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Maliyat
Journal, No. 24
Summer 1999
IN THE NAME OF ALLAH
FROM
THE PRESIDENT
The issue of transfer pricing has attracted greatly
the attention of tax authorities of developed countries over the last two
decades. A considerable part of the world tax literature has also been devoted
to the same subject, so that a number of specialized magazines and publications
are created exclusively for this purpose and for the study of the issues in the
field of transfer pricing. In recent years the scope of these studies has been
extended outside the developed world and has become of great appeal to the
developing countries as well.
The international economic and trade relations have
been so expanded and interwoven that there is no way to keep oneself beyond its
sphere, nor such an action may be considered as wise and reasonable. There was
a time where the national economies could survive in isolation from each other
without facing serious problems. But, by the lapse of time this traditional
state of affairs was dramatically changed, so that today we can sensibly speak
about the existence of a global economy. Besides that, the goal of continuing
the globalization process of world economy and enhancing its benefits is followed
everywhere?
As regards our country, the expansion of economic
and trade relations with the outside world and attraction of foreign investment
and technology constitute a pillar of the government's foreign policy. This
attitude was emphasized by the Parliament as well, when deliberations were
going on in respect of the current year budget.
Parallel with development of relations and cooperation,
however, various problems would valorize, which should be taken care of to be
directed into a sound and rational route. One of such problems that has been
the focal point of tax administration in many countries and has given rise to
many discussions and controversies during the recent decades is the same issue
of transfer pricing. The giant enterprises engaged in huge commercial and
industrial activities, whose role may not be denied in economic and technical
developments of today's world, are mostly multinational and supranational. They
control a wide net of active and dynamic companies and establishments all over
the world, that run various industrial, commercial, financial a service
businesses.
The nature of these enterprises' business, like any
other large or small trade, is based on the attraction of more customers on one
hand, and securing more profits for themselves and their affiliates on the
other. To achieve these ends, they spare no efforts and tricks. One of devices they
resort to is the use of tax avoidance techniques with the aim of paying as less
tax as possible.
Among such techniques the transfer pricing manipulation
the widest spread one and outpaces all other similar tricks. The inter-company
transactions among these trade complexes are mostly priced in a way to direct
to final profits of the family to the regions where the tax burden is lighter than
any where else. Thus, the family as a whole pays less tax.
The tax administration on the other hand, has not
turned a blind eye to the above circumstances. Debates and deliberations on the
subject of transfer pricing is going on everywhere and counter devices and
invented to offset of effects of the aforesaid tricks and techniques. Evolution
of tricks and counter - tricks is on progress and this process have advanced so
far that one can properly conclude that
a new branch of studies or a complicated and intricate art of counter balancing
play has developed between the fisc and taxpayers.
Special attention is paid in today's world to the
training of tax official to deal with the transfer pricing issues. High level
consultants, attorneys and accountants have also turned up on the opposite side
and these two groups of experts confront and challenge each other. The issue is
of great appeal to the academic centers as well.
As far as our country is concerned, different
aspects of the issue should be carefully studied. Care must also be taken of
development needs and strategy of the country. Particular attention is to be
paid to the filling of expertise gap and training of specialists in this
delicate field.
What concerns this journal is the presentation of
various features of the transfer pricing with the aim of acquainting its
readership with this important subject.
Fortunately, there are ample number of the
interested groups, namely tax officials, consultants and academics among our
readers. We will do our best to achieve this purpose.
Dr. Aliakbar
Arabmazar
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An Introduction to the
Iranian Tax System
By Dr.
Mohammad Tavakkol
(Part 4)
As it was mentioned in previous issues, the focus
of this study is on direct taxes as are reflected in The Direct Taxes Act
(DTA). We started with commenting on substantial provisions of DTA regarding
property taxes. The regulations concerning annual taxes on real properties, tax
on unoccupied real property and tax on idle lands were examined first. Then
several topics in respect of inheritance tax were studied. Now we deal with the
last part of our survey in connection inheritance tax are review the following
issues:
Endowment,
tying up, vowing and willing
These topics are dealt with in the
same chapter of The Direct Taxes Act as is allocated to inheritance tax. The logic
behind that is a kind of resemblance between the inheritance and those
categories of legal concepts. In both cases the rights arising from properties are
converged from one person to another free of charge and ex gratis. Since
another chapter of The Direct Taxes Act is assigned to incidental earnings,
which covers gratuitous transfer of properties as well, some regulations
concerning the willing (bequeathing) are also dealt within that chapter, to
which we shall return later.
First, we have to present some
explanations regarding endowment and tying up. The term 'vaqf' which has been
translated to 'endowment', is defined under the Iranian Civil Law to be the
tying up of the substance of a property and devoting its yields to certain (usually
pious and religious) purposes (Civil Code, Article 55). The word “habs” (which
has been translated here as tying up) means to make a property unalienable.
When a person endows property under The Iranian Law, makes it untransferable
and allocates its yields to definite purposes. So, the term tying up (habs) is
not something different and independent from endowment (vaqf). It is rather a
prerequisite and a constituent of endowment Nevertheless; these terms are
treated in The Direct Taxes Act as if they denote two separate legal
categories, independent from each other. Notwithstanding the approach of DTA,
in my opinion the both words are to be construed as expressing one and the same
thing, otherwise, confusion and uncertainty may arise.
The term willing has the same meaning
as in English. To will means to make a disposition of one’s property, to take
effect after his death. The vowing, on the other hand, means a solemn promise
or assertion by which a person binds himself to an act (mostly in the form of
donating some properties or properties rights to other persons or for certain
purposes.
Now let us examine the provisions
regarding the taxation of the above cases. The main provisions in this regard
are provided under The Article 38 of The Direct Taxes Act, which reads as
follows:
"If a property that is
transferred through endowment, tying up, vowing or willing is not qualified for
exceptions provided under the Article 24 (c) here of, and also is not subject to
the provisions of the chapter relating to the tax on incidental income, then it
shall be taxed according to the following provisions:
(a)as for endowment and tying up, each year's yields of the property shall
be subject to taxation at the rates
envisaged under the Article 131 of this Act, and
(b)in case of vowing and willing, where the yields of the property are
vowed or willed, the case shall be dealt
with according to the rule provided by the above paragraph (a).
Where the substance of the property is
subject of vowing or willing, its value shall be determined in accordance with
the provisions of the present chapter, which shall entirely be subject to
inheritance tax at the rates stipulated for the second class heirs."
The following points are worth mentioning
in this respect:
1. As it can be seen in the text of the Article, the cases subject to the
Article 24 (c) of DTA have been accepted from the rule of the Article 38. Those
cases include properties endowed, vowed or willed in favor of certain organizations
purposes referred to in the Article 2, DTA.
2. The transferring (through endowment, etc.) that are subject to the tax
incidental income, are also excluded from the said Article 38. The only case
referred to in the relevant provisions of DTA (chapter VI, title c) as being
subject to the tax on incidental income, relates to a property willed in favor
of beneficiaries other than the heirs. Such transferring shall be subject to
the tax on incidental income (Article 124, DTA). In this case, the total price
of the property shall be taxed at the rates set in the Article 131, DTA (see
Articles 119and 120, DTA).
3. The terms endowment and tying up are inserted in the text of the
Article 38 as two separate concepts. Attention of the readers is drawn to the
explanations given above on the fact that these two terms denote one and the
same concept.
4. Exxcept the case mentioned in the paragraph 2 above, other cases of
endowment, willing and vowing are subject to taxation at two categories of
rates:
a) As for the endowment and tying up (which are the same thing as
explained before) the rates of the Article 131 (see the footnote under the
paragraph 2 above) shall apply. The taxable base shall be the yields of
endowment for each year.
b) In case of will or vowing two different situations may occur. The
first one is where only the yields and
proceedings of a property is willed or vowed, while the testator or the vower
keeps the ownership of the property for himself. In this case (like the case of
the paragraph "a" above) the rates of the Article 131, DTA will apply
on the proceedings of each year.
c) If the substance of the property is willed or vowed, its total value
shall be subject to inheritance tax at the rates stipulated for the second
cleans heirs. In such cases the value of the property shall be appraised
according to the procedure described under the chapter on inheritance tax (see
"Valuation of properties", Maliyat journal, No. 22, pp 8 and 9). The
rates applicable on the second class heirs were also given earlier in this journal
(No. 23, p 4).
The term "Substance" as used
in the above Article 38 (and in some other occasions in DTA) is a concept
employed by the Iranian Civil Law to denote the corporeality of a property that
is understood to be separate from the property's yields or proceeds. The yields
of a property may be transferred to other persons, while the owner retains the
"Substance" of the same for himself.
Some
procedural points:
1. The competent tax authority with regard to endowment will and vowing
is the tax office of the district where the residence of the endowments' administrator
or that of the willing or vowing person is situated.
2. The administrator in case of endowment, the executor in case of a will
and the vower in case of vowing are required to draw and submit tax returns on
special forms provided by competent tax offices. Filing of the tax return
should take place not later than 3 months from the date of endowing, or vowing,
and in the case of a will from the date of the testator's death.
3. The same persons are required to pay applicable taxes as well. In
respect of endowment, the tax on the yields of each year must be paid up to the
end of the month Tir (July 22) of the subsequent year. The same is true in
respect of willing and vowing, where the yields of a property are willed or
vowed. In cases where the substance of a property is willed or vowed, the deadline
shall be 3 months from the time limit stipulated for filing the tax return.
Payment
facilities
Certain facilities are provided under
The Direct Taxes Act for the taxpayers who are not in a position to discharge
their liabilities for one or another reason.
Some instances are given below:
1. Should the taxpayers subject to inheritance tax be unable to pay their
liability, entirely or partially, The Finance Ministry may agree to the payment
of the same in installments over a period of time up to 3 years against a valid
guarantee (Article 40, DTA).
2.In case of nonexistence of cash among the items of the estate left
behind, The Finance Ministry may, if so
requested by the heirs, select and accept in lieu of the tax a property from
among the said items, if it is agreeable to the heirs and if its value is equal
to the relevant tax (Article 41, DTA).
3.In cases where the estate left by the decedent includes a manufacturing
plant or workshop, and the value of
other properties left behind is not sufficient to cover the entire applicable
tax, The Finance Ministry must accept the request of the heirs for the payment
of the balance of the tax in installments over an appropriate period.
The same treatment shall be effected
with regard to the entire tax when the plant or workshop in question
constitutes the only estate left behind.
Our study on the inheritance tax
terminates at this point and we will examine the "stamp duty”, which is considered
under the DTA to be another type of property tax.
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Tax Regulations of the
Budget of 1378 (199-2000)
The
Budget of the Iranian year of 1378 (March 21, 1999 to March 19, 2000) received
the parliament's approval on 2 February 1999. Besides figures, The Budget
contains different regulations on revenues and expenditures, which are termed
as "Notes". There are 60 Notes appended to the Budget, a number of which
embody tax provisions. The most important Notes of the latter kind are examined
below:
Note 2
Paragraphs
C, S and 4 of the Note 2 announce the following tax implications with regard to
public organizations and companies:
1. Under the paragraph C of the Note 2, the state
companies are deprived from setting aside the reserves envisaged in the Article
138 of The Direct Taxes Act (DTA) , and also from making certain expenditures
referred to in the Article 172 of the same Act, unless they satisfy certain
conditions.
Article
138, DTA. This Article provides that any part of the declared profit of
companies derived from industrial and mining activities, which the companies
reserve for the purpose of reconstruction, development or completion of their
existing industrial and mining units, or for establishing new (Industrial and
mining)units, shall be exempted from taxation. The same exemption shall also be
granted if the profit of such companies is allocated to a reserve for
construction of houses for their employees.
"Now
the paragraph C of the Note 2 of the Budget law stipulates that The Industrial
Development and Reconstruction Organization (IDRO) and its affiliated companies
are prohibited from allocating their profits to the reserves described above,
unless a precondition is satisfied: the amount of taxes and dividends payable
by IDRO and its affiliates should not be reduced (as a result of such reserving)
from the relevant force acts of the Budget, IDRO is a vast and important
government organization encompassing a large number of industrial entities.
Article
172, DTA. This Article provides that
certain charitable payments to special accounts declared by the Government
shall be deductible from the taxable income of the respective taxpayers.
Paragraph
C of the Note 2 states that the charitable payments of the Article 172 of DTA
must not result in reduction of income tax of the state companies and their
dividends payable to the government from the forecasts of the Budget.
The
restrictions imposed by the paragraph C of the Note 2 on IDRO, its affiliates
and other government companies reflect the prevailing negative attitude towards
the public sector companies. They absorb 65 % of the government's budget
without producing comparable results.
Ironically,
two big state owned companies, namely National Iranian Steel Company and
National Company of Iranian Copper Industries are treated completely in a
different manner. When discussing about the Note 58, we shall tough upon this
subject.
Paragraph
S
Paragraph
S of the Note 2 requires all companies, banks and entities affiliated with the
government to remit to the Treasury up to 5 % of the funds accorded to them
under the Budget for their current expenditures, and also up to 7 % of the
funds allocated for their development projects. Any remittance of this kind
shall be treated, for tax purposes as acceptable expenses. The exact percentage
of refund (between zero to 5 or to 7respectively) in respect of individual
entities shall be determined by The Council of Ministers on basis of the Plan
and Budget Organizations' proposal.
The
wording of the Paragraph S conveys nothing except a kind of budget cut. It
orders the government companies, etc. to vive back a percentage of the funds
allocated to them under the Budget. The case being so, one can ask: why
forecasting funds and immediately taken it back? The same question was raised
in the course of the Parliament's deliberations. But no convincing answer can
be during the same deliberations.
Paragraph U
The
Paragraph U presents a unique and unprecedented subject. It reads as follows:
"For
the purpose of creating possibilities of competition for the private sector,
all tax exemptions of ministries, organizations, executive bodies, government
companies, public institutions, foundations and profit seeking entities
affiliated with the government who are engaged in economic activities, shall be
nullified in the year 1378 (1999-2000) and all of them will be subject to
taxation. Excepted is the exemption of the Article 138of The Direct Taxes Act
giving effect to the provisions of this paragraph in respect of those
institutions that have permission of or of the High Spiritual Leader shall be
subject to the agreement of the High Spiritual Leader". Several points are
remarkable in this paragraph:
1. This is the first time that a legal text
highlights the significance of the private sector's competitiveness vis-ŕ-vis
the public sector and grants such a considerable advantage to give effect to
this matter.
2. The Scope of the paragraph in question is so
vast, that no government organization or entity can escape from its domain.
3. All types of tax exemption are annulled by
this paragraph. Even those provided under the laws other than The Direct Taxes
Act have also been nullified, since the wording of the paragraph covers those other
exemptions as well. The only tax exemption excluded is that of the Article 138,
DTA, which was described earlier.
4. the most important aspect of this paragraph
is the fact that its coverage extends to the concerns that are called in
Note 8.
Paragraph
B of the Note 8 concerns the persons (whether natural or juridical) who spend
money for construction or complexion of buildings for educational, cultural,
medical and similar purposes, or for construction of roads, bridges and the
like. Such contributions shall be treated as acceptable expenses for tax
purposes. The transfer of such buildings and constructed facilities to the
relevant organizations shall be exempt from the tax on transfer of real
properties.
According
to the Paragraph C of the same Note, the persons donating their properties to
the Education Departments shall be exempt from the payment of the tax on
transfer of properties.
Note 14
The
last part of the Note 14 authorizes the government to refund the consumption
tax on the goods bought and carried abroad by foreign passengers. The tax is
refundable to the passenger at the exit terminal (like airports or other
departure points). This rule is obviously enacted to encourage tourism and
exportation of goods at the same time.
The
term "consumption tax”, however, is not very clear in this country. We
have a series of direct taxes, some of which can be characterized as
consumption taxes. Few sales taxes have also been recently imposed. But, it is
not so easy to individualize certain taxes and label them as consumption tax.
Note 33
Under
the Paragraph A of the Note 33, The Technical and Mechanical Soil Laboratories
Company (an affiliate of the Roads and Transportation Ministry, and also The
Railroad Company of the Islamic Republic of Iran are allowed to use any extra
income they may derive in excess of the relevant amounts forecasted in the budget
as their annual income, for investment purposes. Certain ceiling has also been envisaged
for the investment in question. Such extra income so invested shall be exempt
from taxation.
The
exemption provided in the Note 33 is an obvious deviation from the rule of the
paragraph U of the Note 2, on which we commented earlier, and which nullifies
all tax exemptions for government organizations and entities, in the course of
the budget year.
Note 58
Note
58 imposes certain sales taxes on style (whether produced internally or
imported), copper, cars, new telephone lines, imported cigarettes and soft
drinks produced inside the country. The taxes of each month’s sales are to be
paid by the producers and importers not later than 15 day from the end of the
relevant month. Any delay in the payment will cause a fine equal to 5 % of the differed
tax per each month of delay. No sales tax will apply if the goods subject to
taxation are exported. Collection of the tax will be effected in accordance
with the executive regulations of the Direct Taxes Act.
Steel and Copper
The
Note 58 rules also that the turnover (declared profit) of the National Iranian
Steel Company and its affiliates, as well as that of the National Iranian
Copper Industries Company for the year 1378 (1999-2000)shall be subject to the
provisions of the Article 138 of the Direct Taxes Act.
The
phrase "turnover (declared profit)" of the year 1378 is vague. If it
means the declared profit arising from the turnover of 1378, then the effect of
the rule will extend to the year 1379, since the profit of a year is usually
assessed and taxed in the subsequent year. Then it will be in contradiction
with the Note 60 which limits the operation of the Budget Law to the year 1378.
But
if the profit declared in the year 1378 is intended, then the profit should be
ascribed to the turnover of the year 1377, and not to 1378.
As
mentioned earlier, the Note 2 of the Budget Law imposes restrictions on the
government companies willing to take benefit from the facility provided under
the Article 138 of the Direct Taxes Act. But, the Note 58 treats the Steel and
Copper companies in a different way. They are free from the restrictions of the
Note 2, and more than that they are required to take measures envisaged under
the Article 138, that is to allocate all their profits to the uses enumerated
in the same Article.
(The full text
of tax provisions of the Budget Law is provided at the end of the Persian
section of the journal).
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ABSTRACT
OF PERSIAN ARTICLES
Editorial
Transfer pricing is the subject to which the
editorial of the present issue (both in English and Persian sections) is
devoted. The international background in this connection is portrayed and the
measures needed to be taken by this country in this respect are also described.
State Budget of the current year
Tax regulations of the budget of the Iranian year
1378 (1999-2000) are reviewed in this article. The impact of the actual priorities
and bottlenecks on these regulations are analyzed and comparisons have also
been made with the previous years; budgets. The same article has been summarily
presented in the English section under a similar heading.
Tensions Arising from Tax Treaties and the Idea of Establishment of an
International Tax Court
This is a translation of the article written by J.
Azzi in the IBFD Bulletin. The author advocates the idea of an international
tax court to introduce certainty and uniformity into tax treaty practice and
thus facilitate the conduct of international trade.
Accounting Practice and Profit Assessment of Buyback and B. O. T.
Transactions
Emphasis has been put recently on buy back, B. O.
T. and some other similar methods of financial and technical cooperation as the
means of attraction of foreign capital and technology with the aim of
accelerating the process of the country's development. The author describes
these types of contracts and reflects on accounting practice as well as on the
assessment of taxable income of such transactions.
Model Tax Convention on Estates,
Inheritances and Gifts
In the previous issue of this journal some general
remarks were made on inheritance and gifts tax treaties. In the present issue
we have commenced a series of articles regarding the OECD Model Convention for avoidance
of double taxation with respect to tax on estates, inheritances and gifts.
Special attention has been paid to the regulations of the Iranian Tax Law with
regard to the same subjects.
Transfer Pricing
Following rapid process of globalization of the
world economy and expansion of the geographical sphere of multinational and
supranational companies' operations, the issues connected with this process
become more and more globalized as well. The economic development policy of our
country on the other hand is inclining, more than before, towards the
attraction of foreign capital and technology. These considerations necessitate
that the issues like transfer pricing be taken more seriously into account.
But, the subject of transfer pricing is a new topic in this country, and, therefore
should be studied in all its dimensions. That is why this journal has started a
series of articles in this regard, the first of which is provided in this
issue.
Some Examples of Transfer Pricing
Regulations.
Taking into account the considerations just
referred to, this journal will introduce examples of transfer pricing
regulations of other countries, in each issue, with the aim of acquainting its
readership with this subject. The first example provided in this issue of the
journal is an enclosure published by Danish tax administration which
accompanies the tax return on cross-border transactions
Selected Tax Cases
Space permitting, we introduce some international
tax cases in each issue of the journal. The case provided in the present issue
is the famous case of Mr. and Mrs. Jilly v. Directeur des Services Fiscaux du
Bas-Rhin (France) and the Judgment of the European Court of Justice delivered
in this regard.
Rulings and Regulations
The text of new tax laws and regulations, circular
letters of the tax administration, rulings of the Supreme Tax Council and
verdicts of the Administrative Court of Justice are presented in the Persian
section of the journal. Some of these rulings and regulations are also 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.
The
End
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