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Maliyat journal (Iranian Tax Review)

No. 44, spring 2006

IN THE NAME OF ALLAH

FROM THE PRESIDENT

To secure an integrated tax system certain factors and requirements are to be realized. Among them one can refer to conditions that must be observed in the field of tax law and tax legislation. By the term "tax law" we mean the general denotation of the word. Thus, it would cover all kinds of regulations including the law in its proper sense, state decrees and other binding civil ordinances. To put it another way, the tax law consists of an aggregate of enactments and rulings concerning the work of tax organs on the one hand and rights and duties of taxpayers on the other hand. It would ultimately impact the financial situation of the government as well. A phenomenon of such vast domain and significance may not be left to perils of scatter and disorder.

Let us turn to the example of our own country. The inner core of the Iranian tax law is the Direct Taxes Act (DTA). DTA encompasses both the substantive and procedural regulations, namely the rulings that identify the rights and duties of the parties of this type of legal relations, and also the procedures that are to be followed by tax official and the courses of action available to taxpayers. The first category, that is the substantive provisions, cover all classes of direct taxes including the property tax and the tax on different kinds of income. Such all embracing coverage is rarely met in other tax laws.

A tax system of such characteristic has become well-matured after being hammered out during a long period of enforcement. It has developed a series of traditions, solutions and practices that are the outcome of endeavors of consecutive generations of taxmen, and also the result of interaction of various strata of taxpayers in the course of years and decades. These practices and precedents have had their own effect and role in shaping of the tax system. For understanding of the tax law, one has to take into account not only the written text of the laws and regulations, but also the trails of all actions, reactions and interactions that have been accompanying the implementation of the tax law so far.

So, we are faced with an aggregate whose elements are naturally interrelated and any additions thereto or subtraction thereof may generate different repercussions in some other parts of the same structure. That being the case, one has to have a fair awareness and familiarity with such an overall structure before embarking on amendment and alteration of the law. In other words, before introduction of changes into the tax law, we must be cautious about the impact of our action on other parts thereof.

Now the question is that to whom the task of taking care of such an important issue is to be assigned in order to bring about desired amendments in a proper way and with minimum negative effects on general configuration of the law. In response we must undoubtedly refer to the tax organization that has always been in the center of all developments of taxation affairs.

Our discussion is not restricted to the regulations, the principal theme of which concerns taxation, but it relates also to any enactments, etc. that contain some rulings regarding tax affairs, even though such reference to taxation would not constitute the main purpose or subject of relevant regulations. Discretion would require that the opinion of tax organization be sought in respect of both, the former and latter kinds of new regulations, before they are gone through the stage of approval.

It is not a rare happening that the draft of a law or decree relates principally to non-tax matters, however it contains other provisions too that not only affect the tax revenue in a negative way, but certain complications or even impasses may also arise from enforcement of taxation elements that are included within such regulations. The reason is quite clear. The tax section of any regulations is to be studied and rectified under the light of the overall structure of the tax law, so that to become smoothly enforceable. Lack of such coordination may entail substantive and procedural difficulties.

The next important matter is the necessity of adherence to the government's tax policy. The tax administration by virtue of its responsibility and raison d'etre is the most knowledgeable organ in respect of the content and spirit of such policies. As a result, its competence for observance of tax policy with regard to new regulations is to be recognized. The last observation regards the statutory duties and powers of the tax administration according to which the task of watching over the various activities and actions in the realm of taxation is assigned to that organization. So, looking for advice of the tax administration with regard to new tax regulations is not only based on discretion and sound judgement, but it would conform to the requirement of the law as well.

Our ultimate goal is to secure the enactment of indefectible and more viable law with no proneness to problems at the stage of implementation. No need to confirm that what was said above is based on a clear and obvious logic and we hope to be observed in a proper way.

Dr. Aliakbar Arabmazar

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The law for facilitating the notarization of documents

By: Dr. M. Tavakkol

The above-mentioned law (of August 15, 2006) does not by its appearance relate to tax matters. But it actually contains certain provisions that would impact the taxation to a considerable extent. To include tax regulations within non-tax bills and thus amending the main tax law (Direct Taxes Act) or introducing new provisions thereto, is a procedure adhered to from time to time. The bill of the said law was first referred to the parliament in its previous term, where no action was taken, therefore it was again sent back to the current term of the parliament. Here the bill was referred to the Juridical and Legal Committee for reviewing and deliberation. The fact that the Juridical and Legal Committee (and not the Economic Committee) was appointed as the main and principal committee in respect of the bill indicates that taxation aspect of the law was not considered so important, while as we would see the latter aspect is also fairly significant.

Anyway, the Juridical and Legal Committee completed its work by introducing several important changes into the bill and presented the same to the parliament whose deliberations on it in general sessions continued from July 19 to August 15, 2006 and finally approved the law.

Objectives of the law

No mention is made in the law itself regarding the aims of its adoption. But some references to such objectives were made in the course of parliamentary deliberations that are worthy of mentioning:

- Enabling the parties to notarize their transactions easier, sooner and more assuredly and confidently.

- To remove the causes of delay that are usually associated with notarization of the deeds for transfer of realties, because of the permissions that are to be issued from certain departments, including the tax organization.

- Some members of the parliament used a term which means to take or keep something as bailment or security for a debt or performance of an act. They meant the organizations such as the tax administration have used the need of people for notarization of their transactions as a kind of pawn or bailment to enforce them to pay their tax dues. By referring to that term they wanted really to condemn these types of restrictions.

- Deliverance of people from the bureaucratic troubles was another motive attributed by MPs to the law in question. It was said that people have to spend quite a long time and efforts for getting ok from relevant departments and go ahead with transactions.

By looking at the said objectives one may conclude that most of them can be logically attributed to a law of this kind, except of course one which is the achievement of assuredness and confidence with regard to transactions after removal of the very formalities and requirements that were so criticized by the majority of MPs. We will return to this subject later.

Another aim or purpose had also been followed, especially by the Juridical and Legal Committee, and even was inserted as an article in the bill of law, but it was finally rejected and withdrawn from the text of the law. The Committee had in mind to initiate a kind of privatization in the field of taxation by granting notaries public the right of collection, and even assessment, of taxes on real properties (or at least a part of such taxes). Even a fee had also been determined for notaries public against the collection of relevant taxes. But this specific part of the bill was rejected in final voting. We will refer later to this aspect of the law as well. Now we would examine the tax regulations of the law in detail.

A. Tax dues of real properties

This subject is dealt with in the paragraph "C" of the article 1 of the law. To understand the issue properly, we have to look at the background of the article 1 before the changes made by the Juridical and Legal Committee (and later by the general session of the parliament). The original text of the article 1, as had been presented by the government, provided that for notarization of documents relating to transfer of realties, a set of certificates and permissions are to be obtained from a number of departments, including the tax offices. The latter offices were required under the bill of law, either to deliver a clearance regarding the tax dues, or to declare the actual situation of the dues, namely the kind and amount of such dues. The tax dues under the original bill covered both the past dues related to the property and the amount of the tax applicable to the transaction in hand, that is the tax on transfer of ownership of real properties, transfer of good will or transfer of other rights in respect of the relevant property.

Such was the situation before the changes introduced by the Juridical and Legal Committee of the parliament. The first thing the Committee did was to divide the tax dues to two categories. First, the past dues somehow related to the property and second, the tax applicable to the transaction in hand. Even in case of past dues the Committee introduced a further sentence to the text of the law that would undermine the whole structure of the said requirement. The sentence added by the Committee reads: "Unless the transferee undertakes the payment of any dues that would probably arise, in which case the both parties will be jointly and severally responsible for the payment thereof". We will return later to this matter as well.

As regards the second category, namely the tax on the transaction in hand, a strange step was taken by the Juridical and Legal Committee. Since the Committee's initiation in this respect had been introduced through a special article of the bill, it seems more convenient to give an English translation of the same article:

"When registering any kind of transfers in connection with the real properties (including land and building) or the good will (namely the right of making business, key money or the rights arising from the commercial or administrative position of the property) whether the latter kind of transfer is accompanied by transfer of ownership or not, the notaries public shall be required to compute the transfer tax, either on basis of taxable value of the property or the value of the good will, as the case may be, at the rate of the article 59 of the Direct Taxes Act of the year 1989 including later amendments, and issue a note for payment thereof to the account of the treasury through the bank system. The note shall be delivered to the transferor for paying the tax and specifications thereof shall be recorded on the drawn up document".

Then a Note to the same article provided for a fee to be paid to notaries public for notarization of such documents. The fee, which had to be born by the parties of the transaction, was two percent of the tax base. A fee of this size would have amounted to a good deal. Realties have grown in price inconceivably during the recent decades, and taxable value would grow in proportion with the market price. As far as parties to the transaction are concerned, this would have mean a heavy burden, and thus one can doubt whether the objective of granting easiness to parties by the law in question could really be achieved through such evident encumbrance. As a whole, this part of the bill seems to be favorable to notaries public more than anybody else.

In case of being approved, that article would have introduce the idea of privatization into the realm of taxation. When some MPs protested and considered the taxation a domain of public law and sovereignty, others defended the concept of privatization in a serious manner. One of them said "If some institutions are found to accept this duty and their competence is confirmed by the legislature, and they would act properly, then no problem. This would exactly mean to have a smaller-scale government. It would mean disburdening the government from a series of additional responsibilities and assigning the same to the private sector, so that the government is made smaller and duties are performed more properly". Reference was also made to a statement from one of the authorities who had said that by those proposed provisions the time and energy of relevant employees of tax departments will be freed so that they might be employed for collection of value added tax that is to be approved by the parliament.

Amendments of the parliament on the outcome of the Committees' work

Those who were against the changes made by the Juridical and Legal Committee presented several arguments and discussed upon undesirability of such changes extensively. They succeeded to eliminate that part of the work of the Committee that granted the privilege of tax collection to notaries public. This section of the bill was completely removed from the bill.

Vagueness and confusion – When proposing the withdrawal of the notaries' right of tax collection, the opponents of the Committees' amendments suggested simultaneous proposals that in case of approval could complete the issue and get rid of the points of uncertainty in the final text of the law. They wanted first to nullify the division made by the Committee between the past and present tax dues, on which we discussed earlier in detail. In that case the clearance of tax offices would cover any tax dues arisen up to the time of the relevant transaction on the one hand, and the tax applicable to the present transaction on the other hand. The opponents had also wanted the deletion of the sentence which as we said earlier allows the parties to the transaction to undertake joint and several responsibility with regard to tax dues and thus escape the necessity of getting clearance from the relevant tax offices.

But these latter proposals of the opponents were rejected and what happened in the parliament and afterwards at the stage of publication of the enacted law, not only caused retention of weakness of the law as regards the requirement of settlement of tax dues before notarization of documents, but also created a source of ambiguity as we will explain below. The following happenings are to be mentioned in this connection:

1. The parliament did not vote for canceling the division of tax dues between the past and present and thus the word "past" was retained in the text of the paragraph "C" of the article one. So, the clearance should only be obtained in respect of past dues and not for the tax applicable to the transaction in hand.

2. The legislature retained also the very sentence that allows the parties to escape the requirement of obtaining tax clearance in respect of past dues by undertaking joint and several responsibility for those tax dues.

3. On the other hand the parliament deleted the whole article of the bill that granted notaries public the right of tax collection and the fees that had been envisaged for them.

4. Final text of the approved law was published in the official gazette on September 7, 2006, but without any trace of division of tax dues to past and present.

All those developments are sources of ambiguity and uncertainty. The first thing to be decided is whether the aforesaid division of tax dues to past and present is really cancelled or not. We have to take two possibilities into account: first, the approved text of the bill has been reviewed by the Guardian Council of the Constitution. All enactments of the parliament must be examined by that council lest they contain something contrary to the religion or the Constitution. In that case the relevant part of the enactment will be corrected and published afterwards. That is a weak possibility that may have occurred with regard to this section of our law. In other words, the Guardian Council may have found this specific part of the law unacceptable and the parliament has corrected and published it in its present form. Should that be the case, the concern of the Guardian Council is quite understandable. The parliament divided tax dues to past and present. As regards the past dues, paragraph "C", article 1 determined the way such duets are to be handled. But at the same time another part of the law that dealt with the present tax dues, namely the tax applicable to the transaction in hand, is deleted. The unavoidable result will be a grave lacuna namely to forget about the tax on transfer of real properties, good will, etc. at the very stage of transfer. This situation may have convinced the Guardian Council to take such an action.

The next possibility is the occurring of a typographical error. More exactly, a word that in Persian denotes the concept of "past" might be neglected in printing and the overall result is a text that lacks the division of tax dues to past and present.

Each of these possibilities would entail its own problems and ambiguities. The first assumption is of a certain merit as we pointed out earlier, but it had to be completed by another amendment to the bill, that is the removal of the last sentence of the paragraph "C", article 1. We commented earlier on this sentence and its negative effect on the whole structure of that paragraph. Before the deletion of the word "past" from the text of that paragraph, the effect of the said weakness was limited to tax dues pertaining to the past. But now that the division of tax dues between past and present is cancelled, that negative effect will extend to both the past and present dues. In other words, the parties to the transaction may escape from obtaining clearance in respect of both the past and present tax dues only by accepting joint and several responsibility regarding such dues in case of arising.

Now let us turn to the second possibility, namely the occurrence of a typographical error, more exactly suppose that the word "past" has been omitted from the paragraph "C", article 1. Then we will have to reinsert the same word, in which case the problem to which we referred above will consequently arise. The paragraph "C", article 1 in that case will cover only the past tax dues with no solution left for the present dues.

Altogether, it seems that paying more attention to overall structure of the law after each stage of various changes and amendments could plssibly produce better integrity for the final text.

Note 1 of the article 1

Under the said Note "In cases referred to in the above article [article 1] the respective authorities will be required, when applied by applicants, to give them a certificate indicating the receipt of their requests. Then they will have to issue their answers to such requests within a period of twenty days. The answer of authorities should be clear, reasoned and accompanied by legal evidence. Otherwise, notarization of the document, while mentioning the matter therin, will be allowed". In respect of this Note two points are worthy of mentioning:

1. It adds another weakness to the possibility of collecting taxes in the nick of time. In this case even the acceptance of joint and several responsibility by the parties will not be required. The seller will be freed and in case of the buyer the matter of taxation will be left to unknown developments of the future.

2. The Note 1 of the article 1 requires also the answer of authorities to be "clear, reasoned and accompanied by legal evidence". The Note is composed in a way that may easily lead to the conclusion that if the latter condition is not observed, it will be another cause for allowing the notaries public to ignore the answer of authorities and go ahead with notarization of the document. The point is that the judgment about observance or non-observance of that condition is left to the notary public and nothing is said as to whether the tax authorities will have right to challenge the finding of the notary public or not, and the probable dispute between the notary public and tax officer how, when and where will be settled.

Failure to answer

Article 2 of the law deals with the authorities' answer and says if no answer is received from the relevant authorities, the notary public will inform the buyer that the deed of transfer may be notarized without such answer, only if the buyer and seller undertake joint and several responsibility for payment of any probable debts that are "legally certain and established".

We mentioned earlier that the last sentence of the paragraph "C" of the article 1 permits the notarization of documents even without waiting for authorities’ answer at all and that was also conditioned only on acceptance of joint and several responsibility by the parties. When we have a general permission like that, repetition of the same with a little more restriction in the article 2 seems redundant.

Nevertheless, there is a difference between the said two parts of the law. The last sentence of the paragraph "C", article 1 referred simply to probable tax dues" without giving any qualification for "dues". But the article 2 says that the joint and several responsibility of the parties will be for "legally certain and established" tax dues. This also may be considered a further point of ambiguity. How the difference of phrases can be interpreted? Whether we have to handle these two situations differently, and if yes why and how? But if we have to deal with both situations equally (which seems more logical), how we can justify the existence of those qualifications in one case and absence of the same in another one?

Free transfer of properties to the government and municipalities

Under the article 6 of the law "any free transferring in favor of the government and municipalities will be exempt from payment of duties and obtaining any certificates, except the answer of inquiries from the local office of land and deeds registry". The first noticeable thing in this article is that it refers to exemption from duties and nothing is mentioned about taxation. The fact is that it originally contained the word tax as well, but some members of the parliament protested and stated that existence of the word tax in that article will be against the rule of the article 4 of the law on fourth development plan which prohibits the granting of any tax exemption and abatement during the five year period of that plan. Though the law on fourth development plan is an ordinary law and such laws can be amended, as a principle, by later ordinary enactments of the parliament, but the point is that the internal by-law of the parliament prohibits the amendment of the laws on development plans through any law except the amendment of the relevant plan law itself. In other words the parliament had to amend the law on the fourth development plan for that purpose. First they wanted to do the same, but later decided to simply delete the word "tax" from the text of the article 6.

So, we have the article 6 which grants exemption from duties when a property is transferred to the government or municipalities free of charge. In addition to that, no clearances, etc. are also necessary to be obtained from the relevant organizations. Now the question is: why no tax clearance should be obtained while the exemption from taxation has been withdrawn in respect of such kind of transfers? If they must pay the applicable taxes, then tax clearance should also be obtained. Again a point of inattention which could be avoided by thorough controlling of the texts after each step of changes and alterations.

Conclusion

By revision of what was said in this article, the general bearing of the law and also the debates of parliament on the bill of law, one would reach to the conclusion that the first and main purpose of the law has been the facilitation of notarization of transactions on real properties, a process that would favor the seller on the one hand and the notaries public on the other hand. As regards the tax compliance, this aspect of the issue is not handled as a matter of the first importance. The situation of the other party of the transaction, namely the buyer of realty (whether in case of ownership or good will) is not so illustrious as the seller and notary public. As far as speed is concerned, this can be achieved under the law, a fact that might be seemed positive for the buyer as well. But this is correct at the stage of notarization only. Afterwards the situation may differ considerably. Even grave consequences may arise as far as the interest of the buyer is concerned. To have a better understanding of this specific aspect of the issue, let us refer to the statements made by a member of the parliament at the session of 19 July 2006: "He [the seller] would not say that I owe a tax debt of several millions, probably hundreds of millions of Tumsns in connection with this property [Tuman = 100 Rials]. He would say I owe a small amount only and I am ready to decrease the price of the property for such and such amount, while I will also undertake the payment of accrued taxes. But the buyer is not aware of the tax file of the seller and does not know how much he owes in respect of the relevant property…This gentleman [the seller] play that trick to evade the payment of taxes".

A scenario like that is not out of question and the buyer is really threatened by dangers of that kind. So, one can ask whether it would not be better and safer, at least for the buyer, to wait few days more than to accept the risk of facing with unknown future which may bring forth the souvenirs of trouble and disaster?

The arguments offered in defense of the new law also deserved attention. The most outstanding was the idea of privatization of tax collection (and even tax assessment) that had been included in the text of the bill, though was withdrawn at the end. The next argument was against the practice or tradition of collecting taxes in the nick of time, e. g. when the owner of a real property wants to sell it. The odd suggestion of paying notaries public a large amount of fees for notarization of deeds was another innovation that had been included in the bill, but was set aside at the stage of voting. The last argument worthy of mentioning was the views of some MPs who believed that the purpose of the transactions in question is the transferring of ownership which is arisen evidently from legal right of the owner. So, emphasis is to be put on that right and its manifestations. Interference of taxation and similar matters in a way to impede its realization will be contrary to the nature of the issue and is to be abandoned.

Implementation of the law is another subject that is to be dealt with separately. Taking into account the different ambiguities referred to above, one may expect arising of cases that would need more effort and studies for interpreting the law with a view to integrate it in overall structure of the existing tax system.

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PS – It might be interesting to know that few days before getting this issue of the journal to print; the tax administration issued a circular letter especoally in respect of the law in question. The circular deals with points of ambiguity that may arise from the law at the stage of implementation. There is no room in this writing to reflect on details of the circular, but the mere issuance of it is an indication of reality of our impression regarding the aforesaid law.

The End

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