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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
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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
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
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
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
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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
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