********************************************************************************************

 

Maliyat Journal, No. 23

 

Spring 1999

 

 

 

IN THE NAME OF ALLAH

 

FROM THE PRESIDENT

 

In the previous issue we referred to certain unsound routines developed among some tax officials as a result of negligence. We had in mind the practice of some officials who base their measures on superficies of cases and fail to scrutinize the facts and realities of relevant situations. A probable outcome of such practices might be damage to the government’s revenue.

Now, in the present issue we shall consider a different inclination that exists among certain groups of officials. The reasons that make this new disposition attractive are, by and large, the same as we mentioned in respect of the first attitude. The result, however, seems to be different, though at the end may entail similar consequences.

The new subject pertains to a special mentality that has been governing the conduct of some officials since the indefinite past. Those influenced by this type of disposition pretend as if they are looking after the “interest of the government ". It means that every public employee should always take the benefit of the government into consideration. As far as this outward retention is concerned, nobody would say something against it. Every civil servant has been employed for the same purpose. To serve the interest of the government is raison d'etre of all government employees. But, the fact is that the brand so attached to the practice of the officials in question is, in some occasions, a cover that conceals the actual motive, which is their disposition toward the comfort of mind. This becomes evident when the lawful and acknowledge rights of private persons are dealt with. There are occasions where the law, equity or competent for a have recognized certain rights for the people, nevertheless, the officials in questions are reluctant to respect such rights, since the other party of the issue is the government.

The main object of this behavior is to secure “peace of mind " for the respective officials, since they believe that adhering to the " interest of the government " is much more safe and harmless.

This attitude has influenced the tax organization as well; some tax officials are of the opinion that they will scarcely be harmed in case of adhering to the interest of the government in each and every tax case. This approach may lead to encroachment upon the lawful rights of taxpayers.

There are, of course, some provisions in the tax law that prohibit such treatment. One example is the paragraph 1 of the Article 270 of the Direct Taxes Act which stipulates certain punishments for the officials who disregard the facts of the case and assess the income of taxpayers above or below the actual amounts.

However, the provisions of this type were not so effective to eradicate the behavior under discussion. Any fundamental change in this field will probably require certain transformation in social attitude. Nevertheless, the relevant high-level officials are able to take first steps toward the alleviation of the situation. Their motion should be directed towards the respect for the law. Respect for the law will necessitate the observance of the lawful rights of private persons. An approach of this kind will ultimately result in securing the “interest of the government “as well. It is a well-known fact that every government in today's world makes its best to assure the tax compliance of its citizens. Among the ways adopted for achieving this significant goal, one can refer to the integrity and trustworthiness of the tax administration. This aim can not be realized, unless the taxpayers become sure that they will be treated according to the law and their rights will be respected by the authorities.

 

Dr. Aliakbar Arabmazar

 

*********************

 

Tax News

 

The "Tax News" of this issue is wholly devoted to a circular letter of the Undersecretary for Tax Revenues relating to some aspects of taxation of the permanent establishment of foreign enterprises. Because of its importance for the readership of this English section of the Maliyat journal, the full translation of the circular letter is given hereunder.

 

English Translation of the Circular Letter No. 30/4-3705/17236,

Dated 04-16-1377 (07-07-1998)

 

1. It has been noticed that some tax assessment offices misinterpret the verdict No.3014/1653 dated 02-07-1372 (07-27-1993) of the Supreme Tax Council in respect of the activities and income of the branches and agencies of foreign companies engaged in marketing, gathering of economic and technical data and after sale services in Iran. Accordingly, the fail to undertake necessary and appropriate investigations, and consider it enough to draw a report each year to the effect that the foreign company's branch or agency did not have any activities during the assessment year, and their costs were financed by the relevant parent company. By doing so, they consider their tasks to be discharged. In some cases they take into account only small receipts of such agencies from their headquarters that are remitted for financing the internal expenses of the agencies located in Iran, and subtract from it the relevant accrued expenses. Then they assess and notify a negligible tax on the balance by applying a coefficient to it.

2. Apart from that, it seems that such tax assessment offices have mostly forgotten the fact that the branches of foreign companies registered in Iran after the year 1357 (March 21, 1978 to March 20, 1979) have been created on basis of permissions obtained from some government institutions (that were parties to the transactions concluded with the respective parent companies or with their affiliated groups of companies). As a result of this negligence, most of the tax assessment offices have not bothered, even once, to communicate with the relevant government institutions, or with the juridical persons who were parties to such transactions, for getting information on the operations carried out among them.

3. By investigating the documents and books of accounts of those taxpayers through the procedure envisaged under the Article 181 of the Direct Taxes Act, it become evident that most of the said branches and agencies derived considerable income by engaging in activities in the fields of marketing, brokerage, consignment and other commercial operations related with the business of such agencies. It became evident also that some of the said branches and agencies represent other foreign companies in Iran as well (without declaring such representativeness to the tax authorities). They have earned considerable income from theircommercial activities as the agency of those other companies. But, this type of income has been hidden and the relevant proper taxes have not been claimed as a result of the respective officials' negligence, carelessness and misinterpretation. The officials have occasionally been misled by the statute of such companies which states that they are not allowed to engage in profit - making activities, though they should take into account that such statements must not divert ones attention from realities.

4. Thus, it is evident that the principal character of operations of such agencies and branches has been ignored. The operations in question, which have been carried out in Iran in the name of permanent establishments, have resulted in deriving certain income that is a clear instance governed by the Article 107 (6) of the Direct Taxes Act. Though few of the above taxpayers have presented their agreements with the principal enterprises that include negligible income as a percentage of the expenses incurred by the office established in Iran(expenses + income as a percentage of expenses), or as a fixed commission for the operations to be performed in Iran, or as a commission at rates below one percent. These types of income are also within the limit of the expenses incurred by the relevant offices. Therefore, none of such cases should stop investigation, examination and discovery of realities.

5. One should remember the important fact that under the international custom governing the agency affairs, the fee of a representative is payable in the form of commission and is to be computed in proportion to the final price of the relevant transaction. Different rates of commission, depending on the type of goods and price of transactions, have been computed, the statistics of which shall be declared later (according to the documents obtained as result of execution of the Article 181, instances have been noticed where commissions more than % 10 have been paid). Apart from the said unreasonable rates, cases of extra amounts declared under the bills have also been noticed, which have resulted in disorderly transfer of foreign currency from the country. Under such conditions, the tax assessment offices may consider fixed or low-rate commissions as acceptable only where the case is based on definite and undoubtable evidence and documents.

6. Based on the above considerations and by due regard to this important fact that the earning of income and profit constitutes the primary goal of commercial affairs, and since under the international custom and according to the available documents the marketing and consignment activities involve an income in the form of certain percentage of final price of the sale carried out between the principal seller and the purchaser who resides in Iran, it is hereby ruled that:

In respect of such branches and agencies that announce every year that they did not have activities and declare solely the expenses financed by their parent companies, or cite on unsubstantiated agreements as evidence of their declared income, the tax assessment offices are required, by virtue of the Article 107 of the Direct Taxes Act, to take their measures more carefully, undertake comprehensive investigations, and to employ necessary means and appropriate methods, be it direct (namely obtaining information from the respective branches or agencies regarding the sale of goods and serviced effected between the companies that are parties to the agency agreement and their Iranian customers together with the photocopy of the original agency agreement), or indirect (such as correspondence with, or referring to, the parties of relevant transactions, authorities who issued the permission for registration of the branch, as well as the banks that issued letters of credit).

By the measures and methods described above, and also by executing, in case of necessity, the procedure referred to in the Article 181, the relevant tax assessment offices have to secure information regarding the character and extent of the said branches and agencies’ activities and of the goods supplied by them in Iran as the merchandise of their parent companies (or of the respective affiliated companies), and also about the goods of other foreign companies, whom the branches and agencies in question represent unofficially and without declaring and earn income through such agency, as well. The tax assessment offices should demand the payment of applicable taxes on basis of a comprehensive report that they must prepare in this regard. In case of ambiguity, proper opinion should be sought.

The respective director generals are obligated to send the statistics relates to the measures taken in respect of this circular letter to the office of the Undersecretary for Tax Revenues every three months. The Tax Disciplinary Prosecutor shall also pay attention to the implementation of this circular letter in the course of his investigations and shall report the cases of infringement.

The rule of the present circular in respect of identification of agency and commission income shall be binding on Iranian companies and real persons working as the representative of foreign companies, as well.

The Content of this circular letter has been confirmed by the Supreme Tax Council.

 

Aliakbar Arabmazar, Undersecretary for Tax Revenues

 

 

*******************

 

 

An Introduction to the Iranian Tax System

 

(Part 3)

 

In the previous issues, we pointed out that our study relates to direct taxes only. We also stated that the legal structure, within which the Iranian tax system operates, consists of the enactments of the parliament, customary rules and the case law. Then we referred to the Direct Taxes Act as the most significant constituent of the tax law, and said that it is divided into substantial, procedural and organizational parts.

As far as the substantial provisions are concerned, taxes are divided into two main categories; property tax and income tax. We began with the first category and studied the annual tax on real property, tax on unoccupied real property, tax on idle lands.

Then came the turn of the inheritance tax, which is also considered by the law to be a type of property tax. The subjects touched upon with respect to the inheritance tax were taxable estate, nationality and residence of the deceased person and heirs, valuation of properties and classification of heirs. Let us now continue our comment on the remaining topics of the inheritance tax.

 

Tax rates

The rates of inheritance tax are progressive and are a function of the share of each of the heirs. The tax is computed in accordance with the following table:

 

Taxable Base (IRR)       Category I          Category II        Category III

 

                                                  Up to 8,000,000 9 %                  18 %       30 %

                                                 8,000,000-20,000,000                 20 %       30 %   40 %

                                                 20,000,000-40,000,000               30 %       40 %   50 %

                                                 40,000,000-80,000,000               40 %       50 %   60 %

                                                 Over 80,000,000 50 %                60 %       70 %

 

As it was mentioned earlier (Maliyat, No    , page    ), in cases where the deceased and heirs are Iranians and both of them reside abroad, any taxable estate left in other countries shall be subject to a flat rate of 25 % , irrespective of the status of beneficiaries.

 

Personal allowances

The following personal allowances are granted:

- An allowance of IRR 2,000,000 in favor of each of the first class heirs.

- The same allowance shall be increased to IRR 3,000,000 in cases where;

- A first class heir is under the age of twenty, or is a ward or disabled,

- He / she is under the age of 25 and is engaged in studying solely,

- The heir is a daughter of the deceased, who had not been married before his death.

- An allowance of IRR 1,000,000 in favor of the second class heirs who are under the age of twenty, or are wards or disabled, or are under the age of 25 and engaged in studying only.

- Where all of the heirs are from the first class, including a wife or at least one child who is under the age of twenty or is a ward or disabled, or is a child under the age of 25 who is engaged in studying solely, and the only estate left from the deceased is a dwelling house or apartment, then the total allowances granted to all heirs shall be increased to the amount of IRR 20,000,000 or to the value of such house or apartment, whichever be smaller.

- The first and second class heirs of the martyrs of the Islamic Revolution are exempt from inheritance tax, with respect to those martyr's properties.

 

Deductions

In establishing the taxable base, the items listed below shall be deductible:

1. Funeral expenses and some other similar payments.

2. Established liabilities of the deceased, including the "mahr" of a wife and her alimony for the period of "idda”. Mahr is a term of the law of marriage. It means a sum of money or certain property, which is agreed upon between the bride and bridegroom. It is considered as a debt of the husband to his wife. Idda is another term denoting a prescribed period of waiting, during which a woman may not remarry after being widowed or divorced.

3. Any part of the estate left behind by the deceased that becomes expropriated after his death on basis of law or special verdicts. For such properties to be excluded from inheritance tax, the act of expropriation should take place within one year from the date the relevant taxes become final and conclusive. Any consideration paid against expropriation shall be subject to taxation, and any extra taxes paid shall also be refundable.

4. Any estate transferred or endowed by the heirs in favor of certain charitable organizations and purposes.

5. Uncollectible debts owed to the deceased. Whether a debt to the deceased is collectible or not shall be judged by the Board of Settlement of Tax Disputes (BSTD). The BSTD is an administrative tax forum, competent for reviewing most of tax disputes and claims.

 

Competent authorities

 

The task of assessment of inheritance tax is, like other types of direct taxes, vested with the tax assessment offices. More specifically, the tax assessment office of the district where the last legal residence of the decedent was situated is competent for examination of the inheritance tax files.

The tax assessor is supervised by another tax official of higher rank chief assessor (sarmomayyez in Persian), who is subject to an assessor general (momayyez-e-koll in Persian).Any dispute between the taxpayer and the said tax officials is usually referred to the Board of Settlement of Tax Disputes (BSTD) that is the most common forum for trying the tax claims and disputes at the administrative level. The duties and powers of the said tax officials and for a will be discussed in detail when touching upon the organizational regulations of the Direct Taxes Act (DTA).

 

What the taxpayer has to do?

 

The provisions of the chapter IV of the title B of DTA, which concerns the inheritance tax, deals with two types of taxpayers; the heirs and the other taxpayers. In this part of the essay we examine the tasks of the heirs, and on the other taxpayers we shall refer later.

The heirs have to submit a special tax return to the competent tax assessment office (as defined above). They can file such tax return individually or collectively and submission of the tax return by one of the heirs shall relieve others from the duty in question.

The tax return should contain all items of the estate left by the deceased person at the prices prevailing on the time of his/her death and also the debts and claims of the decedent. Certified copies of the documents and instruments substantiating the contents of the tax return must also be provided by the heirs.

If the taxpayer is a minor or a ward, his/her guardian, trustee or "vali" may submit the tax return. "Vali" is a term of the Iranian Civil law meaning the father and grandfather of the children who are under the legal age or are ward. The guardianship of such children is, under the Civil Code, vested with their father and grandfather, if they are alive and freeform legal hindrance.

The tax return described above must be submitted within six months from the death of the decedent, and the taxpayers are required to pay the amount of the tax assessed by them under the submitted tax return. This payment should be effected not later than three months from the date of filing of the tax return. It will be considered as an on account discharge of the liability, since the tax authorities may assess a different amount for the applicable tax.

 

What have to do the tax authorities and third parties?

 

The tax assessor (head of the tax assessment office) has to examine the tax returns of taxpayers and to assess the value of properties. The procedure of valuation of the estate subject to inheritance tax, as well as the case of dispute between the taxpayer and the tax assessor in respect of valuation were touched upon in the previous issue of this journal (Maliyat, No 22    ).

After the case being examined and the amount of tax being finalized and paid, the tax assessment office shall issue a clearance to the taxpayer.

Another task that the tax assessments offices are require to discharge, is to issue a certificate to taxpayers indicating that they have submitted the necessary tax returns. This certificate includes detailed items of the estate declared in the tax return. The certificate should be submitted by the beneficiaries to the probate court. The court decides upon the number and identity of the beneficiaries and issues a special verdict in this regard. The verdict so issued is a must for transfer of the ownership of the inherited properties to the relevant persons.

The banks, companies and persons that hold some assets belonging to the deceased person must prepare a list of such assets and submit it to the competent tax assessment office. This task is to be performed within one month from the date such entities and persons become aware of the death of the decedent. They are also required to put relevant books of accounts and records at the disposal of the tax assessment offices for investigation, and are not allowed to deliver the assets hold by them to the heirs, unless a certificate from the competent tax assessment office is produced that indicates that the case is tax exempt or the applicable tax is already paid.

The offices of the Registration Department as well as the notaries - public are also prohibited from registration of a property left by the decedent in the name of the heirs, unless the certificate referred to above is produced.

 

Endowment, tying up, vowing and willing

 

The cases of endowing, willing or vowing a property are dealt with under the same chapter of DTA that is devoted to the inheritance tax, since such cases are considered to be somehow similar to inheriting an asset. We shall examine this part of the law in the next issue of the journal.

(Will continue)

 

The End

 

*************************************************************************