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Maliyat journal (Iranian Tax Review)
No. 40, spring 2006
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
The standing of human resources in administration of tax affairs
is very high and eminent. All other means and resources would fail to produce
desired effects, when combined with inefficiency of those who must exploit them
for achieving the goals of the organization. As a significant tool we may refer
to tax laws, which are of great importance for realization of the goals
embodied in economic and financial policies of the government. But in the final
analysis, it is the personnel that fulfill the most vital task of understanding
and proper implementation of the law. Even the best and progressive laws would
not succeed, unless they are accompanied by efficient and appropriate
performance of employees.
Therefore, the education of tax staff with the aim of
raising the level of their efficiency and knowledge must be regarded a vital
function and important step towards the improvement of the organization and
increasing its productivity. This is an obvious fact and nobody can deny the
importance of education for any organization. But the system and method of
education are other matters that are to be examined and scrutinized in a
careful way. As regards the education of tax personnel, the overall results of
educational programs during the recent years have not been very satisfactory,
and a basic change seems to be advisable in this regard.
A fundamental point is the education of the staff in a
way to prepare them for actual work. The current methods are mostly based on
theoretical teaching, and they must be completed by including the actualities
of the arena of work as well. The person who receives education should be
prepared in a way to be in some degrees aware of, and familiar with, the actual
issues of his profession and be able (after finishing the course of studies) to
combine the theory with practice of handling daily affairs and confronting with
challenges of his or her job.
Let us proceed in the same connection to the subject of
teaching the text of the tax law. Every branch of law has obviously its own
theoretical topics. These types of subjects should certainly be taught properly
and in this field more emphasis must be placed on legal principles governing
the domain of taxation. Beside that, in the course of execution of the law many
cases of ambiguity arise, in respect of which interpretations are given by
competent forums. These precedents should also be taught and analyzed while
teaching the relevant parts of the tax law. The purpose is to make students
familiar with practical aspects of tax issues and the way in which the solving
of uncertainties of the law takes place.
The issue of taxpayers' rights deserves special
attention. Various aspects of this subject should be carefully analyzed and
explained, so that to be firmly committed to memories and observed in due
course. Respect for these rights creates an atmosphere of understanding that is
everywhere regarded as a prerequisite for voluntary compliance of taxpayers.
Acquiring information and knowledge on tax systems of the
world and international tax issues in general, must also be taken into account.
This part of education includes comparative studies on foreign tax laws and
works of international institutions dealing with tax subjects.
The new phenomena that have attracted the views of
authorities and organizations in recent years, are also worthy of attention. As
a remarkable example we can name the electronic commerce. It has drawn the
attention, as well as concern, of many tax circles and caused them to initiate
vast studies and deliberations in this field. The electronic commerce by its
nature differs considerably from traditional trade, and therefore has created
complications in application of ordinary principles and rules of taxation.
Hence, it would be advisable to embark on detail study of characteristics and
problems of electronic commerce and thus become prepared to face its challenges
in the near future.
Reference should also be made to knowledge of ongoing
developments in the arena of domestic and international trade and business.
Information technology is also an important topic that deserves to be taken
into consideration. In respect of all these topics and elements, we must pay
attention to the factor of time and arrange the agenda in order of priorities.
This journal being aware of its mission will do its best
to provide the readership with appropriate studies and articles regarding the
aforementioned subjects.
Dr. Aliakbar Arabmazar
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Tax Treaties and Source Taxation of
Developing Countries
By Dr. Mohammad Tavakkol
Tax treaties
are concluded between states with the aim of avoiding the occurrence of double
taxation with regard to various transactions and activities. This has always
been the principal goal of tax treaties. In the course of time other purposes
such as prevention of tax evasion and exchange of information were also taken
into account.
Furthermore,
tax treaties are means of determining the share of each of contracting states
from the relevant applicable taxes. This apportionment takes place by
determining the party who has right to taxation. In rare cases shares are
allocated to both parties. This specific task of double taxation treaties is
not reflected in the title of treaties, but practically is of great importance
and should have been earnestly taken into consideration by those in the western
world who devised the formulae of treaties. They may have had in mind the
interests of developed nations and arranged the mechanism of treaties in a way
to reduce the share of developing countries in favor of their own group.
That was a
guess of course and the author is not aware of such an idea being suggested in
the course of negotiations leading to preparation of current treaty models. The
most well-known model of this kind is the one created by the Organization of
Economic Cooperation and Development (OECD), on basis of which majority of
double-taxation treaties are drawn. Irrespective of the guess referred to
above, and regardless of whether such contradiction of interest in connection
with tax shares have had been set forth in the course of preparatory
negotiations or not, one can find enough evidence in the model treaty of the
OECD, as well as in most of double taxation treaties, that would indicate the
existence of the same treatment with regard to sharing of taxes. Under these
treaties a lesser share is granted to developing countries in comparison with
share of their counterparts from the industrialized world.
Before
reviewing the text of tax treaties and discussing about those indications, a
fact must be pointed out. Under the present circumstances, the relative value
of goods and services exported from developed to developing countries is much
higher than the price of exportations taking place in a reverse direction. As
far as oil is concerned, the fact is that this vital commodity of developing
nations usually belongs to governments and no taxes are imposed on states in
connection with the oil, and thus no sharing of taxes would take place.
International trade on oil is subject to special rules and is carried out in a
wholly different atmosphere. Leaving aside the oil, majority of other
commodities and goods exported from developing to developed countries are
relatively much cheaper than exportations of industrialized nations and
occupies a very inferior position in comparison with exports of developed
countries.
Now let us
see how the model tax treaty has divided taxes and what effects it would have
on overall results with regard to each group of countries. Articles 7 and 12 of
the OECD model tax treaty are more relevant to our discussion.
Article 7
Article 7
concerns the business profits, a very vast area of economic activities which
encompasses all types of commerce, and as far as tax treaties are concerned,
international trade and exportation and importation. The principal rule of the article
is the following one:
"The profits of an enterprise of a
So, if the
goods and services are exported by a company of an industrialized country to a
purchaser residing in a developing country, any taxes arising from it will go
to the treasury of the developed state. Nothing will be given to the government
of the country in which the purchaser resides. This unfair situation occurs,
while the very income on which the tax applies has come from the importing
country. It might be argued that the international trade is a two way channel
and exportation is not limited to industrialized nations. But as we said
earlier, by leaving aside the crude oil, value of other commodities and goods
exported from developing to developed parts of the world is negligible when
compared with the products and services exported from developed to developing
countries. Overall result of this unequal situation would be detrimental for
developing nations as far as tax sharing is concerned.
Next
criticism may come in connection with the concept of permanent establishment.
The term permanent establishment means a fixed place of business through which
the business of an enterprise is wholly or partly carried out. A branch, an
office, a factory, a workshop, a mine, an oil or gas well, a building site and
similar places are examples of permanent establishment. According to the same
article7 of the treaty, in case of existence of a permanent establishment in
the territory of a contracting state through which the business of residents of
another party of the agreement is carried out, then the general rule referred
to above will not apply and profits of relevant enterprise may be taxed in
other state (where the permanent establishment is located), but only so much of
the profits as is attributable to that permanent establishment.
In response
we would say:
1. Such
permanent establishments do not always exist; especially they are rare when
exportation of goods is concerned.
2. Even in
case of existence of permanent establishment, only a part of profits that can
be attributed to it would be subject to taxation of the host country.
3. The
subject of attribution of profits to permanent establishments is not always an
easy and straight matter, still not to say that the model treaty itself
provides lot of limitations and stipulations for such kind of attribution of
profits to permanent establishments.
Article 12
Article 12 of
double taxation treaties relates to royalties. This term is defined under the
same article to mean payments of any kind received as consideration for the use
of, or the right to use, any copyright, patent, trade mark, design, plan,
secret formulae and the like.
No need to
say that most of these items are invented and prepared in developed countries
and owned by enterprises of industrialized nations. It is also a well known
fact that developing countries are desperately in need for those patents,
formulae, etc. Meanwhile, such items are in most cases quite expensive and
total income of owners would amount to high figures. The applicable taxes would
consequently be very considerable. As regards the importers, most of them are
from developing world. The cases where any such items are prepared and
transported from developing to developed countries are very rare.
In spite of
that, the taxes applicable to such kind of transactions would go to the
countries where the receivers of royalties reside. The article 12 of the model
tax treaty reads:
"Royalties
arising in a
The unjust
dealing in this case is more serious than in case of the article 7. Therefore,
the Organization of the United Nations took notice of it and introduced some
modification into the text of article 12 in order to mitigate its harshness.
The general rule of the OECD convention regarding taxation of royalties is
repeated at the beginning of the article 12 of the UN model convention, but a
new paragraph has been added to the latter article which provides:
"However,
such royalties may also be taxed in the Contracting State in which they arise
and according to the laws of that State, but if the recipient is the beneficial
owner of the royalties, the tax so charged shall not exceed … per cent (the
percentage is to be established through bilateral negotiations) of the gross
amount of the royalties. The competent authorities of the Contracting States
shall by mutual agreement settle the mode of application of this limitation"
The adjustment so introduced by the UN convention is well received by many
countries, including
1. The word "however" at the beginning of the paragraph 2,
article 12 of the UN convention indicates that the main and principal rule is
the same as mentioned at the commencement of that article, namely the belonging
of applicable taxes to the exporting countries of copyrights, patents, etc.
2. What has distinguished the UN model from the OECD's is the specification
of the right of parties to enter in a different agreement for division of the
tax shares. No need to say that even without that the door is open to
contracting parties to agree between themselves on any method or matter.
3. Most of the tax treaties adopting the idea of the said paragraph 2,
article 12, have almost repeated the wording of the UN model. In other words,
they have reiterated that it is possible for the states to agree on sharing of
the applicable taxes. But in some treaties (may be few of them) the issue has
been reflected in a distinguished manner. One can refer to tax treaty of 24
August 1980 of
"Each of the contracting states has the right to tax the royalties
received by the residents of any of them from the sources of the other
contracting state" (translated
from Arabic version of the treaty)
Thus, the agreement has altered the first and most important rule of the
article 12 and based it on a new foundation, namely absolute equality of
parties. Under an agreement of this kind, no priority is given to any state and
even the restriction of the paragraph 2, article 12 of the UN model (to which
we shall refer below) shall not apply whatsoever.
4. The said restriction pertains to the last part of the paragraph 2,
article 12 of the UN convention. Under that paragraph, if the receiver of the
royalty is beneficial owner of it, the tax imposed by the importing country
should not exceed a percentage of gross amount of the
royalty. Some explanations seem to be needed in this connection:
a) The term "beneficial owner" is a concept of the common law and
denotes the person who ultimately enjoys the benefits of an asset, as opposed
to the legal owner, who may be only a nominee. The beneficial and legal
ownership of an asset may be vested in different persons or in the same person.
No need to say that such division of ownership is an exception and in majority
of cases both kinds of ownership belong to one and the same person, especially
in connection with parties of tax treaties who are from around the world and
not just from the common law countries. Even in respect of the latter countries
the said separation of ownership is not a general rule and would take place in
rare cases.
So, in majority of occasions the receiver of royalty will be its beneficial
owner as well. As a result, the restriction imposed by paragraph 2, article 12
of the UN model will in most cases apply. It means that the tax share of
developing countries would be limited to a percentage of the amount of
royalties.
b) Hence, the modification so applied in favor of importing countries is a
restricted one, while no limitation is envisaged in case of technology
exporting countries. The right of these countries to receive royalty taxation is
recognized as a principle and besides, no limitation is imposed on them with
regard to tax rates. It is up to them to decide on rates and other aspects of
their taxation.
c) As it was mentioned earlier, the
ceiling of tax share of importing countries is to be decided by concerned
parties and will depend on their weight, power and skills during negotiations.
In case of
5. Based on all that was said above, we may come to the conclusion that the
article 12 of the UN convention has not yet introduced an equal treatment,
though it contains certain improvement in comparison with the OECD model.
6. Meanwhile, this fact must not be overlooked that the credit for the said
relative improvement goes to the UN model only, and no changes of this kind are
happened to the OECD convention. There, everything has remained unchanged and
taxation of royalties is a privilege of technology exporting countries as
before. The reason is obvious. OECD is an organization of industrialized and
developed nations and only a few developing countries are included therein.
A suggestion
The last point may be the question of how the issue can be tackled and what
measures might be taken to ameliorate the situation. According to the author,
the first step is to change the wording of the first paragraph of the article
12 and to substitute it with a sentence like that of the
At the end, let us turn to the subject of internal relations of developing
countries in connection with the same subject of tax sharing. First, a short
account will be given concerning the manner of handling the issue within the
European Union, and then an aspect of the same matter will be reviewed in
respect of relations between the US and EU.
European Union
The EU has always tried to establish a uniform tax regime among its
members. For that purpose, it promulgated directives and regulations that are
binding on member states. As regards the value added tax, the Sixth VAT
directive is of special importance. The theme of jurisdiction is one of the
numerous topics dealt with by the said directive. If suppliers and consumers
reside in the same country, general source rules are applied and thus taxation
at the place of consumption is assured. With respect to cross-boarder supplies,
the principle of "country of destination" is applied.
Bases on that principle, the importing country is entitled to receive the tax.
Such is the case when the question relates to relationship between European
states. But when the issue pertains to relations between the same states with
developing nations, a procedure like that of the OECD convention is followed
and the right of taxation is given to developed partners.
Ironically,
the very tax treaty mechanism that has been designed to limit the source
taxation of developing countries, turned against its European inventors in
their relationship with the
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Tax News
Professional law associations
subject to corporation tax
Iranian commercial law provides for establishment
of legal entities by registration in a department called the General
Directorate of Registration of Companies. Right of establishing legal
personality is granted not only to people having commercial purposes, but also
to members of different professions, charity institutions, etc. When
registered, the entities will be denominated as legal (or juridical) persons.
Meanwhile, under the tax law all legal persons are subject to corporate tax.
Therefore, the tax administration has declared in a recent circular letter that
lawyers and law associations, as well as other natural persons, who are so
registered, will become subject to the regulations of the Direct Taxes Act
regarding taxation of legal persons. That means bearing the burden of keeping
statutory books and records, drawing and submission of tax return, profit and
loss account and other relevant responsibilities. A flat rate of 25% is
applicable to legal persons.
At-source taxation not applicable to
vehicles operated by the owners
Under the article 104 of the Direct
Taxes Act, the government organizations and private companies are required to
withhold 5% of any payment they make as consideration for a series of services
listed in the same article. The services enumerated by the law include, inter alia, the transportation, which is the subject matter of a
new circular letter issued from the tax administration. It pertains to cases
where transportation services are rendered by vehicles operated by the owners
themselves The payments made under such conditions
shall not be subject to the said withholding tax. Thus the circular letter
prevents numerous small payments for transportation to be subjected to
withholding tax and requirement of keeping tax records for each case. But the
circular restricts the said rule to cases where no agreement is concluded
between parties for provision of relevant services; otherwise the withholding
tax of 5% should take place.
Ministerial directive on the article
251 bis
The article 251 bis
of the Direct Taxes Act provides for an extraordinary forum to examine last
resort complaints of taxpayers. According to that article, in case of final
taxes that can not be reviewed by any other forum, the taxpayer may submit a
complaint to the effect that the tax is unfair and apply for reconsideration of
the case. The authority for deciding whether such complaints are capable of
being examined or not, is vested with the Minister of Economic Affairs and
Finance. In case of deciding positively, the case shall be referred to a
special board composed of three members, whom the Minister will nominate
personally. The verdict of the board shall be conclusive and enforceable when
rendered by the majority.
The Minister has recently issued a
special directive for due performance of the said procedure. Main points of the
directive are as follows:
a) The complaint must be based on
the claim of unfairness of the determined tax and should be accompanied by
enough evidence and documents, so that to seem, prima facie, to be valid and
not baseless.
b) The case must have gone through
normal channels of examination and settlement, so that not being reviewable in
any other ordinary forum.
c. The complaint and its attachments
shall be studied to find if it has been substantiated by enough evidence and
documents and is, prima facie, a reviewable suit. In that case the complaint
shall be referred by the Minister to the special board of three members as
described above.
A professional association for tax
consultants
The government has introduced a bill
to the parliament for setting up a professional association for tax
consultants. The term tax consultant covers all persons engaged in practice of
tax law. A similar bill had been proposed to the parliament about two years
ago, but was rejected by the legislation. So, it is the second time that the
same matter is brought in for consideration of the parliament. Presently the
tax law practitioners are not subject to specific regulations and it is up to
taxpayers to choose any person that they may find suitable to defend their case
before the tax offices and fora. Under the bill,
which consists of a single article only, the duty of tax consultants will
include giving advice to taxpayers and representing them before tax offices and
forums. Other details are left to be drafted and approved later.
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Abstract of Persian Articles
Editorial
The editorial
of this issue of the journal deals with the role of human
resources in performance of the tax administration. In this connection emphasis
has been placed on importance of education and it has been said that the
current system of education should be changed with a view to prepare efficient
employees for confronting the actual challenges of real arena of work.
Electronic Commerce
Electronic commerce is developing at a rapid pace involves real challenges
for tax administration all over the world. A series of articles regarding
various aspects of this phenomenon are provided in consecutive issues of this journal.
The subject matter of the present issue is the e-cash or
electronic money, which constitutes an important case of the said challenges.
Fair tax
Nowadays vast discussions are underway in western countries regarding the
above subject. Those participating in the discussion are divided into two
groups: supporters and opponents of the flat tax system. Arguments on both
sides are mostly concentrated on the meaning of fairness. These matters are
examined in an article of the journal.
Comments on a verdict of the Court of Administrative Justice (CAJ)
The CAJ is
the only judicial forum having jurisdiction for examining
complaints on tax matters. Other fora in this field
are of administrative character. One of the verdicts of the CAG has been
analyzed in an article of the journal. The verdict relates to the task of
notaries-public in respect of a special tax and a duty that should be paid by
the owners and vendors of cars and other vehicles.
Operational Performance
The organization of Economic Cooperation and Development (OECD) has
published comparative data on aspects of tax systems of its member
countries. The subjects covered include,
inter-alia, the operational performance of member
countries. This section of OECD’S publication has been reviewed in the
present issue of the journal. The areas covered are: ratio of administrative costs to revenue
collections, relative staffing levels of revenue bodies, tax arrears and taxes
as percentage of GDP.
Tax contractors in ancient
Tax revenue
which Romans derived from conquered countries, were let out to the highest
bidders. The persons who undertook the farming of such revenues were called publicani.
The article gives an account of this historical phenomenon and describes its
details and specifications.
Tax avoidance
or tax evasion?
The author
describes a special case in which an enterprise residing in
the country «A» dispatches its personnel to the country «B» to render their
services in respect of a certain project. The enterprise may divide the salaries
of its personnel and pay a part of it in the country B and the rest in the
country A. in such cases, the employers pretend that the first payment
constitutes the whole salary of employers and would pay the tax applicable to
that portion to the country B.
Then in the
country A they would resort to loopholes of the tax law, like the
regulations granting abatement for exportation and other beneficial statutes,
and thus escape from payment of tax in that country. This single process can be
defined as tax avoidance in the country A and as tax evasion in the country B.
Inflation and adjustment mechanism
The monetary amounts of the tax law would loose their real value as the
inflationary trend goes on. A mechanism for adjustment of the law’s monetary
figures is provided under the article 175 of the Direct Taxes Act. The author
examines this topic and puts forward the question whether the time has reached
for making such type of adjustment or not.
Vehicles operated by owners
According to
the current tax law, the government agencies and all companies have to withhold
an at-source tax of 5% from their payments to providers of a series of
services, including transportation. A circular letter of the tax administration
has excluded from that at-source taxation the cases where relevant vehicles are
operated by the owners themselves. The focus of the article is on that circular
and analyzes its ruling.
The End
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