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

 

Maliyat journal (Iranian Tax Review)

No. 38, summer 2005

 

 

IN THE NAME OF ALLAH

 

FROM THE PRESIDENT

 

We would like to begin this issue of the journal with the subject of new amendments that are going to be effected in the tax law. The need for the amendment has been emphasized by the law of the fourth development plan with the aim of achieving two specific purposes. First, to raise the level of tax revenue, so that it would become a substitute for oil revenue in financing the government's current expenditures. Second, the amendment should be based on tax policies aiming at redistribution of income, in order that social justice and stability and alleviation of economic and social inequity could be achieved.

Based on those general directives, tax administration has announced some detailed objectives that would support the realization of the aforesaid goals. These detailed objectives include, inter alia, the introduction of new tax sources, more efficient ways of assessment of taxpayers' actual income, providing incentives for voluntary compliance of taxpayers, reducing the causes and cases of tax evasion, elimination of unnecessary tax exemptions, simplification of tax regulations, more effective prosecution of tax offenders and the like.

Those rulings and directives will, in all probability, be taken into account in the new amendment. Beside that, we would offer certain issues and considerations in this regard and hope that they would also draw attention of the authorities embarking on this significant measure. Our main suggestion relates to a subject that demands foresight and ability to go along with future developments. What we have in mind is the domain of electronic commerce; a phenomenon that is expanding with an unprecedented speed as a result of continuous progress of electronics and information technology.

Repercussions of e-commerce on taxation capacity of developed countries have already raised concern of their governments and made them come together to fine solutions for challenges of new circumstances. The issue has not become so serious for our country so far, but it would, no doubt, become so in the future and we ought to have real preparedness for meeting similar challenges in due time. One of the elements of such preparedness is the study of legal aspects of the electronic commerce. Since the tax law is going to be amended in the near future, this specific subject should also be taken into consideration while deciding on the new amendment.

The next matter concerns the cases of discord among some parts of the tax law. For instance, there are cases where an article of the law refers to a ruling supposed to be included in another article, while the latter article is wholly deleted or changed in a way that is incompatible with the intention of the former one. The same is true in case of carelessness shown in composition of phrases and words of the law that may lead to illogical conclusions.  Since the tax administration has in mind to simplify the tax law and remove the possibility of contradicting interpretations, such kinds of discord among various parts of the law should also be taken into account and rectified accordingly.

The matters referred to above have also been dealt with by this journal. Certain articles in this, and also in previous, issue are devoted to the same purpose; a task that will continue in the future as well.

 

Dr. Aliakbar Arabmazar

 

 

 

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

 

 

Tax Regulations of the Budget Law

 

By Mohammad Tavakkol

 

Iranian budget law of the year 1384 (21 March 2005 – 20 March 2006) passed the parliament and was published in the Official Gazette. The budget amounts to an unprecedented figure of 1.590 quadrillion Rials (one US $ = 9000 Iranian Rials approximately). This huge amount displays the growth of public sector on the one hand and effects of inflation on the other hand. Main part  of that amount (more than 1.055 quadrillion Rials) relates to the companies and other juridical persons affiliated with the government ministries and institutions. The remaining amount (537 trillion Rials) is the budget of the government in its proper meaning that is the ministries and other government organizations. It is worth mentioning that a considerable number of state-owned companies are unprofitable, so that each year considerable amounts of budgetary sources are to be allocated for offsetting their losses. That's why the idea of privatization of public sector companies is highly supported everywhere and legal and administrative actions are vastly taken in this regard, though not very successful so far.

As far as tax provisions of the budget are concerned, it seems suitable to examine not only the regulations that were finally included in the law, but also those that were disapproved of by the parliament.

 

A. Approved provisions

 

In this group the most important ones are as follows:

 

1) More tax burden on state-owned corporations

Some public sector corporations (including banks) that are supposed to be profitable are listed in attachment No. 2 of the budget (with certain amounts of net profits and applicable taxes attributed to them.) Now, paragraphs "d" and "e" of the Note 1 of the budget law have obligated the said corporations to make the following payments during the budget year:

a) Income tax of their operations during the preceding year (Iranian year 1383). This is a normal payment which all taxable companies have to make according o the relevant regulations of the tax law, but the companies in question have to bear, according to the budget law, the following additional burdens as well:

b) income tax applicable to their current year operations, as estimated in relevant part of the budget. This estimated tax is to be paid in 12 monthly installments (till the final settlement in next year).

c) an additional tax equal to 30% of net income of the preceding year (1383) as declared by taxpayers.

 

 

2. Higher gasoline tax

Rate of tax on gasoline has been raised from 20% to 30% for the budget year. Base of tax is consumption price of gasoline (paragraph "g" of the Note 1).

 

3. Budgetary support for Customs Department

Paragraph "h" of note 1 of the budget law has allocated funds with a view to improve capabilities and resources of this revenue collecting organization. The funds are to be spent for purposes such as education, giving incentive for better performance, equipping remote offices of the department with electronic and other modern facilities, encouraging employees to work in deprived regions, and the like.

 

B. Disapproved provisions

 

The following tax regulations of the draft of the budget law faced objections in the parliament:

 

1. Higher tax rates for transfer of real property and good will

According to the article 59 of the Direct Taxes Act, transfer of real property and good will is subject to taxation at rates of 5% and 2% respectively. It had been suggested in the draft of budget law (paragraph "l" of the note 1) to increase those rates to 6% in case of real property and 4% with regard to good will. Though the proposal had to be effected only for one year, it was rejected.

 

2. Tax rate increase in case of transfer of companies' shares

According to article 143 of the Direct Taxes Act, each transfer of companies' shares through the stock market is taxable at flat rate of 0.5% applicable to the sale value of shares. The same transaction shall be taxed at flat rate of 4% of the face value of securities if transfer takes place outside the stock market.

According to the draft of the budget law those rates had to be raised to 1% and 6% respectively. The latter rate of 6% had to be applicable if the time elapsed from the date of establishment of the relevant company was not more than five years at the date of transaction. Otherwise, one percent had to be added to that rate for each year of extra life of the company, but maximum rate applicable in this way intended to be 15%. This part of the draft was also left unapproved.

 

3. A green tax

Note 13 of the draft of the budget law had dealt with a chronic environmental issue, that is the problem of used, and in many cases worn out cars moving along the big cities' streets. One of remedies adopted by the draft had been the imposition of an extra duty on such old vehicles. The duty in question had to be equal to the normal annual duty applicable in different amounts to various types of cars. The extra duty would have been applied to vehicles with a life not exceeding 10 years. It should have been doubled, tripled and so on for each additional 10 years of age of vehicles. In case of approval, this could be the first environmental tax applicable in the country, but it was refused and cancelled.

 

4. Budgetary support for the tax organization

Unlikely to the case of Customs Department, a similar support suggested by the draft of the budget in connection with the Organization of Tax Affairs was rejected by the parliament. Paragraph "i" of the note 1 of the draft had allocated a special fund (400 billion Rials at maximum) to that organization with a view to be spent for improvement of productivity, evolution of tax system, education, purchase of buildings and equipment and other similar purposes.

 

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

 

 

 

Value added tax in Iran

 

By M.T. Hamadani

 

 

 

It is more than fifteen years that the idea of introducing value added tax is nourished and followed up by the government. The plan was first initiated by the Finance Ministry and went through a long course of drafting and redrafting, comments, criticisms and so on. The final draft prepared by that ministry was at last approved by the Council of Ministers in September 2002 and a month later was sent by the President to the parliament (Islamic Consultative Assembly) to be enacted as a law. It was referred to internal committees of the parliament for primary study and consideration. Deliberation at this stage continued for nearly two and a half years and eventually the outcome was sent back (in last April) to the plenary session of the parliament for another round of deliberation.

 

Important features of the draft in question are as follows:

1. Supply of goods and provision of services within Iran, as well as the importation and exportation of the same, shall be subject to value added tax. Persons engaged in such kinds of businesses shall be considered as taxpayers under the law.

 

2. Every solar year will be divided into six tax periods of two months each. Taxpayers shall be required to submit, within 15 days from the expiry of each tax period, tax return of that period and remit the applicable taxes to relevant tax offices.

 

3. Article 12 enumerates a vast range of goods and services that will be exempt from taxation. They include, inter alia, the following categories:

- unprocessed agricultural products;

 - flour, bread, meat, sugar, rice, cereals, milk and some other foodstuffs;

- paper for printing, writing and newspapers;

- immovable properties;

- medicine and medical services;

- services subject to tax on salary income

-  services rendered by banks and non-bank credit and financial institutions;

- transport services;

- books and printed media; and

- education and research services.

 

4. Beside that, the article 22 authorizes the Finance Ministry to exempt some businesses from the duties imposed by the law. Decision so taken, should be approved by the Council of Ministers and there would be no need for approval of the parliament.

 

5.  Taxpayers are required to apply for registration as such in accordance with the arrangements to be determined by the tax organization. When supplying goods or services subject to taxation, they should issue invoices according to the instruction of the same organization. The taxpayers are also required to use books of accounts, cash register machines or other means and methods of keeping accounts, which will be determined by the tax organization. As it was mentioned earlier, they have to prepare and submit tax returns six times a year.

 

6. The base of computation of the tax will be the price of goods or services as recorded on  invoices. If no invoices are provided by the taxpayer, the prevalent price of the goods and services shall be taken into account. In case of importation the CIF value of the goods plus relevant customs duties and fees will constitute the basis of computation of the tax. The rate of value added tax shall be 7 percent in all cases.

 

7. The taxpayers refraining to comply with the duties prescribed under the law, or committing an offence, shall be required to pay – in addition to the relevant tax – a fine up to twice of the amount of the applicable tax at maximum. Payment of the tax after the prescribed time limit shall result in application of a late payment fine equal to maximum bank rate for facilities granted by banks to the service sector plus one percent.

 

7. The State Organization of Tax Affairs shall be responsible for management of all affairs related to value added tax and enforcement of the law in question. It has been authorized under the draft to take necessary actions in the field of organizational and other aspects of execution of the VAT law.

 

Conclusion

Some points are worthy of mentioning in respect of the VAT program in Iran:

a) The draft described above will, in all probability, be approved by the parliament during the current year, unless unexpected obstacles would arise.

 

b) But the enforcement of the law would presumably be postponed for one, or even more, years. The logic is obvious, and that pertains to lack of preparedness for execution of such a tremendous program. As it was mentioned above, the draft has exempted a lot of goods and services from the tax and also has provided for exemption of unlimited number of businesses from the law. In all likelihood retailers and majority of service providers shall be exempted in this way. It would mean leaving aside a considerable number of businesses and services from VAT and restricting its scope to wholesalers, plants and limited number of services. But even in such conditions the introduction of VAT to tax system would mean a positive step forward.

 

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

 

 

General policies adopted in connection with

 

the article 44 of the Constitution

 

 

According to article 44 of the Iranian constitution three sectors are recognized for the economy of the country: public, private and cooperative. Meanwhile, it has been envisaged under the first paragraph of the article 110 of the same law that the High leadership will have power and right to delineate general policies of the country after consultation with the Expediency Council. Such determination of policies has taken place recently in respect of  article 44 of the constitution (full text of the article 44 is given at the end of this section). Taking into consideration the impact of these policies on all aspects of the nation's economic life, including taxation, an English translation of them is given below:

 

 

"General policies of the article 44 of the Constitution of the Islamic Republic of Iran are hereby determined with due regard to the last part of the same article and provisions of the article 43 of the Constitution, so that to achieve the following purposes

- Accelerating the growth of national economy;

- Extension of ownership at the level of general public with the aim of securing social justice;

- Advancement of efficiency of economic enterprises and productivity of material, human and technological resources;

- Enhancement of competitiveness of the national economy;

- Increasing the share of private and cooperative sectors in the national economy;

- Reducing the financial and managerial burden of the government in connection with the undertaking of economic activities;

- Raising the overall level of employment;

- Encouraging all groups of people to save and invest and also to improve the family income;

 

A – General policies regarding the development of non-state sectors and prevention of enlargement of the government sector

 

1. The government is prohibited from embarking on new economic activities beyond the scope determined under the first part of article 44 of the Constitution and shall be obligated to transfer to cooperative, private and non-state public sectors – up to the end of the term of the fourth  development plan at maximum – any kind of activities (including continuance of previous activities and exploitation thereof) that are not specified under the first part of the article 44 of the Constitution, so that its activities are reduced not less than 20% per annum.

Taking into account the responsibility of the regime for expedient administration of the state, the government is permitted to continue, or to start, urgent activities beyond the scope of the titles specified under the first part of the article 44 of the Constitution, after such activities are proposed by the Council of Ministers and approved by the Islamic Consultative Assembly.

Administration and production of military, disciplinary and intelligence products of the armed and intelligence forces that are of confidential nature shall be excepted from the rule of this section.

2. Investment in, and ownership and management of, the fields mentioned in the first part of the article 44 of the Constitution shall  be allowed for institutions and foundations of the public non-state sector and also for private and cooperative sectors, as is described below:

2-1. Major industries, mother industries (including major industries of oil and gas downstream operations) and major mines (including oil and gas).

2-2. Foreign trade activities within the frame of commercial and foreign exchange policies of the country.

2-3. Banking by public non-state institutions and by public joint-stock cooperative companies and joint-stock corporations, provided a ceiling for each shareholder's share is determined by the law.

2-4. Insurance.

2-5. Provision of energy, including production and importation of electricity for internal consumption and also for exportation.

2-6. All postal and communication affairs, except for main networks of communication, provision of frequencies, and principal systems of separation, exchange and distribution of base postal services.

2-7. Roads and railroads.

2-8. Aviation (air transportation) and navigation (sea carriage).

The optimum share of state and non-state sectors with regard to activities of the first part of the article 44 of the Constitution shall be determined by due regard to protection of sovereignty of the state, independence of the country, social justice and economic growth and development.

 

B. General policies of cooperative sector

1. An increase of 25% in the share of cooperative sector in the economy up to the end of the term of the fifth development plan.

2. Taking effective measures by the government for establishment of cooperatives for the unemployed with the aim of creating jobs.

3. Supporting the establishment and development of cooperatives by the government through methods such as tax abatement, granting protective credit facilities via all financial institutions and refraining from collecting any extra payments from cooperatives in comparison with the private sector.

4. Removal of restrictions for participation of cooperatives in all economic scenes including banking and insurance.

5. Establishment of a cooperation development bank with  government capital and with the aim of  raising the share of cooperative sector in the economy of the country.

6. Government supporting for access of cooperatives to final markets and providing fair and comprehensive information to that sector.

7. Exercising  sovereign rights by the government through policy making and supervision over execution of enacted laws and refraining from interference in executive and managerial affairs of cooperatives.

8. Promotion of technical and professional education and other necessary supports for raising the efficiency and ability of cooperatives.

9. Flexibility and diversity in methods of capital raising and distribution of shares in cooperative sector and taking necessary measures so that in addition to ordinary cooperatives, establishment of new types of cooperatives in the form of public joint-stock companies with limitation of ownership of each shareholder up to a legally determined ceiling would become possible.

10. Supporting the cooperatives by the government in proportion with the number of their members.

11. Establishment of all-inclusive national cooperatives to cover first three tenths of the population for the purpose of removing the poverty.

 

C. General policies regarding development of non-state sectors through transfer of government activities and  enterprises

 

(General policies of this section will be determined and announced afterwards)

 

D. General policies of transfers

 

1. Requirements of transfer

1-1. Enabling the private and cooperative sectors to undertake extensive activities and manage major economic companies.

1-2. Post-conveyance control and support by relevant authorities for realization of purposes of transfers.

1-3. Using valid and healthy methods of transfer with emphasis on stock market, strengthening the transfer organization, establishment of a transparent system for provision of information, creating equal opportunities for everybody, taking benefit from gradual offering of shares of major companies in stock market to arrive at base price of shares.

1-4. Disinterestedness of those engaged in transfers and also of the government authorities involved in decision making with regard to transfers.

1-5. Observance of general policies of cooperative sector in connection to transfers.

 

2. Usage of incomes derived from transfers

The funds derived from transfer of shares of government enterprises shall be remitted to a special account with the general treasury and shall be spent within the frame of approved plans and budgets and as is described below:

2-1. Giving rise to self reliance among depressed and deprived families and consolidating social security.

2-2. Allocation of 30% of the incomes derived from transfers to all-inclusive national cooperatives with the aim of removal of poverty.

2-3. Construction of economic infrastructure while giving priority to less developed regions.

2-4. Granting facilities (managed funds) for reinforcement of cooperatives, renovation and improvement of non-state economic enterprises while giving priority to transferred enterprises, and also for investment of non-government sectors in development of less developed regions.

2-5. Participation of state-owned companies with non-state sectors – up to a ceiling of 49% - for the purpose of economic development of less developed areas.

2-6. Completion of semi-finished projects of state companies by due regard to section "A" of these policies.

 

E. General policies in connection with sovereignty exercising and refraining from monopoly

1. Continuation of sovereignty exercising by the government, after the coming forward of non-state sectors, through policy making, enforcement of laws and regulations and controlling, especially with regard to observance of religious and legal criteria, in non-state banks.

2. Prevention of influence and domination of aliens over the national economy.

3. Preventing non-government economic enterprises from establishing monopoly through preparation and approval of laws and regulations."

 

kkkkk

 

( Full text of the article 44 is as follows:

(1) The economy of the Islamic Republic of Iran is to consist of three sectors: state, cooperative, and private, and is to be based on systematic and sound planning.
(2) The state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams, and large-scale irrigation networks, radio and television, post, telegraph and telephone services, aviation, shipping, roads, railroads and the like; all these will be publicly owned and administered by the State.

(3) The cooperative sector is to include cooperative companies and enterprises concerned with production and distribution, in urban and rural areas, in accordance with Islamic criteria.

(4) The private sector consists of those activities concerned with agriculture, animal husbandry, industry, trade, and services that supplement the economic activities of the state and cooperative sectors.

(5) Ownership in each of these three sectors is protected by the laws of the Islamic Republic, in so far as this ownership is in conformity with the other articles of this chapter, does not go beyond the bounds of Islamic law, contributes to the economic growth and progress of the country and does not harm society.

(6) The scope of each of these sectors as well as the regulations and conditions governing their operation, will be specified by law.)

 

The End