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Maliyat Journal, No. 12 - Summer 1996
IN THE NAME OF ALLAH
FROM THE PRESIDENT
The
importance of international aspects of taxation has always been emphasized upon
in this journal. Contemporary developments of economic and commercial
relationships around the world have had strong impact on the tax system of
different countries, a manifestation of which is the proliferation of vast
categories of tax treaties. The number of tax treaties is rapidly growing, so
that one can scarcely find a country without this type of international
contractual ties.
There
are extensive and far-reaching economic and trade connections between this
country and nearly all nations of the world. Great efforts are also being
exerted for attraction of capital and technology. Among such efforts one can
refer to establishment of free-zone areas in appropriate regions.
The
tax organization, however, had not been very dynamic in this field, and we were
– until recently - counted among the nations availing themselves of the least
numbers of international tax treaties. This state of affairs was not comparable
to the actual position of the country, nor was it commensurate with the extent
of its foreign trade and economic relations.
The
situation drew the attention of tax administration, and substantial steps were
taken towards the correction of these conditions. We had only two double
taxation treaties in the past, one concluded with France and the other with the
Federal Republic of Germany. Such was the case during a considerably long
period of time. The actions taken in recent times by the authorities have
demonstrably changed the outlook. Negotiations initiated with countries like
The
subjects covered by these agreements include double taxation avoidance,
prevention of tax evasion, and exchange of information between the parties.
They contain non-discrimination clause, and a particular procedure for
resolving difficulties and reaching mutual consensus.
In
general, it can be said that an interesting stage of dynamism and activeness
has been commenced in the realm of international tax relations, which we hope
to result in success.
Dr. Aliakbar Arabmazar
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NON-PROFIT
SCHOOLS AND UNIVERSITIES
A
COMMENT ON THE OPINION EXPRESSED BY
THE
SUPREME COUNCIL OF TAXATION
By Dr. Mohammad Tavakkol
The adjective
"non-profit" when used as a legal term denotes the attribute of an
association or corporation, whose income is not distributable to its members,
directors or officials. The Persian equivalent of the same word connotes to man
in the street the idea of not being after profit and money, engaging in
humanitarian activities, and the like.
Ironically the
non-profit educational institutions are wholeheartedly after business and
money, and one can scarcely find in them the signs of mercy and benevolence.
That is why most people regard the expression "non-profit" as a
euphemism: substitution of an agreeable word for one that may suggest something
unpleasant.
Leaving aside this -
relevant or irrelevant - linguistic discussion; we would turn now to the theme
of taxation. Non-profit educational institutions are tax-exempted under the
Iranian tax law. The text of the relevant part of the law (Article 134 of the
Direct Taxation Act) reads as follows:
"Income of
non-profit schools, including elementary, secondary and high schools, technical
and vocational schools, and also non-profit universities and higher education
institutions, as well as the centers for keeping handicapped and mentally ill
people, which are organized and administered by permission of, and according to
the criteria established by, the relevant legal organizations; and also the
income of the institutes and clubs engaged - on basis of permit of the Physical
Education Organization - in sport activities solely, shall be exempted from
payment of income tax."
Thus, the non-profit
schools and universities which are set up and run according to the rules
enacted by relevant governmental organizations, enjoy full tax exemption.
A question was
recently raised regarding the scope of the word "income" at the
beginning of the said article. Whether we have to restrict it to the proceeds
of habitual educational activities which are customarily performed by such
institutions, or the word "income" should be regarded as an absolute
term that refers to any kind of earnings, no matter in what connection they are
derived. Suppose that a non-profit school would engage in purchasing and
selling properties. Would the earnings of such activity enjoy the exemption
provided for in Article 134, or we have to consider it as an affair outside the
coverage of the said article, and thus not deserving the tax exemption foreseen
by these regulations?
The case was referred
to the Supreme Council of Taxation (SCT) for consideration, and the SCT
reviewed it in its Plenary Board. The opinion expressed by the Board of SCT was
as follows:
"Notwithstanding
the kind of income, the prerequisite for enjoying tax exemption provided for in
Article 134 is that the relevant schools and universities be set up and run
under the permission, and according to the criteria, of the competent legal
organizations (Ministry of Education or other relevant ministries). Thus, the
income of any such institution which has been established and run under the
said criteria and permits will enjoy the tax exemption; otherwise it shall be
subject to tax, according to relevant regulations."
The phrase
"notwithstanding the kind of income" on the beginning of SCT's
opinion means that the SCT considers the word "income" in Article 134
to have a broad coverage, without being restricted to the revenue raised solely
from educational activities.
ABSOLUTENESS
AND GENERALITY OF THE LAW
An argument might be
offered in support of the SCT's opinion. The basis of such argument would be
the fact that the word "income" at the beginning of Article 134 is
used unconditionally, and no qualification is attached thereto. So, one can
conclude that any type of earnings of such institutions, whether pertaining to
customary educational activities or not, should be subject to tax exemption.
This kind of reasoning
equals to literal interpretation of law, namely to follow the literal meaning
of words without going beyond the surface and superficiality of phrases and
words. Such type of interpretation might, in many occasions, result in
illogical and unacceptable conclusions.
The verdict under
discussion is a clear example of this reality. The tax exemption under Article
134 is granted because non-profit schools and universities are engaged in
educational activity. If they would take it easy, and go after other businesses
that has nothing to do with education, then how one can allow them to enjoy
such exemption? This is why we stated that the literal interpretation of law is
not a sufficient and adequate tool. It must be supported by logical
interpretation, which means to search for the logic and philosophy of the law.
The rational behind an article, a chapter of a law, a law in its totality, and
even in the general system of a country's law, might be of great help for
understanding the sound meaning of regulations.
PERMITS
AND CRITERIA
The SCT did not pay
attention in its verdict to the logic of Article 134, and considered any type
of income of non-profit educational institutions as exempted from taxation. It
emphasized on another subject instead, namely the requirement that non-profit
institutions must be set up by the permission of the competent organizations,
and to be run according to the criteria adopted by the same authorities. One
might say that this specific provision is enough for preventing the tax
exemption to be extended to institutions that engage in businesses beyond their
original mission. The competent authorities would probably disallow such extra
activities. The answer to such statement is as follows:
Firstly, there is no
clear and certain assurance that the relevant authorities be very severe and
forbidding in this respect. They might even be reluctant to prevent educational
institutions from profit making activities, since that would lessen their need
to public sources, which otherwise must be financed by the same authorities.
Secondly, the Article
134, DTA and the tax exemption provided by it, are in realm of taxation. It is
hundred percent the job of tax officials and tax dispute-settling organs to
decide upon the issues pertaining to the content of this article. It is not
logical and advisable for tax organization to confer its own duty and
competence to the discretion of other organizations. If we would say that the
only condition for enjoying tax exemption under article 134 is that the
non-profit institutes be set up and run according to the criteria drawn by relevant
organizations, then we would have certainly entrusted the destiny of the tax
exemption to the discretion of those organizations. This would lead to
infringing the legal duties vested with the tax authorities solely.
CONTRADICTORY
RULINGS
It is worthwhile
mentioning here that a circular issued recently from the Ministry of Economy
and Finance refers to a situation very similar to that of the aforesaid Article
134, DTA. The circular speaks of the tax exemption accorded to certain
cooperatives under the Article 133 of the same law. The Article reads as
follows:
"Hundred percent
of the income of rural, tribal, agricultural, fishermen, workers, civil
servants, and students cooperative companies and their unions shall be exempted
from taxation."
The circular
concludes, after referring to the text of Article 133, that:
"It should be
taken into the consideration that the said tax exemption is relevant to the
income which has been derived within the frame of regulations and statutes
drawn up on basis of law concerning the cooperative sector. Such earnings must
be consistent with the title of relevant companies; otherwise the income earned
through the activities inconsistent with the title of these cooperatives shall
not be subject to tax exemption."
These two articles
(133 and 134) are very similar to each other and one can not find any
significant and structural differences between them, so that could justify such
contradictory and opposite ways of handling.
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Tax News
THE LAW
CONCERNING EXISE TAXES AND STAMP DUTIES
Some new excise taxes
are levied on soft drinks, aerated beverages, cigarettes, industrial and
medical alcohol, cement, and steel. The excise duty on some of these items will
be charged as follows: Imported soft drinks, aerated beverages, and fruit
juice: 200 Rials per liter.
Internally produced
soft drinks 70 Rials per liter
(Exported soft drinks
are exempted from this kind of taxation).
Imported
cigarettes 10 Rials per
single cigarette
Internally manufactured
cigarettes 5 Rials per single cigarette
Medical alcohol 400 Rials per bottle (600 cc)
(80% exemption is
granted if used inside the country)
Industrial alcohol
(ethanol) 100 Rials
per bottle (600 cc)
Solid industrial
alcohol 10 Rials per
500 grams
Bottled methanol 50 Rials per bottle (600 cc)
Cement produced in the
country 300 Rials per ton
The law includes some
stamp duties payable on instruments like:
Certificate for
exemption from military services: 5000
Rials
Driving license (for
motorcycle): 500 Rials (per year)
Driving license (for
other vehicles): 1000 Rials (per year)
International driving
license 30000 Rials
Different kinds of
bills of lading: from 80 to 500 Rials
Various types of
educational diplomas or certificates:
from 100 to 10000 Rials
Some taxes on transfer
of automobiles and other vehicles, and few other miscellaneous charges, are
also stipulated by the same law.
RENTAL
INCOME AND STATUTE OF LIMITATION
Rent arising from
immovable property is taxable under the Iranian tax law. Rental income paid by
governmental organizations and legal entities is subject to the withholding of
income tax at source. The paying organization or entity has to remit the
deducted tax to the relevant tax office within a period of 10 days.
FACTS: One of the
provincial departments of Education Ministry had a building under its disposal
for a long time (more than 10 years), without paying rental to the owner of the
property. No taxes were also levied, either on the owner or the Provincial
Department, and none of them were asked by the tax office to pay taxes on the
income of the building. In the course of these years, the owner managed to
raise and follow up a case against the Department. He won the case at the end,
and the Department was compelled to pay all the deferred rental of 10 years.
STATUTE
OF LIMITATION
The maximum period
during which the income tax liability may be demanded is three years from expiry
of the deadline for payment of the tax due (Article 157, DTA). Since the
Provincial Department of Education had not paid the relevant rental on time, and
the three years time limit was elapsed (with regard to almost all the period
for which the court judgment had been rendered), therefore a question was
addressed to the Supreme Council of Taxation, as to whether the liability of
the taxpayer became statute-barred.
The Plenary Board of
SCT reviewed the matter but could not reach unanimous decision, and two different
opinions were expressed by the majority and minority members of the Board.
A positive answer was
given by the Majority to the said question. According to them, the taxpayer (owner
of the property) had not been asked by the relevant tax office - within the
three years legal time limit - to pay his tax liability. Therefore, the statute
of limitation would relieve the taxpayer from requirement of paying such
statute-barred taxes. The Board even decided that any payments already made by
the taxpayer, for that period, might be refunded to him under the law.
The Minority on the
other hand took a wholly different position. They (two members of the Board) referred
- in support of their opinion - to the Note No. 9 of the Article 157 of the
Direct Taxation Act. The Note is relevant to a situation where the lessee of a
leased property is a governmental organization or a juridical person. In that
case, the lessee is obligated, as we mentioned before, to withhold the
applicable tax from its payments to the lessor, and to remit it to the tax
office within a period of 10 days.
The Minority argued
that the said obligation of the lessee begins from the date of playability of rentals.
So, the three years time limit provided for in statute of limitation, has not
been elapsed yet and the applicable tax is demandable.
The Minority rejected
the view expressed by the Majority on the subject of refunding as well. They referred
to the Article 735 of the Civil Procedural Law, according to which a debtor who
has paid his dues to the creditor could not demand repayment of the same by
virtue of the Statute of Limitations. Therefore, the taxes already paid by the
taxpayer shall not be refundable for the sole reason of being statue-barred.
CONSTRUCTION
DEVELOPERS AND TAXES PAID ON ACCOUNT
Construction
developing has always been a booming business in this country. That is why a special
position in tax regulations has been dedicated to construction developers.
These people are called by the public as: "construct and sell" (both
verbs in imperative mood).
The taxable income of
a construction developer is usually determined by deduction of market price of
land and cost price of construction from the selling price of completed
buildings. These taxpayers are required to pay during each year, an advance
payment estimated as the income tax of the same year. Such on account payments
shall be deducted from the final income tax of the relevant year. They have
been brought under this obligation by the Ministry of Economic Affairs and Finance.
Article 163 of the
Direct Taxation Act authorizes the Finance Minister to impose such requirement on
certain categories of taxpayers. A circular has been recently issued from the
Ministry, which reiterates the same obligation with regard to construction
developers and determines the basis of estimation of their income and other details
of the subject.
The basis of
calculation is "transactional value" of the buildings. The term
"transactional value", used in the Direct Taxation Act, is somehow
misleading, and it is better to call it: "taxation value", since the
only purpose of such prices or values is to determine a hypothetical basis for
calculation of income tax. Market prices of immovable properties are
incomparably higher than this theoretical transaction (or taxation) values.
The main points of new
circular are as follows:
- Capital city
- Transactional values
of buildings in all districts of
- These transactional
values are to be multiplied by 6, 5, and 4 in the first, second and third areas
respectively.
- The result shall be
assumed, provisionally, to be the selling value of properties involved.
- Then a percentage of
this hypothetical selling price is to be deducted as the cost price of the building,
for determination of taxable income.
- Since such figure
may not be calculated at the middle of a year, certain percentages of the
assumed selling price shall be considered as taxable income.
- These percentages
are mentioned in a separate table called: "table of coefficients".
- The progressive tax
rates of Article 131, DTA shall be applied to the taxable income for determining
the amount of tax liability of each taxpayer.
- This will be an on
account tax, and shall be deductible from the annual income tax of the relevant
taxpayers.
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ABSTRACT
OF PERSIAN ARTICLES
EDITORIAL
The editorial in this
issue examines the subject of international tax relations, and refers to the
recent tax treaties concluded between
TAXATION
IN THE
Maliyat journal had an
interview with Mr. Vajihollah Malek-Mohammadi, Director General of Economic
Affairs and Finance of the
Different aspects of
the issue of taxation in
ESTABLISHMENT
OF SPECIALIZED TAX CIRCLES
We had another
interview with Mr. Mohammad Reza Yazdizadeh, Director General of the Tax Information
and Services Department of the Finance Ministry. The Ministry has recently
established specialized tax offices for assessment of tax liability of certain
branches of businesses. Good briefing was presented by the interviewee
regarding this new development, as well as the agreements reached between the
Ministry and several unions of different businesses in the capital city
IRANIAN LAW
AND TAX PRINCIPLES
General principles
governing imposition and execution of taxes have always been the subject of theoretical
and legal discussions in different societies. Canons of Taxation, introduced by
Adam Smith in his famous book “Wealth of Nations”, are historical examples of
such discussions. Tax principles are embodied in legal system of many countries
as well. Constitutional limitations provided in organic laws of countries like
NON-PROFIT
EDUCATIONAL INSTITUTIONS
Income of non-profit
schools and universities, which are financially well-off, is tax exempted under
the relevant regulations. The Supreme Council of Taxation had been asked to
make it clear whether all kinds of income derived by these institutions could
enjoy tax exemption status, or the exemption is confined to the income raised
from educational activities solely. The answers given by the majority and
minority members of the SCT are reviewed and analyzed in the article. Same subject
is provided in English section as well.
COMPARATIVE
STUDIES: CORPORATE TAX RATES
Corporate tax rates in
various categories of countries around the world have been the subject of a series
of articles in several issues of Maliyat journal. Two developing countries,
namely
TAXATION OF
SOFTWARE TRANSACTIONS
The subject is dealt
with again in the present issue of the journal. Iranian taxation law is devoid
of special regulations in this field. Therefore, studies about the issue in
other countries can be helpful for introduction of modern approaches and
standards developed in the present-day world. The country reviewed in this
issue is
REOPENING OF
TAX CLAIMS
It is an accepted
principle of law that a point of finality must be recognized in any kind of
legal proceedings, and issues should not be reactivated beyond a particular
stage. This principle applies to tax cases as well, but there are always some
officials who try to reopen the course of tax assessment through the loopholes
of the law. The procedure followed by some tax officials was subject of an
article in the previous issue of the journal. The Pakistani experience on same
subject is dealt with in the present issue.
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."
A FINANCIAL
DOCUMENT FROM THE ERA OF SAFAVID DYNASTY
This document belongs
to the last years of the reign of King Shah Tahmasb the Second of the Safavid
dynasty (early 18th century). It is an official letter addressed to the
governor of the city Ardestan (near Isphahan). The governor is instructed to
prevent Ardestanis from interfering in taxation affairs of a tribe called
Barzavand. It is stated in the letter that fiscal affairs of Barzavandis have
been separated from those of Ardestan, and no Ardestani is permitted to bother
Barzavandis any more.
TAX GLOSSARY
Several tax terms and
expressions are presented and defined in each issue of Maliyat journal. Detailed
explanations follow the definition of the terms.
LETTERS AND
INQUIRIES OF READERS
The inquiries of our
readers related to different tax matters are answered by tax experts. Readers
in other countries also can address their inquiries to us.
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 in both
English and Persian sections of the Journal.
The End
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