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Maliyat Journal, No. 14
Winter 1996-97
IN THE NAME OF ALLAH
FROM THE PRESIDENT
We have always pointed out that the promotion of
tax knowledge of our readership constitutes one of the main goals of this
journal. Such an undertaking would naturally have broad dimensions, and would
cover vast areas of tax issues and problems. One interesting and important
subject of this kind is the issue of the interpretation of tax laws and
regulations.
It is interesting to know that the topic is quite
new in this country, and nobody have ever tried to elaborate on various aspects
of this specific subject. The importance of the issue is due to the fact that
the rights and duties of both sides of the tax system - namely the government
and taxpayers - depend on how the laws are understood and deciphered.
The main question is: whether the tax laws and
regulations are to be construed according to certain rules and principles or
not, and if the answer is positive, what are those maxims and rules of
interpretation?
As far as the necessity of interpretation is
concerned, the answer is certainly positive. It is impossible for those who
formulate or approve the law, to foresee and anticipate all circumstances that
will govern the atmosphere in which the law is going to be implemented.
The time passes and the economic life of the
society - that makes up the principal ground for execution of tax law - is apt
to alter and evolve uninterruptedly. Let us take the current tax law as an example.
This law (Direct Taxation Act) was approved in March 1988, say less than a
decade ago. During this very short period, vast and tremendous changes have
taken place in the varieties and volume of transactions, the form and substance
of economic relations, and many other factors that have direct or indirect
effects on taxes and taxation affairs.
The people who were involved in deliberation and
approval of the said law logically were not able to foresee all these changes
and developments. The best evidence for this statement is the large number of
circulars, by-laws, and other types of rulings issued for explanation of the
same law.
This is an unavoidable process which is prevailing
all over the world and among all categories of countries and societies. So,
first we have to determine a viable policy in this regard. Have we to leave the
matter as it is, or have we to regulate it through appropriate legal channels,
so that a reasonable and clear way of action could be founded?
The next question is: whether the tax law must be
treated as any other law (for instance civil law) and subject to the same rules
and methods of interpretation adopted in respect of ordinary regulations? Or,
we have to consider the tax law as a separate category requiring special rules
of construing and deciphering?
In case of choosing the latter approach, what are
those rules and principles of interpretation which suit the tax regulations?
More questions of this kind can be raised. Our aim
is to draw the attention to the issue in general, with a view to cause a
movement in direction of research and study towards this significant topic.
Maliyat journal considers - as always - its duty to take an active part in this
type of research and deliberation. The subject has been reviewed in some
articles of the present issue, which we hope to draw the attention of tax
experts and practitioners, and to be starting point for evolution of clear
approaches in this field.
Dr.
Aliakbar Arabmazar
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TREATY
DEVELOPMENTS
A COMMENT ON RECENT TAX TREATIES CONCLUDED
WITH A DOZEN OF FOREIGN COUNTRIES
(Part 2)
BY Dr. Mohammad Tavakkol
As
we mentioned in the last issue of this Maliyat journal, Iranian tax
administration has taken remarkable steps towards the expansion of
international tax relations with other countries. Many tax treaties are
concluded, or are at the stage of negotiations, which would increase the number
of such type of agreements to a level unprecedented in this country.
We
mentioned also that all these treaties are drawn on basis of a prototype or
pattern agreement, which in its turn is based on the OECD Model Double Taxation
Convention on Income and Capital. Therefore, we chose the OECD Model and the
said pattern agreement, as well as one of the signed agreements - namely the Iran-Ukrainian
agreement - as the bases of our discussion. The subjects commented on in the
last issue were: "title of treaties", "personal scope", and
"taxes covered" by the agreements under review.
Now
the study will continue as follows:
General
Definitions (Article 3)
Article
3 of the Iranian tax treaties is divided (like the OECD Model) into two
paragraphs or sections. Section one presents definitions for several terms, and
section 2 states that any term not defined in the agreement " shall,
unless the context otherwise requires, have the meaning which it has under the
law " of the relevant states. It means that in case of terms and
expressions not defined in the agreement – neither in Article 3 nor elsewhere -
have the contracting parties to interpret the term according to their internal
regulations.
The
words defined in paragraph 1 of Article 3 of the agreement are as follows:
A)
Contracting State "the term 'a contracting state' and 'the other
contracting state' mean the Islamic Republic of Iran or
Some
points are worth of mentioning with regard to the said definition:
1.
The term so defined, namely "contracting state", is not found among
the definitions of Article 3 of the OECD Model. It has been added through the
bilateral agreement of the parties to the Iranian treaties.
2.
As it could be seen, the above text is somehow different in respect of the
definition of”
3.
Most of the modern tax treaties contain broad definition of areas under
sovereignty and control of the contracting parties. It seems that the above
short definition of " " is borrowed from the old tax conventions of
this country concluded with
Although
the definition of
The
term
The
word territory when used in singular means the geographical area under the
sovereignty of a state. It includes the land, internal waters, and territorial
sea. When we use the same word in plural, and say: '
4.
More important is the fact that the term "
As
a matter of fact, the jurisdiction of coastal states over the continental shelf
is not the same as they have over their main territories. The control they may
exercise with regard to continental shelf can not be termed as "sovereignty
", though they may practice some exclusive rights over the natural resources
of this area. So, the continental shelf can not be categorized as a
"territory under the sovereignty" of a coastal state.
This
being the case, one might ask whether the Iranian party did not want the treaty
to apply to the continental shelf of this country. We must remember that
4.
The other face of the coin - which seems more probable - is that the Iranian
party did not mean the exclusion of continental shelf from the geographical
scope of the treaty. If so, the text of the treaty - as regards the definition
of
B and C)
Person and Company
The
agreements under discussion follow the suit of the OECD Model in defining these
two words. We had some comments on both of them in the previous issue of the
journal.
D)
Registered Office. This is another term which is not defined in Article 3 of
the OECD Model. Registered office means - according to the Iranian new
agreements - head office of an enterprise registered under the relevant laws of
either contracting state. One of the occasions in which the term
"registered office" is used, can be found in paragraph 3 of Article
15. It pertains to the "remuneration derived in respect of an employment exercised
aboard a ship, boat, aircraft or road and railroad vehicle operated in
international traffic". This type of remuneration "may be taxed in
the contracting state in which the registered office of the enterprise is
situated”. The same term is used also in paragraph 3 of the Article 22,
according to which "Capital represented by ships, boats, aircraft, road
and railway vehicles operated in international traffic...shall be taxable only
in the
Comparing
these two paragraphs with the relevant sections of the OECD Model, one can see
that "place of effective management” in the Model has been substituted for
the "registered office” in the Iranian treaties. Perhaps the reason for
this alteration is to bring those cases to coincidence with the Iranian income
tax regulations.
In
case of companies and other juridical persons, the concept of
"residence" is principally alike, both in respect of civil and
commercial - as well as the taxation - affairs. This principle can be inferred
from the Article 110 of the Direct Taxation Act (DTA). It provides that the
taxation affairs of legal persons should be handled by the tax office of the
district, where the residence of juridical person is situated.
The
term "residence of juridical person" means - according to the
commercial law - the place where such person is registered.
A
company may have registered branches and subdivisions as well, but the term
"place of incorporation” when used absolutely, means the central and
principal office of a corporation. It seems that the same concept is followed
by the Iranian double taxation treaties, since the head office of an enterprise
is - in majority of cases - located in the same place where it is incorporated.
E)
The
terms "enterprise of a
F)
International Traffic
Sub-paragraph
"" provides a definition similar to the OECD Model, except for the
following aspects:
-
The Model defines the term as "any transport by a ship or aircraft",
while the Iranian treaties cover "boat, aircraft, or road and railway
vehicle- According to the Model, the ship or aircraft must be "operated by
an enterprise which has its place of effective management in a Contracting
State As it was mentioned above, an "enterprise of a Contracting
State" means the enterprise carried out by a resident of either
contracting parties. The criteria for deciding whether a person is resident of
a state are provided in Article 4. Suppose an individual named "" is
considered (for the purpose of the treaty) to be resident of both Contracting
States. Suppose also that he has a home in
G)
Competent Authorities
The
term "competent authority" when used in these treaties, means
"the Minister of Economic Affairs and Finance" in case of
H)
National
The
term "national" which is not found in the OECD Model, means:
"1.
Any individual possessing the nationality of a
2.
Any legal person, deriving its status as such from the laws in force in a
At
least the first of these definitions is redundant and does not actually provide
a description for the Resident (Article 4)
The
purpose of the Article 4 is to define the meaning of the term
"resident" and to solve cases of double residence, since double
residence may result in double taxation.
Paragraph
1 of Article 4 provides a general rule for determining whether a person is
resident of a
The
said paragraph 1 of the Article 4 of the Iranian agreements differs from the
OECD Model in two
1.
The expression "place of management" in the Model (as a criterion of
residence) is changed to "place of registration". We have already
explained the reason why the Iranian party preferred the latter expression to
the former, though the alteration seems redundant in this particular case. The
phrase any other criterion of a similar nature “would cover "place of
registration" as well.
2.
A whole sentence at the end of paragraph 1, Article 4 has been deleted in the
Iranian treaties. The deleted sentence reads: "But this term does not
include any person who is liable to tax in that State in respect only of income
from sources in that State or capital situated therein
The
rule prescribed by that sentence, may be construed as pertaining to a situation
where a person is national of, and domiciled and working in, a third country.
Such a person may earn incidentally an income from the sources in a
It
is interesting to know that the situation described above, is very clearly
foreseen by the main taxation law of
Among
them, one can find the following categories:
-
Iranian individuals residents abroad, in respect of income derived from sources
in
-
Non-Iranian persons (whether natural or legal) in respect of income derived
from transfer of royalties; and
-
Owners of properties located in
Those
are very clear examples of the taxpayers categorized under second sentence of
paragraph 1, Article 4 of the OECD Model. Taking these facts into account, it
seems curious that the sentence 2 is deleted from the text of the said
paragraph 1. Did the parties really want to apply the agreement to such odd
people? The answer hardly can be positive. Suppose that a resident of a
Double
Residence (individuals)
Paragraph
2 of Article 4 prescribes a procedure for solving the problem of double
residence. This paragraph and the sub-paragraphs coming under it are in exact
conformity with the OECD Model. A brief presentation of the procedure provided
by the treaty is as follows:
-
When an individual is considered (under paragraph 1) to be resident of both
states, then he shall be deemed to be resident of that state in which he has a
permanent home.
-
If he has permanent home in both states, he shall be considered to be resident
of the state in which his center of vital interests is situated.
-
If such location can not be determined, or if he has not a permanent home in
either state, then we have to find in which country he has a habitual abode.
-
In case he has a habitual abode in both states, or in neither of them, he shall
be deemed to be resident of the state of which he is a national.
-
At last, if our individual is national of both states, or none of them, then
the parties to the agreement should settle the question by mutual agreement.
Double
Residence (persons other than individuals)
According
to Paragraph 3 of Article 4 "Where, by reason of provisions of paragraph 1
of this Article a person other than an individual is a resident of both
Contracting States, then it shall be deemed to be resident of the State in which
its registered office is situated
As
it was explained in the previous issue of the journal, the persons subject to
the agreement can be divided into three categories: natural persons or
individuals, legal persons (companies and other incorporated bodies), and semi
juridical persons, namely the bodies of persons that are not considered legal
persons as such, but at the same time they are treated as single taxpayers
under the taxation law. Paragraph 3 pertains to categories 2 (legal persons)
and 3 (semi juridical persons).
It
provides that the issue of double residence in case of these two types of persons
shall be solved by reference to the place of registration of their head
offices. This is another case of substitution of the expression "place of
effective management" (in OECD Model) with "registered office"
(in the Iranian treaties).
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Tax News
UNJUSTIFIED
PROTESTING
In
a new circular of the Finance Ministry, the tax officials are instructed to
refrain from filing unjustifiable protests against the verdicts rendered by the
Boards of Settlement of Tax Dispute (BSTDs). BSTDs are bodies organized under
the Direct Taxation Act (DTA) for reviewing and settling all kinds of tax
disputes, both at the first and second instances. The cases can be brought
before BSTDs, either by taxpayers or tax officials.
The
final verdicts of BSTDs are also appealable before the Supreme Council of
Taxation (SCT) on the ground of inconsistency with the laws and regulations or
insufficiency of examination.
The
substance of the Ministry's circular is that the protests and complaints of tax
officials in all these cases should be based on justifiable grounds. They are
prohibited from filing protests as such and without reasonable foundation and
evidence.
Some
of the points raised in the circular are as follows:
1.
Although the officials are granted the right to protest against the verdicts of
BSTDs, but this does not in any case mean that they are required to do so in
all cases, without discrimination as to the existence or absence of justifiable
grounds;
2.
The verdicts issued by BSTDs are, as a common rule, rendered by consideration
of facts and after sufficient deliberation;
3.
Raising baseless and unsubstantiated complaints would result in prolongation of
examination, wasting of time of BSTDs and of the officials themselves, and
postponement of collection of taxes.
Based
on this reasoning, the Ministry orders the officials to participate actively in
deliberations of the first-instance BSTDs, and to provide all the evidence they
may have in defense of their cases.
When,
after such steps are taken, the BSTD delivers its verdict, the relevant tax
official may protest against it, only if he has sufficient grounds and
convincing evidence for his action. If there are no such substantiated grounds,
he should refrain from protesting, otherwise he will be prosecuted by the High
Disciplinary Board.
The
same is applicable - according to the circular - with regard to filing of
unfounded complaints with the Supreme Council of Taxation.
COMPLAINTS
ARISING FROM THE PROCESS OF EXECUTION
If
the taxpayer fails to pay his dues on time, the tax office shall take certain
actions to collect such dues from him. A section of the Iranian Direct Taxation
Act (DTA) is devoted to the process of issuing and enforcing the writ of
execution in respect of unpaid taxes. The procedure and steps provided under
this section of the law are called "the execution measures".
Any
protest against the execution measures is to be submitted to, and reviewed by,
the Board of Settlement of Tax Disputes (BSTD). Sometimes the complaint
involves a special element, and that is the claim of the taxpayer to the effect
that the process of execution took place before finalization of the related
taxes. In such cases, the BSTD considers this particular claim and if finds it justified,
it shall rule for cancellation of the writ of execution, and shall review the
substance of the case, and issues its verdict on the liability of the taxpayer.
(Article 216, DTA)
The
Ministry of Economic Affairs and Finance has recently issued a circular in this
respect. It has been stated in the circular that most of BSTDs do not actually
pay due attention to the exact requirements of the relevant regulations. In
other words, they enter in consideration of the substance of the case, without
enough deliberation for finding if the relevant taxes are really finalized, or
they have not passed yet the last stage of finalization. The circular instructs
the BSTDs to be more accurate, and refrain from doing so, before being sure
that the case is finalized.
INCOME
TAX OF MEMBERS OF GUILDS
The
income tax of enterprises operated by natural persons is titled - under the
Direct Taxation Act (DTA) - as the business income tax. Such businesses are
mostly associated with business unions or guilds. Under the Note 6 to the
Article 100 of DTA, the Ministry of Finance may enter into agreement with those
guilds about the determination of taxable income of their members. The taxes assessed
in this manner shall be final and binding on both parties.
The
procedure so defined used to be scarcely activated in the past. In recent
years, however, more attention has been paid to the issue, both by the unions
and the Finance Ministry. A considerable number of agreements have been
concluded from which the members of the relevant guilds can take benefit.
A
recent circular of the Finance Ministry refers to those agreements and
discrepancies encountered in their implementation. As it can be inferred from
the circular, such difficulties arise mostly from the attitude of some tax
officials. They resort to various excuses for neglecting the agreements and to assess
the tax liability of relevant people via ordinary and common procedures.
Some
of those excuses are - according to the circular - as follows:
-
A number of taxpayers have not been able to pay tax installments on time;
-
Some others did mistake in computation of their liability, and paid less taxes
than they had to The relevant tax offices claimed that those failing taxpayers
breached their agreements by doing so, and therefore their taxes should be
assessed without consideration of the agreements. They have also claimed in
some cases that the real amount of tax liability can not be ascertained under
the conditions of these agreements.
This
approach has resulted in disapproval of the guilds and their members, as well
as in increment of the number of tax disputes. The aim of the Ministerial
circular is to stop this way of action, and to facilitate the implementation of
the tax agreements concluded with those business guilds.
REVALUATION
OF FOREIGN CURRENCY
The
Supreme Council of Taxation (SCT) delivered recently an opinion on proceeds of
enterprises from revaluation of their foreign currencies. According to
paragraph "a" of Article 141 of the Direct Taxation Act (DTA) income
derived from exportation of certain goods and products is wholly or partially
exempted from taxation. Such enterprises keep accounts in foreign currency, which
is apt to revaluation at the end of tax year. The SCT was asked to consider a
situation where those enterprises earn proceeds from such revaluation, and to
render its opinion as to whether such proceeds are subject to income tax, while
the source of their income (namely the earning from exportation) was tax
exempted. The Plenary Board of the SCT reviewed the matter and stated
unanimously that those proceeds from revaluation of foreign exchange are
subject to taxation, although the income from exportation of goods - from which
the foreign currency is derived - was tax exempted. The income from revaluation
- according to the SCT - is something quite different from exportation, and it
is earned in a later stage. It is resulted not from the exportation, but from
keeping the money for certain duration of time.
TRADE
AGREEMENT BETWEEN
This
agreement which has been recently ratified by the Parliament contains some tax
regulations. Article 6 of the agreement reads as follows:
"The
Contracting Parties shall provide, under their internal laws and regulations,
exemption from custom duties, taxes and other levies for importation and
exportation of the following articles:
a)
Simples and items for advertisement; and
b)
Containers and special packing equipment used as returnable items in
international trade". The Article 8 of the same agreement provides for
encouragement of economic institutions of both countries to participate in
international fairs and markets, etc., organized in their territories. Pursuant
to this purpose, the Article states:
"The
Contracting Parties shall exempt - under their internal laws and regulations -
the importation and exportation of the following items from custom duties,
taxes, and other levies:
a)
Accessories and articles imported for installing or repairing, provided that
they will be exported later;
b)
imported items for temporary fairs or markets, provided that they will be
re-exported.
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ABSTRACT OF PERSIAN ARTICLES
EDITORIAL
The
editorial in this issue, both in Persian and English sections, is devoted to
the subject of interpretation of tax laws. The President has discussed the
matter in broad and general terms, with a view to draw the attention of
researchers and practitioners to the significance of this issue.
TAXATION
IN
The
Editor had an interview with Mr. Sayyed Abdorrassul Beladi, Director General of
Economic Affairs and Finance of Khuzistan Province. Our readers are familiar
with this series of interviews. The Economic situation of the Province in
general, and taxation data in particular, are presented by the interviewee. The
latter includes information about the level of taxes collected in recent years,
degree of tax compliance by taxpayers, cases of success, bottlenecks and
shortcomings, and several other interesting subjects and issues.
TREATY
DEVELOPMENTS, A COMPARATIVE AND ANALYTICAL STUDY ON NEW TAX
TREATIES CONCLUDED WITH SEVERAL COUNTRIES
This
is the second part of the study undertaken with regard to the Iranian new tax
treaties. In this second part, the author examines Articles 4 and 5 of the
treaties. General definitions of some terms are presented in the Article 3, and
Article 4 is devoted to the subject of residence. As it was mentioned in the
previous issue, the agreements under discussion are generally drawn on basis of
the revised OECD Model Double Taxation Convention. So, the study is
concentrated on that Model, as well as on a prototype treaty that constitutes
the basis of the Iranian agreements. One of the signed agreements, namely the
one concluded with
INTERPRETATION
OF TAX LAWS
This
is one of the articles printed in the present issue of the journal about the
said subject, which has been also discussed by the President in more general
terms in the Editorial. Several interesting ideas and principles evolved during
recent decades in western countries in the field of this subject are
deliberated by the author. Among those one can refer to the rule of the
"substance over the form", economic interpretation of tax law",
effectiveness of law", and other rules and maxims.
ENCROACHMENT
INTO THE REALM OF THE SUPREME COUNCIL OF
TAXATION
The
Supreme Council of Taxation (SCT) is the highest organ - under the Direct
Taxation Act - for reviewing tax complaints and cases. The SCT has several
branches and a Plenary Board. Decisions taken by the latter Board have the same
value as the law, since they can not be altered except by a law or by the
subsequent decision of the same Board.
There
is also a judicial organ called the Administrative Court of Justice (ACJ) which
has the authority to review and settle complaints against the measures taken by
the various governmental organizations. As far as the taxation is concerned,
the ACJ is competent to
rule on the decisions of "tax commissions". The ACJ has
construed the term "tax commission" to include the SCT and even the
Plenary Board of that organ.
This
subject and reasoning of ACJ about its competence to review the verdicts of the
Plenary
Board of the Supreme Council of Taxation is dealt with in the article.
TAX
AMNESTY IN SOUTH ASIAN COUNTRIES
Tax
amnesty is a general phenomenon in this part of the world. The governments have
resorted to this policy in many occasions.
TAX
EXEMPTIONS AND DEDUCTIBILITY OF EXPENSES WITH REGARD TO IN-KIND BENEFITS OF WORKERS
The
employers are reluctant to increase the main salary of their workers, since
that would cause increment of their future obligations towards the workers,
under the regulations of the labor law. They are more ready, instead, to
compensate their workers by giving them facilities and other benefits in kind.
The workers, on the other hand, agree with this way of action, because the
in-kind benefits are exempted from taxation. Only tax officials are not happy
with this process, since it results in less tax payable to tax organization.
The
same creates difficulty in other respect. The employers want the in-kind benefits,
to be accepted as deductible expenditures, while the tax officials are
reluctant to do so.
Both
sides of the issue are dealt with in the article. The author tries to solve the
problem by referring to new rules of interpretation of tax laws (like the rule
of substance over the form) and also by analyzing the text of the relevant
regulations.
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."
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.
The End
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