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No. 37, Spring 2005
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
We would like to greet again our readership after elapse
of such a long time since publication of Maliyat journal was stopped. Leaving the
journal was not a voluntary action; it was due to reluctance of the
ex-publisher and its procrastination in financing the relevant costs, though
the costs were unbelievably low and negligible. We published the journal by
spending minimum resources, but at the same time very efficiently and in good
circulation.
After the publication of Maliyat journal was stopped, our
readers contacted us many times and insistently wanted us to do something for
republishing it. For the sake of those sentiments and our own cordial interest,
we could manage to renew our journalistic work. We feel obliged to forward our
gratitude to the State Organization of Tax Affairs and its honorable president
for their appreciable assistance and support.
Our approach will be the same as before; a publication
substantially academic, but at the same time regardful of practicality and
understandability.
At the same time, our endeavor for gradual improvement of
quality of the journal's content will also continue, so that to deserve kind
attention and sympathy of our readership. Any remarkable success in this
respect would obviously depend on our own efforts and favor of the new
publisher.
By publication of this issue, Maliyat journal have begun
a new phase of its life. But certain articles of the previous issue (No. 36)
were unfinished and some readers have asked for remaining parts of them. For
responding to that demand, we have resorted to the site of Maliyat journal at
the Internet (http://e-tax.tripod.com).
You can find full text of these articles under the electronic issue No. 36 of
the journal.
With best wishes for all of you and for success of this
magazine,
Dr. Aliakbar Arabmazar
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Taxation and fourth development plan
A substitute for oil revenue
And an instrument for redistribution
of income
By: Dr. Mohammad Tavakkol
Iranian fourth development plan passed the parliament
on last October and was notified to the government for execution. The plan
covers a five-year period beginning from 21 March 2005 and ending at 20th
of March 2009. It had been approved by the previous (sixth) session of the
parliament before, but the seventh session revised the plan and re-approved it
in its present form.
Full title of the law is "the Law on Fourth
Economic, Social and Cultural Development of the Islamic Republic of
Iran". It comprises 6 sections, 14 chapters and 161 articles. None of
sections and chapters are independently allocated to
taxation, but several articles inside some chapters are related to tax matters.
The most important among them are paragraph "a" of the article 2 (in
chapter 1) and paragraph "b" of the article 95 (in chapter 8). They
include significant strategic regulations in the field of taxation, which are
studied hereunder.
Tax as a substitute for oil revenue
That strategic goal is embodied in the paragraph
"a" of the article 2 of the chapter one. Certain important issues are
dealt with in this chapter. The first and most important is the emphasis on
necessity of ending the process of financing government current expenditures by
oil revenue. This process has been continuing for several decades in spite of
being considered a negative point of the country's economy at all times.
Freeing the economy from that undesirable phenomenon has always been a national
aspiration, which is now embodied in the law of fourth development plan. The
law is not confined to referring to this subject as a matter of principle, but
it has clearly obligated the government to take all necessary measures, so that
to reach that goal at the end of the period of the plan. The text of the law
reads:
"The government is required to raise the share of
non-oil resources in financing its current expenditures, so that such
expenditures be completely financed through taxes and
other non-oil revenues up to the end of the fourth plan"
It should be noticed that other non-oil revenues
(other than taxes) referred to in the above paragraph are not so considerable,
and thus the burden would mostly rest on tax revenue.
Paragraph "b" of the same article 2 has
deprived the government from other undesirable source of financing as well. It
says:
"Financing budget deficit through borrowing from
Central Bank of Islamic
Thus, the government has to stop resorting to banks
(either domestic or foreign) for financing its expenditures, a restriction that
would lead to more emphasis on tax revenue.
We should also refer to the article 4 of the same law,
which reads:
"During the years of this plan no abatements,
preferences or exemptions from taxes (whether direct or indirect) and import
duties, except those already approved under relevant laws, shall be granted to
real and juridical persons, including organizations mentioned in the article
161 hereof." (organizations mentioned under the article 161 are
the government organizations and companies, but municipalities are not included
in the article).
Article 4 can be considered as complementary to the
aforesaid paragraph "a" of the article 2. Since the latter paragraph
provides for considerable increase in volume of tax revenue, door should be
closed to new and additional abatements and exemptions.
A side aspect of the issue must also be taken into
account. Suppose the government would succeed in achieving the goal prescribed
by the said paragraph "a" of the article 2. Such a huge success would
shut the door to previous practice, namely resorting to oil revenue for
financing current expenditures of the government. Nobody would dare to say that
the period of the fourth plan is expired and its regulations are no more
obligatory. The new approach that would rely on taxes instead of oil revenue
will continue, unless serious obstacles would arise.
Based on that argument, the ruling of the law of
fourth plan in this specific regard can be considered a strategy not restricted
to the period of fourth plan, but rather a long-time one.
Tax as means of redistribution of
income
Establishment of social justice and stability and alleviation
of social and economic inequality are the goals followed by the chapter 8 of
the law on fourth development plan. The government is required, under the
regulations of the same chapter, to take all necessary measures and adopt
appropriate policies for achieving the said goal. "Tax policies with the
aim of equitable redistribution of income" has a remarkable place among
those measures and policies (paragraph “b” of the article 95). This also can be
considered a strategic rule of the fourth development plan.
The government is obligated to review relevant laws and prepare draft of
amendments, or new laws, for realization of the policies in question.
For the purpose of achieving both strategic goals of the fourth plant the
government has to revise tax laws and regulations, bring about necessary
reforms in tax organization and remove various shortcomings that may preclude
efficient discharge of tax administration's responsibilities.
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Taxmen and compliance with the law
By: M. T. Hamadani
Noncompliance with tax law is a term usually used in connection with
taxpayers, but sometimes it can be attributed to tax officials as well. In
But the problem of noncompliance with tax law extends, in some degrees, to
tax officials as well. Legal rights of taxpayers are not always duly taken into
account. Some common examples of such negligence are as follows:
1. Nonacceptance (rejection) of taxpayers’
statutory books of accounts and other tax records on basis of vague and
negligible grounds. In such cases the ex-officio assessment is unduly resorted
to as a way of assessment of taxable income. In cases where there is no way to
reject the books of accounts, they would try to reject the expenditures of
taxpayers and consider them nondeductible as far as possible. Sometimes the
reasons given for this type of behavior are week and unfounded.
Of course one must not attribute such practices to shortcomings of tax
regulations. Iranian tax law pays due attention to taxpayers’ rights. As an
example, we can refer to the Article 237 of the Direct Taxes Act (principal tax
law of the country) which reads:
“Tax assessment notice should
be drawn on a correct basis and must be substantiated by sufficient evidence
and information, in a manner to reflect manifestly all related activities and
incomes derived therefrom, so that to be clear for
the taxpayer. Those signing the assessment notice must record their full name
and position in a readable manner thereon, and they shall be responsible for
the contents of the assessment notice and for their own opinion in every
respect. In case of inquiry by the taxpayer about the manner of assessment, the
aforesaid persons shall be required to announce details of the report
constituting the basis of tax assessment and have to furnish any explanations
the taxpayer may request in this respect.”
The problem should be sought in the degree of compliance with tax law by
tax officers. Treatment of officials is not, certainly, the same in all cases.
But in some cases the assessment notices are devoid of characteristics
specified by the aforesaid article 237. Some incomes may be imputed to
taxpayers without mentioning viable justifications and reasons. The amount of
information and justification provided to taxpayers may also be negligible.
Such failures with regard to taxpayers’ rights are sometimes repeated in
the forums responsible for settlement of tax disputes between taxpayers and tax
assessment officers.
From time to time the tax organization comes forward with instructions to
all concerned for correcting their practices and paying more attention to the
regulations of the law. One example of such interferences is a circular letter
issued by the State Organization of Tax Affairs (SOTA). This organization is
the highest tax organ supervising over all tax affairs of the country. The
following are most interesting points of the said circular:
a) At the beginning the aims of the circular are described as: realization
of basic changes in tax system of the country, adopting arrangements for
increasing the degree of compliance with laws and regulations, accelerating the
process of finalization of tax cases, achieving the aims such as satisfaction
of taxpayers and securing their voluntary compliance and cutting down the
number of tax cases that are to be reviewed by the boards for settlement of tax
disputes.
b) Under the circular, tax officials are instructed to refrain from
rejection of statutory books of accounts and tax records of taxpayers if there
are no justifiable reasons for that purpose. The same rule should be observed
in respect of rejection of taxpayers’ expenditures, or inclusion of additional
income for them. None of such actions are allowed except when taken on basis of
fair justification. Those violating the instruction will become subject to
prosecution.
c) Tax departments are ordered to do their best for winning the consent and
compliance of taxpayers, and to refrain from sending tax disputes to relevant
settlement forums, as far as possible. It has been emphasized in the circular
that records of tax officials with respect to this matter will be taken into
account for their promotion.
d) Another interesting point in the circular pertains to the composition of
the board for settlement of tax disputes. According to the Article 244 of the
Direct Taxes Act, every Board of Settlement of Tax Disputes shall consist of
three members: one representative from the State Organization of Tax Affairs;
one judge, whether active or retired, and a person introduced by civil
institutions that represent the interests of different groups of taxpayers.
Note 1 to the same article 244 states clearly that “the quorum for the
sessions of the Board of Settlement of Tax Disputes shall consist of three
members”. This means that all three members of the board should be present;
otherwise the session shall not be competent to examine the case.
Against that clear rule, in some cases only two members are present at the
board session. The circular of the State Organization of Tax Affairs refers to
this procedure as an illegal practice, which may become subject to prosecution.
Beside that, some declarations (or warnings) are attached to the circular and
the boards are instructed to affix them on the wall of the room where the
sessions are held, so that taxpayers can easily see the content of these
papers.
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A Plan for Major Tax Reform
by M. Alvandkouhi
Iran’s State Organization of Tax Affairs (SOTA), a juridical agency
affiliated with the Ministry of Economic Affairs and Finance, and the main body
responsible for taxation (and for enacting measures related to tax
requirements), recently issued a circular announcing the government’s plan to
revise the Direct Taxes Act, Iran’s principal tax law, to achieve the goals
prescribed by the Law on the Fourth Economic, Social, and Cultural Development
Plan of the Islamic Republic of Iran.
Tax regulations in that law require the government to increase nonoil revenues so that current expenditures are fully
financed through taxes and other nonoil revenues by
March 2009, the end of the period covered by the fourth development plan. More
specifically, the quantity tables attached to the law require the government to
increase annual tax revenues, as a whole, by 250 percent.
The social provisions of the plan also assign another duty to the
government. They state that taxation should be used as an instrument for
redistributing income, and therefore, for achieving the goals of social justice
and alleviating economic inequities.
The circular in question specified some detailed objectives, including not
only the goals prescribed by the fourth development plan but also several other
objectives that, according to SOTA, will further the achievement of those
goals. Those additional objectives include, among others:
- the
introduction of new tax sources;
- more
efficient methods for tracking taxpayers and their actual income;
- incentives
to encourage voluntary compliance by taxpayers;
- measures
to reduce the incidence of, and motives for, tax evasion;
- more
severe legal sanctions for tax law violations;
- the
cancellation of unnecessary tax exemptions;
- the
simplification of tax regulations to make them easier to understand and
execute, and to reduce the likelihood of differing interpretations;
- more
effective legal provisions on taxpayer documentation and reporting requirements;
- the elimination of unnecessary formalities and a
shortening of the deadlines for the finalization and payment of taxes;
- more
effective prosecution of tax offenders in judicial forums; and
- the cancellation of all tax regulations that are
repeated in different, nontax regulations, and the inclusion of the applicable regulations
in a single tax code.
The previous revision of the tax law addressed mainly economic objectives,
the most important of which was to encourage economic activities in the private
sector. In that connection, there were two amendments in particular: an
immediate reduction of the corporation tax, from 64 percent to 25 percent (the
dividends of shareholders are fully tax-exempt), and a very
favorable tax abatement for major construction companies and the owners of
building complexes. The only tax imposed on them is a small percentage of the
price of each unit at the time of transfer. No other taxes, including income
tax, are levied on those entities. Even the rental income from units in
building complexes is tax-exempt (except in very rare cases). Now the law must
move in a new direction: insuring more revenue and securing social justice.
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Abstract of Persian Articles
Editorial
With the
present issue of Maliyat journal, this publication enters a new phase of its lilfe. The editorial deals with this subject and explains
how we could manage to renew our journalistic work and what course of action
will be taken in the future.
Tax and fourth development
plan
The law on
fourth development plan was approved by the parliament few months ago. The
author elaborates on tax provisions of the plan especially those establishing
new strategies in this field, namely the necessity of raising the share of
taxation, instead of oil revenue, in financing government expenditures and
using the tax as means of redistribution of income, and thus securing social
justice and stability. A similar article is provided in the English section.
Forthcoming amendment of
the tax law
The
parliament and the government have recently announced their intention for
revising the Direct Taxes Act. As a step towards this purpose, all competent
persons and institutions are invited to propose their views in this regard.
Maliyat journal has come forward with a number of proposals, one of which is
contained in this article. The subject dealt with here is the flat rate of
corporate taxation. Since the Iranian tax law has no imputation system, flat
rate would impose equal degree of burden on large and small companies, and
consequently of reach and poor shareholders. This weakness of the law is
tackled by the author and graduate rates of taxation are proposed
as a way of rectification.
Education
and taxation
The importance of education of tax staff is emphasized in this article. The
author criticizes the current type of education given to taxmen and recommends
direct embarking of tax organization on this duty, which is presently handled
by a separate institution.
Taxpayers'
charter of rights and obligations
Iranian tax law, as in many other countries, does not have a separate
charter of taxpayers' rights and obligations. Provisions regarding rights and
obligations of taxpayers are scattered throughout the tax law. The author
elaborates on this theme and advocates the idea of adoption such separate and
explicit charter. The model charter developed by the OECD Committee of
Financial Affairs has been introduced as a sample and general guidance in this
respect.
Draft
of the law concerning tax advocates
Tax advisors and consultants practice their profession freely without being
recognized as such by the law or being organized and supervised under a legal
enactment. Few months ago draft of a law was proposed by the Finance Ministry
to bring tax practitioners under a statutory umbrella. But, the parliament
rejected for certain reasons, which are criticized in this article and the
author defends the idea of creating a legal society for tax lawyers.
Compliance
of taxmen with the law
The subject studied under this article is the degree of compliance of tax
officials with relevant laws, especially those related to rights of taxpayers.
The study is based of a circular letter issued recently by tax organization on
the same subject.
The End
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