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Maliyat Journal, No. 22
Winter 1998-1999
IN THE NAME OF ALLAH
FROM THE PRESIDENT
In the field of taxation, like any other
area of the social and administrative life, some practices and formalities may
develop, which arise at the beginning from an impression on issues at hand that
may not be wholly correct and accurate. The concepts of this kind can, as a
result of characteristics peculiar to the nature of the human being, grow to
some well-established and accepted procedures.
This phenomenon may influence the legal
texts as well, so that an error occurred in certain regulations, may survive,
because of negligence of those dealing with the law, for a long time, and even
find its way to further amendments of the same text.
For preventing such unsound practices
from becoming chronic, one must overcome the routine usages and insert his
uttermost for finding and removing the defects and shortcomings of this type.
One example of this situation was found
in connection with the salary tax of expatriates working in
The practice so dictated by the
necessities of certain interval of time was carried forward and followed in
subsequent years, so that it became an established procedure. Disposition towards
easiness and comfort might be responsible, in some degrees, for this state of
affairs. It, however, is in contradiction with the basic requirements of a
sound and reasonable assessment of taxes. The income constituting the base of
taxation, should be assessed by due regard to the actual data as fare as
possible.
Based on that, the tax administration
adopted logical arrangements in this regard and ruled that this particular type
of tax must, like any other type, be assessed and collected on basis of actual
income earned by the taxpayer, and tax officials ought to do their best for
achieving this reasonable goal.
Another situation similar to that,
though of different type and assumptions, was noticed in respect of permanent
establishments and representatives of foreign enterprises making business in
In those cases, no considerable taxes
could be estimated, if we would confine ourselves to the contractual texts.
This case was also studied by the tax administration, and relevant authorities
were instructed to scrutinize each case for finding out actual transactions and
earnings, instead of confining solely to formal relationships. In other words,
the substance must be given priority over the form.
This journal has always taken the
defects of tax practices and regulations as an important subject and provided
several studies and articles in this regard, a work that will be continued in
the future as well.
Dr.
Aliakbar Arabmazar
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An
Introduction to the Iranian Tax System
By: Dr.
Mohammad Tavakkol
(Part 2)
The first part of this study was introduced in the
previous issue. First, we stated that the term tax (Maliyat in Persian) when
used in this country, would commonly be understood to mean the direct taxes
collected by the Ministry of Economic Affairs and Finance, and, therefore, our
study would also focus on these types of taxes. Then the legal structure within
which the tax system works was presented. Under this heading we began to study
the Direct Taxes Act (DTA) as the most significant constituent of the Iranian
tax law. Since the direct taxes under DTA are divided into property' and
`income' taxes, the first category, namely property tax, was touched upon
first.
The property taxes are, in their own turn, divided
into five kinds; annual tax on real property, tax on unoccupied dwelling real
property, tax on idle lands, inheritance tax and stamp duty. The first type
(annual tax on real property) was commented on in the previous issue, and now
we will study the second type, that is the tax on dwelling real properties left
unoccupied by their respective owners.
Tax on Unoccupied
Dwelling Real Property
The owners of dwelling real estates may become
subject to taxation if they keep their properties unoccupied for more than six
months. The rate of taxation is 0.2% of the taxable value of the property per
each month. If the property remains unoccupied for more than one year, a higher
rate of 0.4 % will apply in respect of the consequent years. For the taxation
to be applicable, the property must be situated in the cities or towns with a
population in excess of 1,000,000, and it should also be in condition of
leasing, without any legal hindrance being present in the way of leasing or
using such dwelling property. If the property is left unoccupied for reasons
beyond the owner’s control, it shall be exempt from the taxation, as long as
such condition persists. In case the unoccupied property is the sole property
of the owner, no taxes will apply.
Those subject to the aforesaid taxation, have to
file a special annual tax return with regard to such properties with the
competent tax assessment offices.
The tax on unoccupied dwelling real estates was
levied as a negative incentive for the owners to lease their residential
properties and thus alleviating the ever-growing pressure on those in need of
housing. Housing is a real problem in big cities and towns, and the level of
rental payments asked by landlords goes up every year. The experience has
shown, however, that taxation may not play any important role in this regard.
The amount of revenue collected from this particular source of taxation has
also been negligible. Therefore, the provisions of this part of DTA have
scarcely been subject to judicial or administrative interpretation and no case
law has been developed in this respect. (See Articles 10 and 11, DTA)
Tax on Idle Lands
Article 12 to 15 of DTA is allocated to this type
of taxation. According to the Note 2 of the Article13, the definition of the
term 'idle lands' as used in this part of DTA is to be sought in the Law on
Urban Lands. The Article 4 of the latter defines the urban idle lands as the
lands that had formerly been developed in some degrees, but then left idle and
unemployed. Such idle lands within the urban limits are taxable at the rates of
2 % to 5 % per annum; depending on how long they are kept undeveloped. The
basis of taxation is taxable value of the relevant idle land, which is to be
determined by a special committee.
Where the land subject to taxation ceases to be undeveloped
any more, it will not be liable to the tax in question as from the year of
changing its status. Even certain actions taken by the landlord toward the
development of his idle land may relieve him from the taxation. An example is
the obtaining of building or development permission from the competent
authorities, provided that the construction of the building or development of
the land would complete within the period prescribed by the same authorities.
Existence of any hindrance beyond the control of
the owner for development of the land will also relieve him from the tax in
question.
The owners of idle lands who declare to the
Ministry of Housing and Town Planning that they are prepared to sell their
lands and take appropriate measures in this respect, will be exempt from the
applicable tax as from the date of such declaration.
Exempted from taxation are also the persons who are
devoid of appropriate dwelling, but own one or more plots of idle lands. Such
persons are not liable to the tax in question, up to certain limit stipulated
under the Urban Land Act of 1987.
The owners of taxable undeveloped lands have to
file special annual tax returns with the competent tax offices, and to pay the
applicable taxes up to the end of the Iranian month of Ordibehesht (May21) of
the following year.
The tax on idle lands was also introduced with some
economic and social purposes in mind. Among such purposes one can refer to the
development of urban lands, solving the housing problem, diverting capital from
land speculation to more useful activities and the like. These purposes were
not realized as it was expected and the revenue side of the taxation has also
been weak and negligible. The reflection of this situation can be seen in the
meagerness of the case law and lack of active jurisprudence with respect to the
related provisions of DTA. (See Articles 12 to 16, DTA)
Inheritance Tax
As it was said earlier (Maliyat No. 21, pages 6 and
7), the inheritance tax is considered under the Direct Taxes Act (DTA) to be a kind
of property tax. According to the Article 17, DTA, if as a result of a person's
death (whether real or presumptive) any estate is left from him, it shall be
subject to inheritance tax.
The term presumptive death is borrowed from the
Civil Law and relates to a situation where somebody disappears for a
considerably long time, while being in disappointing conditions, and no
information being available about his destiny. Under such circumstances, the
relatives of the absent person or other beneficiaries may apply to the
competent court for issuing a verdict on his presumptive death. The term
presumptive is used, because the judgment is based on presumption and the court
is not certain about the destiny of the absent person.
Taxable estate
The properties liable to inheritance tax consist of
the entire estate left by the deceased in
- Any cash deposits of the deceased held by the
Iranian banks, 50 % of the deceased's shares in the companies whose stocks are
accepted for stock exchange transactions, and also 40 % of the deceased’s
shares in the industrial and mining public joint-stock companies;
- The properties endowed or bequeathed in favor of
certain charitable purposes;
- Social security payments, retirement pensions,
payments made by insurers, the furniture of the place of deceased's residence,
etc.
Nationality and
residence
The Article 17 of DTA distinguishes the cases where
the deceased person or heirs are Iranians or foreigners, residing in
When both the deceased and heirs are Iranian
nationals domiciled abroad, different treatment will apply in respect of the
properties located in
The estate left in
Double taxation
In all cases the inheritance taxes paid on
properties located abroad to other governments are deductible from the tax
imposed on the same properties. This can be considered as a partial double
taxation relief, since it is applicable to the estate left abroad only. If any
foreign state would impose death duty on the estate left by the deceased in
Valuation of properties
The beneficiaries are obliged to file, directly or
through their legal representatives, a tax return with the competent tax
office. The tax return should contain all items of the estate left by the
deceased.
Each item must also be accompanied by its value.
The prices to be taken into consideration are those prevailing on the time of
the deceased's death.
Along with that, some specific rules are also
provided under the Article 32, DTA.
According to the said Article, the base of
valuation of real properties, whether the land, building or goodwill, shall be
the taxable value of the estate at the time of the deceased's death. As we
mentioned earlier, the taxable value is a value determined by special
committees for taxation purposes. We will study this subject later.
The basis for valuation of other properties shall
be their market value at the time of death. In case of existence of official
prices for such properties and property rights, the official price of the time
of death shall be taken into account. Any decline in the value resulting from
the use of depreciable asset (at the interval between the death and valuation)
shall also be taken into consideration.
In case of the buildings that have extraordinary
value, because of their architecture style or the type of materials used
therein, the taxable value of the building shall not be taken as the basis of
valuation. In this case, as well as in case of jewelry and precious objects,
the opinion of relevant experts of public sector is to be sought by the tax
authorities.
Disputed valuation
The competent tax assessment office might reject
the values mentioned by beneficiaries in the tax return, wholly or partially.
The Article 30 of DTA governs such situations and rules as follows:
a) In case the total value declared in the tax
return does not differ more than 15 % from the value determined by the relevant
tax office, the tax return shall be considered as final and acceptable.
b) If the aforesaid difference is more than 15 %,
the tax office shall assess the applicable tax on basis of its own valuation.
The tax so assessed can be disputed by the taxpayers, in which case the dispute
will be adjudicated through the channels provided under the law.
Classification of heirs
For the purpose of inheritance tax, the heirs are
divided into three classes:
(a) The first class heirs are the father, mother,
wife or husband of the deceased and his/her children and grandchildren.
(b) The second class heirs are the grandparents as
well as the brother and sister of the deceased and their children.
(c) The third class heirs are the paternal uncle
and aunt and maternal uncle and aunt of the deceased, as well as their
children.
This classification is taken from the Civil Law,
except in respect of spouses, who are categorized, under the Civil Law,
separately as the heirs who inherit the deceased person because of connection
to him by marriage
(Will
continue)
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Tax News
Salary Tax of Expatriates
Taxation of foreigners has always been
a field not properly scrutinized in all its aspects. Sometimes the subject is
treated on basis of criteria originated from assumptions which have been
adopted for the sake of easiness, and which have rarely been carefully analyzed
with the aim to see how far they coincide with the actualities of different
cases and circumstances prevalent at various times.
The tax administration has recently
become active in this regard and has emphasized the need for more careful examination
of the fields not properly dealt with so far. One area emphasized upon by the
tax administration is the salary tax of expatriates working in this country.
They are mostly taxed on basis of a schedule prepared and administered by the
Labor Ministry. The schedule was prepared by the said ministry for the purpose
of computing a fee imposed on foreigners who apply for the work permit. It is
drawn on annex officio basis and is not founded on the salaries actually
received by the foreigners from their respective employers. This procedure of
computation of the salary tax liability is not, obviously, in agreement with
the necessities of a proper and justifiable tax assessment, which requires
exertion of more endeavors for finding the facts of relevant cases.
The tax administration took the subject
into consideration and issued a special ruling with the aim of correcting the
criticized procedure referred to above. Since such ruling is of special
significance for the readers of this English section of Maliyat journal, the
full translation of the relevant circular letter is given below:
English translation of the circular
letter No. 112 dated 02/08/98
It has been noticed that the tax on
salaries paid to the expatriate employees working in Iran is mainly computed
and claimed on basis of a schedule drawn up by the Labor Ministry, whereas the
employment of foreign employees is usually effected on basis of contracts that
contain their salaries, allowances for occupation in Iran, securing housing and
car, education expenses of their children, two-way ticket from and to the home
country, and even the job allowances such as allocation of shares, etc.
Unfortunately, it has been forgotten, during the recent years, to obtain
information on the actual salaries of foreign employees and to collect the
government's correct taxes on such real salary income.
Therefore, and for the sake of
observance of tax equity, prevention of waste of the public funds and creation
of appropriate conditions for assessment of the said persons’ income tax, it is
hereby ruled that:
1. It should be notified to all foreign
employers of such persons that they are required to present the official
employment contracts of their foreign employees, containing their salary and
all job allowances, to the tax assessment offices.
The said contracts (which might have
the form of a "hiring document for certain occupation") must be
confirmed by the responsible officers of the principal enterprises and the
signatures of such officers should also be confirmed by the official
authorities of their respective countries, as wells as by the embassy of the
Islamic Republic of Iran in the same country.
2. since furnishing the above documents
requires enough time, the relevant employers are allowed to supply such
documents up to the date of 04/31/77 (07/22/1998) at maximum. Before the expiry
of the above time limit and in case of non-availability of valid and reliable documents, the salary
tax should certainly be computed and claimed according to the customary method
and as an on account payment.
3. to avoid double taxation of such
persons, it should be arranged that a certificate be issued regarding the
payment of the salary tax of foreign persons and containing information on the
salaries, fringe benefits and the taxes paid. The certificate must be put at
the disposal of the said persons, after the signature thereof being certified
by the authorities of the Ministry of Foreign Affairs, so that the said persons
may present the relevant tax receipts to the tax authorities of their
respective countries, and thus the double taxation be avoided.
4. The criteria for ex officio
assessment will be declared later.
Aliakbar Arabmazar, Undersecretary for
Tax Revenues
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ABSTRACT
OF PERSIAN ARTICLES
Editorial
The practices that may develop in
response to necessities of a certain interval of time are apt to grow to
established procedures and survive even after the termination of those
temporary necessities. This state of affairs, as has been noticed in the field
of taxation, and remedies adopted by the tax administration in this regard, are
commented on in the editorial (both in English and Persian sections).
Thin Capitalization Problems in
Anybody reviewing the Official Gazette
will realize that several companies are registered everyday with negligible
amount of capital. This subject is dealt with in the article as a clear
evidence of a broad practice of thin capitalization, and the financial and
taxation aspects of the same reanalyzed.
A Comment on the DTA's Amendment of
February 1998
Some articles of the Direct Taxes Act
were amended in the last days of February. The amendment was related to certain
cases of tax exemption provided under the said law. The author examines and
reflects on the amended articles. The first part of the comment was published
in the previous issue.
Title of Tax Laws
The Iranian tax law, namely the Direct
Taxes Act, has a brief and acceptable length and its wording is also quite
desirable, as far as the Persian language is concerned. The same is not,
however, true with regard to further amendments of the same law. The name given
to the law amending a primary law is usually much longer and sometime contains
more than 20 or even 30 words. The result is an overlong and complicated sentence
hardly understandable by an ordinary reader. This subject is dealt with in the
article with certain proposals suggested by the author.
Unfitting Shape of Amendments
Any amendment to a law should be molded
in a shape capable of being placed within the frame of an existing text, easily
and without difficulty. This simple and obvious rule is not always observed and
amendments are sometimes enacted in a way incompatible with the principal
structure of the respective parts of the law. This problem is examined in the
article.
Vehicle - Related Taxes
This is a brief translation of an
interesting article published by the Bulletin of Asia - Pacific Taxation with
regard to taxes and other charges imposed on the ownership and usage of motor
vehicles in
Double Payment of Social Security
Charges
Double taxation agreements are quite
familiar and well-recognized arrangements. The main cause of development of
these types of agreements, namely the two times imposition of tax on one and
the same income, has become true in respect of social security charges as well.
This has led some countries to take measures for conclusion of agreements for
avoidance of imposition of such payments. This subject is dealt with in the
article.
The End
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