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Maliyat journal
(Iranian Tax Review)
No. 41, summer 2006
IN THE NAME
OF ALLAH
FROM THE PRESIDENT
Legal procedure for adjudication of tax litigations is a factor that can play
decisive role in regularization of the whole tax system of a country. Integrity
and soundness of arrangements governing tax proceedings would contribute to
weakening of tax-evasion tendencies among taxpayers. It would also persuade tax
officials to be more careful in their decisions with regard to tax disputes,
and thereby to be more attentive to legal rights of taxpayers. Such a course of
action would play, by its turn, an important role in better compliance of
taxpayers.
It should also be taken into account that the procedure envisaged under the
Iranian tax law for settlement of tax disputes is a unique system. In most
countries, tax cases are reviewed by two separate fora,
namely the administrative boards and judicial courts. The Iranian system is similar
to none of them, though elements of each of them are embodied in it. In
addition, the representatives of business associations, such as chamber of
commerce, cooperatives and the like, would also take part in the structure of relevant forums. This structure would be capable of
realizing most of desirable aspects of other systems, provided that due
attention is paid to its perfect actualization.
To achieve that purpose, certain measures are to be
taken by relevant authorities. Organizational works, such as appropriate
designations, effective education and the like, would obviously constitute the
first step in this connection. Beside that, the active participation of all
concerned, with a sense of responsibility, in the process of examination of
cases, will be of great significance.
By the words "all concerned" we mean the
taxpayers, members of adjudication forums and the pertinent tax officials. As
far as forums and officers are concerned, such active participation is a matter
of discharging their legal duties. But it would, at the same time, induce the
taxpayers to be more serious about their cases and base them on more viable
foundations.
The point does not concern the mere physical presence
of members of forums or relevant tax officials in sessions of the Boards for
Settlement of Tax Disputes (BSTDs). Refrainment from such physical presence is completely out
of question and would constitute breach of a legal responsibility. Our
discussion goes beyond the mere physical presence in sessions of the BSTDs. We have in mind an active and effective
participation of all involved in the proceedings. The tax officials have to
defend their assessments seriously and in a proper way. Thus, they would
protect not only the public interests, but also their own prestige as well. A
procedure of this type would also teach the officials to be more careful about
their work and refrain from baseless assessments that may cause inability at
the stage of defense before the tax fora.
We would also call the taxpayers to follow the same
approach and found their cases on acceptable legal grounds. They should do
their best to show the conformity of their statements with rulings of law and
correctness of their claims. It is worthy of mentioning at this point that a
bill has been recently submitted to the parliament with regard to tax
consultants. In case of approval, the new bill would regularize the issue of
tax practice, which in many countries is considered to be a special and
separate branch of general attorneyship.
Of much more importance is the responsibility of
members of dispute-settlement forums. Their diligence with respect to exact and
correct examination of tax cases corresponds not only to requirements of their
legal duties, but to expectations of the government and citizens as well. Our
reference is to all three members of the BSTDs. Their
attentiveness to facts of cases, rights of both parties to the dispute and due
observance of the law, would lead the tax system to integrity and
trustworthiness.
None of these matters should deter us from paying due
attention to another vital necessity. That is the prevention of tax cases and
claims to be created as far as possible. A considerable number of tax
litigations can be prevented from being initiated, if properly handled at the beginning.
Both, the tax officials and taxpayers can play important role in this regard.
The relevant regulations and procedures should also be amended with a view to
discourage the resorting of people to such kinds of litigations. This is a
subject worth of further discussion, to which we will refer in a later
occasion.
Dr. Aliakbar Arabmazar
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Tax Threshold of Salary Income
A Common Basis for other Kinds of Taxes
By: Dr. Mohammad Tavakkol
According to the article 84 of the Direct Taxes Act
(DTA) the annual income subject to salary tax is exempt from taxation up to an
amount equal to 150 times of the base minimum salary of a schedule envisaged in
the Iranian civil service regulations. This tax threshold is not limited to the
salary tax and is applicable to some other branches of taxation as well. Tax
threshold means a level of income, sales, etc. at which tax commences to be
applied. A taxpayer with income below the threshold level would be exempt from
income tax; an estate below a certain threshold value would be exempt from
inheritance tax and a trader whose sales are below the relevant threshold would
be exempt from value added tax.
The said
threshold of the article 84, DTA is not a stable and permanent basis and would
change in the course of time to compensate for inflation and upward trend of
living costs. For that purpose a special coefficient has been included in civil
service regulations that constitute the basis of determination of the said
minimum salary. Necessary changes are usually applied to this coefficient and
thereby to the base minimum salary, and then the threshold in question will
also be changed through multiplying of the new base salary by 150.
The
last increase in the above tax threshold of salary income took place recently
on basis of the decree dated April 10, 2006 of the Council of Ministers and
declared by the State Tax Organization to be observed from that date onward. As
a result, the threshold has been raised to an annual salary of 25920000 Iranian
Rials, namely 2160000 Rials
per month. So, the tax would apply to salaries that exceed this threshold.
Other
cases of application
As
we said above, the threshold in question applies to some other kinds of taxes
as well. They are as follows:
A.
Rental income
Under
the article 57, DTA, the annual taxable income of individuals with no other
sources of income (except the rental income) has been exempted from taxation up
to the level of tax exemption of salary income envisaged in the article 84 of
the same law. It means that this category of taxpayers would also take benefit
from the salary tax threshold as is applicable to salary receivers. The reason
for extension of that threshold to individuals whose only income consists of
rental is clear. They are in a situation very similar to salary receivers and
are to be dealt with in the same manner.
B.
Business income
According
to article 101, DTA, the annual taxable income of the owners of businesses
shall be exempted from taxation up to the same threshold that described in
respect of salary receivers, provided that they would submit their tax returns
on time. Here again the same rationale has justified the extension of the threshold
to business owners. A minimum amount of income is to be left untouched for
individuals and their families, whether they are employees, business owners or
persons whose only source of income is the rental of real estate. In case of
business owners the abatement in question is conditioned on submission of tax
return on time. But this requirement has been withdrawn by the budget laws of
recent years. Of course not for all business owners, but only in favor of lower
class of businessmen who at the same time constitute majority strata of these
taxpayers (see ,for instance, paragraph "f", Note 1 of the budget law
of the Iranian year 1385).
Other
taxes
In
case of other direct taxes no reference has been made to the tax threshold of salary
income. As far as inheritance tax is concerned, a special threshold (other than
that of the salary income) is applicable. The article 20, DTA provides for a
threshold of 30 million Iranian Rials in respect of
each of the first class heirs. The same shall be raised to 50 million Rials if a first class heir is under the age of twenty or
is a ward or disabled and devoid of working ability. So, the threshold is
applicable only in favor of first class heirs and other categories of heirs are
deprived from it. The rationale for more favorable treatment with the heirs
that are closer to the deceased person is clear and the same treatment is
followed everywhere.
There
remains two other types of direct taxes, namely the
tax on legal entities and tax on incidental income. None of them is subject to
any thresholds. The reason behind that is understandable in case of the
incidental income. The very title of the tax would indicate the reason. The
incidental income is defined under the article 119, DTA as "the cash or
non cash income that a real or juridical person earns ex gratia
or through favoritism or as an award or under any other similar titles".
This qualification would by itself justify the lack of threshold in case of
incidental income.
Legal
entities
More
discussion would be necessary in case of this specific category. Some time ago
(in February 2006) the Direct Taxes Act (Iranian main tax law) underwent a
thorough amendment. Among alterations, the most important one was a tremendous
abatement granted to companies and other legal entities in the form of a very
considerable reduction of the tax rate. Before that, a flat rate of 10% applied
to corporate profits and dividends were subject to a schedule of progressive
rates. The rates begun from 12% and ended at 54%, the latter
for incomes above 300 million Rials. Profits
of such a size are fairly moderate and incomes of big and average companies
would easily surpass this final bracket.
As a
result, a large part of companies' profits was subject to that marginal rate of
54%, which by adding the aforesaid corporate income tax of 10% raised to 64%.
Now
after the amendment, that rate of 64% has fallen to 25%, which is a flat rate
applicable to taxable income of all legal persons. The corporate income tax of
10% has also been cancelled.
That
huge abatement in favor of legal entities was, most probably, the reason why no
tax threshold granted to this category of taxpayers. This proves to be true
when considering another favor given to companies under the amendment. It was
the exemption of dividends, and thus the shareholders, from taxation. Based on
that reasoning, lack of threshold seems to be quite understandable, but one can
not ignore another fact, that is the situation of small and weak companies. To
have the title of company would not necessarily mean a sizeable amount of
turnover and income.
There
are many individual business owners who earn quite big amounts of profits
without being registered as companies. Their financial and commercial
potentialities are much higher than many weak and small companies. Beside that,
the non-company businesses are owned by one person, while companies belong to a
number of participants. This would result in allocation of less income to each
shareholder, whereas in case of businesses all the profits would go to a single
owner.
So,
one may raise the question why no tax threshold has been provided at least for
such weak companies, while the same favor is shown to single business owners?
Another fact would also call for paying attention to this situation. It is the
absence of imputation system in the Iranian tax law. Under an imputation system
the taxable corporate profits are subject to corporate income tax. When the
profits are distributed, each shareholder is entitled to a credit for the
underlying corporation tax that can be attributed to dividends. Then the
shareholder would declare as taxable income the dividends received (together
with other items of his income) when submitting his annual return. Through that
mechanism the corporate level tax would ultimately credited against the
shareholder's own tax liability. If this imputation credit exceeds the
shareholder's tax liability, he may claim refund of the excess. But if his
liability exceeds the credit, he must pay the difference.
No
such arrangements are foreseen under the Iranian tax system. A less viable
system of "tax on aggregate income" had been provided under the DTA,
which did not implemented properly and was annulled totally by the last
amendment of the law. Taking into account all these considerations, it seems
appropriate to take measure for redressing the inequality that exists under the
law in disadvantage of small companies as described above.
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Tax News
Suspension of a tax during
the term of
development plan
The article 141 of the Direct Taxes Act (DTA) has
exempted from taxation the income derived from exportation of industrial
finished goods and products of agricultural sector. As regards other goods and
products, the said exemption is restricted to 50% of exportation income, and
the rest of it shall be subject to income tax. Such is the rule of DTA which is
a permanent law. On the other hand, the Law of Fourth Development Plan (which
is a temporary law and covers a period of 5 years only) had also provided for a
special rule concerning the exportation of goods and services. It provides,
under paragraph "d", article 33, that "no taxes and duties
are permitted to be imposed on exportation of services and non-oil goods during
the term of the development plan" [namely from March 21, 2005 to March
20, 2010].
Comparison of those two regulations (article 141 of
DTA and paragraph "d', article 33 of the fourth development plan) would
show that the only difference between them relates to the category of
"other goods" referred to
under the DTA, namely any goods other than finished industrial goods and
products of agricultural sector. These are subject to taxation under the DTA
(of course in respect of 50% of the income derived from their exportation). But
the rule of the development plan (concerning the tax exemption) does not
differentiate between those categories of exported goods and services.
Now the point is that whether the phrase "to be
imposed" in the aforementioned para
"d", article 33 of the development plan means the creation of new
taxes and duties or it prohibits collection of previously levied imposts? A new
circular of the tax administration has decided in favor of the latter
interpretation and stated that the rule of the article 141 of the DTA shall be
suspended during the term
of the fourth development plan, so that only the paragraph
"d", article 33 of that plan would govern in respect of exportation
of goods and services without exception in the course of the said period.
It should be mentioned that the said interpretation is
based on an opinion given by the office of the Vice President in Charge of
Legal and Parliamentary Affairs. It is also worthy of mentioning that the tax
exemption granted for exportation of services is an innovation, the credit of
which goes to the said law of development plan.
Composition of a tax forum
The forum for reviewing all tax disputes is the Board
of Settlement of Tax Disputes (BSTD), except in cases where other forums are
provided under the Direct Taxes Act (DTA). Every BSTD is composed of three
members; a representative from the State Tax Organization, one judge and a
person introduced by some civil organizations, such as the chamber of commerce,
chamber of cooperatives, association of official accountants, guild
organizations and the like.
As far as the Iranian tax system is concerned, that
structure is of special importance. Ordinary tax tribunals do not exist in this
country and all tax disputes are referred to BSTDs.
That is why this forum has such a composition. The representative of tax
organization is an expert in the field of tax affairs and aware of issues faced
by, and viewpoints of, that organization. The man from civil organizations is
supposed to have enough knowledge on current issues and problems of relevant
sections of the private sector. And the judge would assist the BSTD with his
judicial expertise and impartiality that is supposed to be the characteristic
of his job.
Because of significance of that structure, the tax law
has emphasized that "the quorum for the sessions of the BSTD shall
consist of three members" (Note 1, article 253, DTA). It means that
all three members pf the Board should take part in sessions. In spite of that,
some BSTDs by-pass the rule and hear the cases
without physical presence of one, or even two, members, namely the judge and
the man from civil organizations. Thus, only the man from tax organization
would actually participate in BSTD's session, while
the other member, or members, would give their opinion later.
The tax administration has paid due attention to this
problem and ordered, in a circular, that the legal composition of BSTDs should be strictly observed and all three members of
the board must be physically present at relevant sessions and take part in
deliberations of that forum. An organ called the Board for Supervision over the
Work of BSTDs' Affairs has been given the mission to
follow up the order and report cases of infringement to relevant authorities.
Refunding of extra taxes
The tax law requires the refunding of extra taxes when
they are collected as result of miscalculation, and also where tax is
refundable under the provisions of the same law. A new circular letter of the
tax administration draws the attention of tax officials to this matter and
orders them to take necessary measures for repayment of such taxes on time and
without delay. An interesting point in the circular is the prevention of
officials from setting off the repayable amount against any tax claims that may
exist at the time of refunding. It states: "the extra tax must be
repaid to taxpayer, irrespective of his indebtedness for any finalized taxes
related to previous or subsequent years, unless the taxpayer himself would
apply in writing for offsetting the extra tax against such finalized tax debts
of other years". General directors of tax departments are ordered to follow up the
matter and report the cases of infringement to the office of the Disciplinary
Prosecutor.
Underground economy and the verdict
of CAJ
The Court of Administrative Justice has issued a
verdict and annulled a circular letter of the tax administration. The circular
relates to people who buy several cars during a year and sell them outside the
formal business channels and thus escape the tax net. It had required the
relevant officials to follow up such activities and take measures to ascertain
the receipt of the applicable taxes. The circulation had been followed by a
complementary instruction of the Department of Tax Information and Services
that is a section of the tax administration. Under the latter instruction, the
persons engaged in those activities had been divided to different categories,
one of them being persons without any place of business. In respect of these
people, the tax officials had been instructed to obtain relevant information
from manufacturing companies who have sold the cars. Such information relates
to one side of underground activities only, that is
the number and price of purchased cars. As regards the price they had received
from selling of the same cars, the said department had instructed the officials
to take annual purchase as an indication for determining the taxable income.
This procedure is based on articles 152 and 153, DTA. In addition, that this
latter guidance had been recommended only in case of one category of the
persons engaged in the activities in question. In respect of other categories,
no reference had been made to similar procedures and ordinary methods of
examining and assessment of taxes had been recommended. Nevertheless, the
verdict of the CAJ annulled not only the instruction of the aforesaid
department, but the circular letter of the tax administration as well. The
reason presented in the verdict is that the circular demanded the assessment of
taxes on basis of purchases only without paying attention to selling and actual
income realized from such transactions.
Health tax
The government has in mind to prepare a bill regarding
some new taxes under the title of "health taxes". The news was declared
by the public relations office of the Plan and Budget Organization. A blend of
different things will be taxed under the bill. Tobacco products, solid cooking
oil and cars are mentioned as examples of taxable items. The bill will be
prepared as an ingredient of a series of measures in the field of public
health. It will be presented to the parliament during the current Iranian year.
Though the bill would contain some green taxes, but it may not be considered as
an environmental law, since the green taxes would constitute only a part of the
bill and many other non-environmental taxes will also be included in it. Very
little attention has been paid to green taxes so far. Environmental issues are
dealt with in various occasions, but relevant deliberations and measures do not
usually tackle the taxation aspect of the subject.
The End
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