitting, the
answers will be published in the journal, otherwise they will be sent directly
to the inquirers.
A
HISTORICAL DOCUMENT FROM THR ERA OF QAJAR DYNASTY
A
letter issued on January 1915 from the Iranian Finance Ministry is introduced
in the present issue of the journal. The letter is addressed to the Council of
Ministers, requesting the Council to arrange for payment of the deferred salary
of employees. The civil servants of the Ministry had not received their
salaries for 3 consecutive months. Interesting arguments are presented in the
letter to demonstrate that the salary f tax officials constitute an important
part of collection cost, and the tax system would fail if the cost of
collection would not be paid regularly.
REGULATIONS
AND RULINGS
The
texts of latest laws, regulations, decrees, and opinions of the Supreme Council
of Taxation are reported in the Persian section of the Journal. A summary of
the same is provided in the English section under the heading "Tax
News."
BOOK
REVIEW
Authors
and publishers are invited to submit one copy of their books and publications
to the Editor for review. In each issue we will review their works and
introduce them to our readers in
TAX
NEWS AROUND THE WORLD
A
number of international tax news are selected and presented to the Iranian
readership.
SELECTED
CASES BEFORE THE TRIBUNALS
This
section is also devoted to the international arena. Cases are selected so that
to be of interest to the Iranian readership.
The End
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