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Maliyat Journal, No. 21
Autumn 1998
IN THE NAME OF ALLAH
FROM THE PRESIDENT
In the last issue, we touched upon the subject of
“semantic integrity “of the tax law. Now we shall examine a new topic that may
affect, in a similar way, the readability of the tax regulations that is the
confusion that may arise from the use of lengthy and complicated sentences.
Nowadays, tax specialists everywhere talk about the tax simplification, an
important element of which is the introduction of shorter and more transparent
sentences.
It should be accepted that the use of overlong and
confusing sentences is, unfortunately, more common in tax regulations than
other branches of law. The origins of this phenomenon are not well-known, but
it could be said, anyway, that the use of this unsound style has become a
rooted tradition in the field of tax law codification.
Let us examine the text of the current Direct
Taxes Act. There, we encounter with situations where exaggeratedly long
sentences are used that confuse the reader in spite of all patience and
carefulness that he or she may display for understanding such sentences. As an
example, we refer to the Article 64 of the same law. It consists of two main
parts. The first part determines the organization of a committee that is vested
with the task of assessing the taxable value of real properties throughout the
country, and the second part describes the procedure to be followed for making
such assessment. The first thing that should be said is the fact that each of
these two parts could be presented by separate articles, for the sake of
brevity and avoidance of overlong articles. Leaving that aside, the main
problem concerns the second part. Here a single sentence composed of17 lines is
employed, each line of which on the average consists of 13 words. It means that
more than 230 words are used in one and the same sentence. The first of those
230 words is the subject, and the last of them is the predicate of the
sentence. This very fact is enough to imagine how burdensome is for the reader
to grasp the general idea and relationship of the parts of the sentence.
Sometimes the user of the law encounters situations
where he may entirely be misled. A clear example is the employment of terms
that are taken from wholly different contexts, without any reference being made
to the particular atmosphere within which they had been used. The terms so
borrowed from a dissimilar field, are looked upon from an angel that is
characteristic of tax regulations. For instance, a phrase used several times in
the tax law reads as follows:
"The organizations, that the applicability of
the law to them is conditioned on mentioning of their names".
This phrase is taken from other legal texts that
handle the budgetary and public expenditures’ themes. It meant, originally,
that some rules stipulated under those regulations would apply, where such
organizations were referred to by name.
But, now the reader of the tax law may conclude,
seeing the same phrase in a tax context, that the application of this or that
particular tax rule is intended.
Such cases of complication and misunderstanding are
not very rare in the tax law, and considerable work must be done for correcting
them, so that less effort and cost be imposed on taxpayers for complying with
their tax duties.
Dr. Aliakbar
Arabmazar
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An Introduction to the Iranian Tax System
By: Dr. Mohammad
Tavakkol
(Part 1)
Introduction
to the Introduction
When the term "tax" is
spoken of in this country, everybody's attention will be drawn to those types of
direct taxes that have traditionally been collected by the Finance Ministry.
There are, of course, other kinds, as well as other collectors, of various
contributions that could logically be categorized as taxes, though not being
recognized as such at the first glance. Indirect taxes, social security
contributions, customs duties, user charges, municipality levies, and
impositions charged by certain organizations, are examples of the other kinds
of taxes referred to above.
Based on the aforesaid common approach
toward the notion of tax and taxation, any study in this field should also be
patterned according to the same classification; tax in proper and tax in
general. The focus of the present study will be on the tax in its first
coverage, that is the direct tax as usually is administered by the Finance
Ministry. Such orientation will embrace not only the kinds of taxes to be
studied and substantial provisions pertaining to them, but also every aspect of
tax administration, including organizational, procedural, adjudicatory and
legislative rules and customs.
The first topic to be dealt with
is the legal structure within which the tax system is working, and we shall
begin our work with this very subject. The study in whole will be presented in
few sections, the first of which is devoted to the said topic of legal
structure.
Section
I - Legal Structure
The legal structure, within
which our tax system operates, consists of the law in a broad meaning, customs
in a loose sense and the case law.
By the expression "law in
its broad meaning" we mean the law as approved by the legislature,
executory or interpretative regulations and rulings issued by competent
authorities.
We characterized the term
"customs" by the phrase "in a loose sense", because we have
in mind not only the customs related to the substance of the tax law, that is
the rights and responsibilities of the subjects of the law, but also the
habits, and even mentalities, generated through the time among the taxmen and
practitioners in discharging their duties.
As far as the case law is
concerned, the most important source has always been the Supreme Tax Council,
while a new source has also been recently created to which we shall refer
later.
Now, let us touch upon each of
those three constituents of the tax system's legal structure.
Chapter
1- Law
As we mentioned earlier, the
word law in this occasion means the rules and regulations adopted by the
legislature. To facilitate our discussion, we shall try to introduce it through
four subtitles; the Direct Taxes Act, other relevant laws, legal
interpretations of the parliament and legal opinions delivered by the Council
of Guardians of the Constitution.
A.
Direct Taxes Act
This is the skeleton and most
significant structural framework of the legal basis of the Iranian tax system.
The Act (which can be abbreviated as DTA) was approved by the parliament on
March 1988 and amended on April 1992. It was not, at the time of its
introduction and adoption, a new offspring, but rather a continuation of an
older law, with several changes and alterations that reflected some objectives
and requirements of the time. That older law, in its turn, had also been
derived from a much older one, and this chain of derivation could be followed
back to the first decade of the present century when the constitutional system
of government was first introduced in this country. Even at that time, the tax
law had been composed not only by reference to some modern tax systems of
a)
Structure of the law
The Direct Taxes Act (DTA) is a
multidimensional law. It covers, in the first place direct taxes in proper
sense of the words, namely the substantial regulations concerning such taxes;
the titles of taxes, the sources on which such taxes can be imposed, rates,
persons subject to taxation, exemptions and allowances, authorized deductions,
penalties, incentives and the like.
The procedures to be followed by
taxpayers and tax officials in discharging their tasks and duties, come next;
what kinds of records are to be kept by taxpayers, what other actions are to be
taken by them, what time limits are to be observed, what measures are to be
effected by tax officials in the fields of investigation, examination,
assessment, following up of cases, and other similar procedural functions and
themes.
The last chapter of DTA is
devoted to the organization of tax assessment division of the tax
administration, and also to the organs responsible for adjudication of tax
disputes.
Under the following paragraphs
each of the aforesaid parts will be studied in more detail.
I-
Substantial part of DTA
The points worth of mentioning
in this respect can be listed as follows:
Kinds of taxes - The taxes covered
by DTA are divided first into two main types: taxes on property and taxes on
income. First we shall deal with the taxes on property.
Property
tax
The Direct taxation Act consists
of 271 articles, some of which entail one or more (sometimes up to 10) "Tabsara"s,
which can be translated as clauses or Notes. These articles are divided between
5 parts or titles, and under each of these titles there are several chapters.
The second title of DTA is pertaining to the "tax on property", and
divides into 5chapters, each covering one specific type of property tax. The
headings of the chapter are: annual tax on real property, tax on unoccupied
dwelling real property, tax on idle lands, inheritance tax and stamp duty.
As it can be seen from the above
classification, the inheritance tax and stamp duty are considered to be
property taxes.
It seems appropriate to make a
comment on the subject. The fundamental characteristic of property tax, as
known in the West, is taxing in-rem rights relating to property. The inheritance
tax, on the other hand, is not usually imposed on the estate as such but rather
upon the beneficial share of the estate that each beneficiary acquires. Thus it
can not be put in the category of property tax, however,
a) In many countries, as well as
in
b) It seems that the logic
behind the treatment of inheritance tax as a class of property taxes, under the
Iranian tax law, has been somehow different from that of the Europeans. Here
the aspect of death duties that is taken into account seems to be the fact that
relevant properties are usually transferred to some people, causa mortis. Those
drafting the law did not, apparently, take further step to distinguish between
the types of transfer. The income tax is also imposed on the transfer of
property, and the only criterion that separates it from the talon property is
the characteristic and type of the transfer.
As far as the stamp duty is
concerned, the case is more ambiguous. This type of tax is usually levied upon
the issue of some kinds of documents such as identity cards, passports, deeds,
contracts for the transfer of ownership, checks, promissory notes, and
documents of similar nature. Though some kinds of such documents can be
considered as property in proper meaning of the word, but inclusion of many
other such documents under the umbrella of property might not be so easy.
Examples of the latter type of documents are not rare in the provisions of the
relevant part of the Iranian law.
Let us now study property taxes
in more detail:
Annual
tax on real property
This is a typical property tax
that is levied on the value of the immovable properties located within the
bounds of cities, towns and dwelling quarters. Villas, summer and winter
quarters, as well as buildings on the coast of
Exemptions
The following properties are
excluded from application of the tax in question:
- Real properties belonging to
public companies and cooperative societies that allocate such properties to the
housing needs of their members, as well as the properties of foreign embassies
on the condition of reciprocal treatment; and
- One dwelling unit, for each
owner, be it a house or an apartment.
Tax
holiday
Cases of tax holiday are as
follows:
- The properties employed for
industrial, agricultural, and animal husbandry production; and for cultural,
educational, sporting, hygiene, medical treatment affairs and other similar
purposes enumerated under the Article 4, DTA, all enjoy tax exemption, as long
as they are exploited for such purposes;
- The properties whose owners
are deprived, by virtue of judgment of juridical authorities and similar
reasons from exploiting their properties or making transactions on them, are
also exempted from this type of taxation, while the status described above
remains unchanged;
- Where the ownership of a real
property is transferred, the tax in question shall not apply in the year the
transfer takes place;
- The properties for which a
building permit is issued and are completed within the time limit stipulated
under the permit, shall enjoy tax exemption till the end of the second year
from the date of completion of the building; and
- The residential units leased
in accordance with the criteria determined by the government, will be exempted
from the taxation, as long as they are under lease.
Base
of taxation and rates
The base of taxation is the
taxable value of the property, and the rates are as follows:
Up to IRR 20,000,000 exempt
Next IRR 20,000,000 2 %
Next IRR 20,000,000 3 %
Next IRR 20,000,000 4 %
Next IRR 20,000,000 6%
Over IRR 100,000,000 8 %
Some comments might be useful in
respect of the said base and rates:
- The term taxable value, upon
which we will touch later as well, is to be determined by the authority
referred to in DTA. It is usually much more moderate than the market or fair
value of real properties.
- The abbreviation IRR was
chosen by the author for Iranian Rials, which is the currency unit of this
country. At the present the free market parity of the currency is above IRR
5500against each
Tax
return
The owners of taxable properties
(whether real or juridical persons) are obligated to file a special tax return
with the competent tax assessment office and to pay the annual applicable
taxes, within a specified time limit.
(See Articles
3-9, DTA).
(Will continue)
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Tax
News
Tax
Agents
The role of tax agents has never been dealt with in a
comprehensive way under the Iranian tax system, and there has been no
legislative framework for the services of this group of professionals. The
business of tax agency, however, does exist and tax agents are quite active in
this country, though they have never been recognized as such and, as a result,
are not bound to any code of practice.
A circular of the tax administration ruled recently on the
subject, without calling such professionals as tax agents or, as tax advocates
(a title given to them by ordinary people). The circular addresses these de
facto tax agents as "persons other than taxpayers who follow up, either in
company of the taxpayer or in his absence, the tax affairs before the tax assessor,
general assessor or before the Board of Settlement of Tax Disputes"
(BSTD).
The circular rules that only the following persons are
authorized to attend the sessions of BSTDs:
a) As for the juridical persons, the entity's directors,
after being identified by presenting demonstrative documents;
b) The employees of taxpayers (whether the taxpayer is a
real or juridical person), provided they are introduced by the taxpayer in
writing and their names are included among the salary receivers of the
taxpayer; and
c) The agents and legal representatives of the taxpayer who
are required to present the deed of their power of attorney. The stamp duty, as
stipulated under the relevant part of the Direct Taxes Act, should also be
affixed and cancelled on the said deeds of power of attorney.
The circular continues by stating that no other persons
except those enumerated above, will be allowed to attend BSTDs and tax offices
for following up the cases related to taxpayers. It further instructs the tax
offices and BSTDs to inform the tax office of the district where the tax agent
resides, about the cases advocated by each tax agent and amount of the tax
stamp affixed and cancelled by him. The tax office receiving such information
shall be required to assess and demand the payment of the annual tax of
relevant tax agents.
The tax agents will not, undoubtedly, welcome this last
instruction of the circular, since their unrecognized statues could, more or
less; protect them from taxation so far.
Users' Deposits
The business of supplying electricity to the public is
placed in control of certain newly created entities called regional electricity
companies (RECs). RECs are subject to special regulations adopted by the
parliament and respective government organizations. Those applying for
connection to the electricity current should deposit certain amount of cash
with relevant RECs, which is called connection deposit. Such deposit is to be
kept by RECs till the time when respective customers decide to end their use of
connection and to withdraw the deposits. Should such a condition be realized
the deposit of respective persons will be refunded, but this is only a
theoretical case and approximately never will happen. Nobody would waive his
right of using electricity, which can not be provided except through the same
RECs. In practice, however, the RECs use the deposits for their investment
needs.
Some tax authorities considered the said deposits as the
income of RECs and demanded them to pay tax on it.
The RECs protested and argued that:
a) The deposits so received is a part of the annual budget
of RECs as approved under the State Budge Bill, and items of budget can not be
considered as the taxable income of receiving organizations;
b) RECs never use the deposits for their current
expenditures, and allocate it for investment purposes only; and
c) The deposits are refundable, anyway.
Based on the above reasoning, the RECs applied for
reconsideration of the case.
The case was referred to the Supreme Tax Council (STC) and the
STC ruled in favor of the respective tax offices, based on the following
reasons:
(i) The use of deposits for capital investment purposes does
not mean by itself that they can not be qualified as "income";
(ii) Investment of deposits will result in acquiring new
capital assets, the depreciation of which shall be deducted from the taxable
income of RECs'
(iii) The refunding of deposits to relevant customers, if
ever takes place, will not be effected in respect of the total amount of
deposit received, but different costs and expenditures will be deducted
therefrom by virtue of the regulations approved with regard to such theoretical
happening; and
(iv) The balance of any refunded money will also be accepted
as deductible expenditure in computation of the RECs income tax.
Request for a Religious Opinion
Hajj is an Islamic term meaning the pilgrimage to the holy
shrine of Kaaba that is situated in
The Ministry of Finance asked for such a religious opinion
on a case relating to Hajj and taxation at the same time. He applied, for this
purpose, to the High Leader of the country as the supreme religious jurist and
put his case as follows:
“Is a person 'mostati,' and obliged to make Hajj pilgrimage,
if he is in debt to other persons or to the government and states that he is
not able to discharge his liability?”
The opinion delivered was:
“If he is required to pay his liability and the debt is not
of a kind that habitually is not demanded, like customary 'mahr's- then he is
not a 'mostati,' ".
The liability to the government as referred to in the
Minister's letter, includes, in particular, the tax liability, and the case
pertains to those pretending that they are not in a financial position to pay
their applicable taxes. The rich businessmen and other wealthy people, who
decide to make Hajj, will probably feel psychological uneasiness in resorting
to the aforesaid excuse for noncompliance with their tax duties.
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ABSTRACT OF PERSIAN ARTICLES
Editorial
The confusion that may arise from
the use of lengthy and complicated sentences in the text of tax regulations, is
the topic dealt with in the editorial of the present issue, both in Persian and
English sections of the journal.
Text of the Minister's Speech
Dr. Hussein Namazi is the Iranian
Minister of Economic Affairs and Finance. On 19 July of the current year, he
delivered a speech at a meeting of the heads of distribution and service guilds
of
Fiscal year, Tax year
The topic of "semantic
integrity" of the tax law was touched upon in the editorial of the
journal’s previous issue. It requires that the terms used in the tax law be
stable and continuous, as far as the semantic aspect of the law is concerned.
An example of nonobservance of the said rule can be found in the use of the
terms "fiscal year" and "tax year" in the Direct Taxes Act.
The author analyzes the cases of the confusion resulting from this situation.
Experiences in the Field of Tax
Simplification
The first part of this article
was presented in the last issue of Maliyat journal. It is a Persian summary of
an essay published in the Bulletin of IBFD. The lessons derived from the
experiences of
Endowment and Tying Up, Synonymous or
Different Terms?
The word "habs" is a
term of the Islamic Law that is borrowed by the Iranian Civil Law. It denotes
the conditions of a property that is made legally inalienable. The realization
of this condition is a prerequisite for endowing properties. So the term tying
up or "habs" is not something different and independent from
endowment (vaqf). In the Direct Taxes Act, however, the term's "habs"
and "vaqf" (tying up and endowing a property) are treated as if they
denote two separate legal categories independent from each other. This subject
is examined in the article.
New Amendment to the Direct Taxes Act
The author examines the
amendment made in February of the current year to some articles of the Direct
Taxes Act. The main cases of the amendment are relating to the tax exemption of
industrial and mining enterprises (as provided under the Article 132, DTA),
exemption of authorized tourist agencies (which is subject of a new clause or
Note added to the same Article 132), tax exemption of medical services rendered
in certain poor areas (Article 139) and exemption of the income derived from
export of agricultural and industrial products (Article 141).
The End
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