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Maliyat journal (Iranian Tax Review)
No. 25 - Autumn 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 also arise, 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 manipulations is 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 in such a way that one may 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
An
Introduction to the Iranian Tax System
(Part 5)
As we mentioned earlier, this essay is devoted to the
study of the direct taxes as are reflected in the Iranian Direct Taxes Act
(DTA). We begun our work with the substantial provisions of DTA first, and
analyzed its regulations regarding the annual taxes on real properties, tax on
unoccupied dwelling real estates, tax on idle lands and inheritance tax. All
these taxes are, under the Iranian tax law, considered to be various types of
property taxes, and are presented under the common title of property taxes
(Title B, DTA).
There remains another type of property taxes,
namely the Stamp Duties, which is to be reviewed in the present issue.
Stamp Duty
The Iranian tax law considers the stamp duty as a
kind of property tax. If we define the property tax as a tax imposed on
properties owned by natural and juridical persons, then categorizing all levies
referred to as stamp duties under the DTA as a group of property tax, might not
be easily acceptable in all cases. There are, of course, some cases of stamp
duties that are really imposed on certain types of properties. For instance,
the stamp duty collected from negotiable instruments (Article 46) can fairly be
accepted as a tax imposed on a kind of property. But certain documents, for
example the form of acceptance of general conditions of current accounts (signed
by the persons applying for opening of such accounts in banks), are also
subject to stamp duty, while a document of this kind may not be considered a
"property" at all.
The cases subject to stamp duty are as follows:
1.
Endowment,
tying up, vowing and willing
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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 how 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 completion 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
budgets 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
deferred 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).
ABSTRACTS 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 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 anymore globalize 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 inter-company 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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