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Maliyat journal (Iranian
Tax Review)
No. 45, summer 2006
IN THE NAME OF ALLAH
FROM THE PRESIDENT
Growth of Investment and expansion of economic activities
are the necessary factors for achievement of development and welfare in a
society. For many, attainment of that purpose requires the establishment of
economic security and protection of investment, which they consider a must and
prerequisite in this regard.
That is a fact that nobody would deny. For instance, we
can find among the general policies laid down for the fourth development plan,
the paragraph 45 which refers to the "stabilization of a secure atmosphere
for economic activities and investments" as a recognized policy. but it
should not be forgotten that by granting rights and privileges, the society
would follow the achievement of some higher goals and aims. That is why the
second paragraph of general policies approved concerning the security of
investment, states that the purpose of such security is to enhance general
welfare and economic boom and also establishment of economic justice and
removal of poverty.
The logic and good sense would also require that abidance
by duties be expected from those to whom the rights are granted. In today's
world, especially in the countries with most liberal and free economies, the
respect and diligence towards the economic security is always accompanied by
due observance and enforcement of certain principles as well. Among them, the
most important one is the principle of transparency that must be adhered to in
all aspects of economic and financial activities. This is an axiom through
which the society may guarantee its rights in a suitable manner.
In other words, the case is not solely removal of
obstacles from the way of investors, so that they could follow their material interests
without acknowledging reciprocal duties for themselves. To provide security for
investment and economic activities is only one side of the issue that should
obviously be realized. But as we narrated above from the approved general
principles, the society would also follow its own objectives, namely the public
welfare, economic boom, justice and removal of poverty.
How the latter aims can be achieved? One important, or
may be most significant, condition is the existence of economic transparency,
which has been recognized as such everywhere. No need to say that transparency
is a prerequisite for prevention of many unlawful actions and violations as
well.
Transparency becomes much more vital when taxation aspect
of the issue is at stake, since it is the very taxation that affords
possibility for attainment of purposes such as the public welfare, social
justice, removal of poverty, and even improvement of a country's economy.
What we said above does not obviously mean that the
expansion of economic activities and growth of investment would not constitute
by itself, and notwithstanding the taxation aspect of the issue, an important
factor for creation of business boom, jobs, welfare and the like. But the
taxation side of any matter is more pertaining to the work of this magazine
that is wholly dedicated to tax studies. Beside that, the effects of economic
transparency are apt to be manifested in the realm of taxation more than any
other domain.
Justice and social considerations would also require the
enforcement of economic transparency. To realize security for business
activities, the society has to remove all kinds of unnecessary obstacles from
the way of Investment and exploitation of it. But nobody can deny that the said
activities must be performed in a sound and healthy manner, while the requirements
of law are safely observed. These considerations may not be realized in an
atmosphere that lucks the requisites of transparency. Transparency would cause
the tax laws and regulations to be executed more easily and by better access to
reliable information. Under such conditions, the investors and businesses may
earn lawful profits, the society would take benefit from blessings of healthy
economic activities, and necessary sources will also be secured for the
treasury to be consumed for well being and progress of the country.
The domain and manner of application of transparency
should obviously be defined and clarified. Considerable progress in this regard
has been achieved in the world. Even opening of a bank account and transfer of
money to it require the observance of certain degrees of transparency.
Extensive studies are to be undertaken, not only in respect of the current
circumstances and prevailing conditions of the internal economy, but also with
regard to what is going on in the outer world, especially in developed
countries for realization of financial and economic transparency. Based on such
studies, reasonable and viable criteria can be codified and executed.
As regards the taxation, existing internal laws have
dealt with some aspects of the issue. Further studies and endeavors are surely
necessary to improve the situation and raise our regulations to a level
compatible with requirements of transparency in its modern sense.
Beside that, enough will and support are also indispensable.
In that case, the tax transparency would serve as a powerful tool for securing
more financial revenues and thus reducing the reliance of country's budget on
oil revenue. It would also facilitate the economic transparency in general, an
objective to which, as we mentioned earlier, special attention is paid by the
people and high leadership of the country.
Dr. Aliakbar Arabmazar
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Tax Regulations of the Budget Law
By: Dr. Mohammad Tavakkol
The budget of
the current year (Iranian solar year 1386 beginning from 21 March 2007) amounts
to a sum of 2.317 quadrillion Rials. As usual, the budget is divided to two
separate parts. The first part relates to the government in its proper sense,
namely organizations such as ministries, state institutions and the like. While
the second part of the budget covers the public companies including banks. This
latter section absorbs nearly 72.4% of total amount of the budget and the
remaining portion of 27.6% is allocated to government ministries and organizations.
Of course the figure mentioned in the budget for government ministries, etc.
(692 trillion Rials) comes to a share of the total budget slightly more than
the said percentage of 27.6%. The reason is that a part of that amount (equal
to 52 trillion Rials) is to be spent for offsetting the losses envisaged for
state-owned corporations. By subtracting that figure, the net budget of
government agencies, etc. will amount to 640 trillion Rials, which is exactly
27.6% of total budget.
After that
brief presentation of budget figures let us turn to the principal theme of this
article, namely the tax regulations of the budget. Before dealing with monetary
figures, the budget law first introduces several legal provisions whose
validity duration is limited to the budget year. Each of these separate
regulations is called a "tabsareh", which we would translate to
"Note" in this writing. Notes are mostly divided to sections,
subsections and the like. Meanwhile, the subjects dealt with by the Notes
pertain to different matters. Therefore, our discussion will be confined to few
Notes that refer to tax issues and will leave the non-tax regulations.
Section "B" of the Note
1
This section
relates to the corporate tax of state-owned companies whose business is
supposed to produce profits and therefore certain amounts of taxes are
envisaged for them. As regards the operations of public oil companies and
enterprises, a separate figure is forecast as the income tax applicable to this
type of activities of those companies. The relevant item is entitled as the
"tax on oil turnover" and inserted as a separate figure in the
budget.
Those tax
items (corporate tax of state-owned oil companies and the tax on oil turnover)
add up to 4525.5 billion Iranian Rials. Now the section "B" of the
Note 1 of the budget law states that that amount of taxation is to be paid to
the tax organization in twelve monthly installments during the budget year.
This means obviously the prepayment of the tax, since otherwise the applicable
tax had to be paid after expiration of taxable year and also after examination
of tax returns.
The same
profitable public corporations have also been required (under the section
"C" of the Note 1) to pay not less than 40% of the net profit that
they will declare in respect of their previous year operations. This amount
will be considered as dividend of those corporations.
Section "D" of the Note
1
This section relates
to the rate of tax on gasoline, which is determined, the same as in the
previous year. Twenty per cent of the sale price of gasoline will be collected
as tax and another ten per cent as excise duty.
Section "F" of the Note
1
As in the
previous year, small businesses are exempted from a proviso of the article 101
of the Direct Taxes Act. According to the said article taking benefit from the
threshold provided for businesses under the tax law, would depend on submission
of tax return in due time. The budget law states that such restricting proviso
will not be observed in respect of small businesses during the budget year.
Section "E" of the Note
4
Note 4 of the
budget law provides for a series of measures and policies with the aim of
securing the development of non-state sectors of the economy. One of such
measures is referred to under the section "E" of the Note 4 which
reads:
"The
on-account tax mentioned in the part "A" of the article 8 of the law
on fourth development plan shall be considered final and no other payments will
be demanded as the income tax on transfer of shares and priority rights of shares
during the year 1386"
The article 8
of the law on fourth development plan referred to above provides that the
receipts from sale of shares of state companies shall be deposited with the
General Treasury and will be allocated to several purposes. A portion equal to
20% of such receipts is envisaged (under the paragraph "A" of the
said article 8) to be allocated to a special account as on-account payment of
the tax on the operations of relevant holding companies and their associated corporations.
Now the section "E" of the Note 4 of the budget law states that
though the fourth development law has considered the said 20% as on-account
payment of taxation, but for the budget year the same will be accepted as final
amount of tax and no other payments will be claimed as the tax on transfer of
comapanies' stocks under the art 143 of the Direct Taxes Act.
Section "D" of the Note
6
Dozens of
measures and policies are laid down by the Note 6 of the budget law for
improvement of housing situation in the country. Two of these directives
involve tax regulations, both of which are presented through the section
"D" of that Note. They are as follows:
1. The
government is authorized to subsidize the housing projects that are undertaken
by private constructors. The subsidy will be given in respect of the interest
on bank loans that the constructors will receive to fund their projects.
Payment of subsidies is conditioned on a number of stipulations that are
enumerated in the same Note. In case all conditions are met, the first transfer
of constructed housing units will be exempt from payment of the tax on transfer
of immovable properties (first paragraph of the section "E" of the
Note 6).
A similar rule
is provided under the sixth paragraph of the same section "E" of the
Note 6. The private companies and institutions that embark on mass production
of houses by using new technology and observing certain other conditions and
criteria, will take benefit from a number of supports, including tax abatement.
First transfer of houses built within the housing complexes according to
certain patterns and by observance of the aforesaid conditions, will be exempt
from the tax on transfer of immovable properties.
Section "C" of the Note
11
The energy and
its relevant problems and issues are subject matters of the Note 11 of the
budget law. The following parts of the
section "C" of that Note relate to our discussion:
1. The paragraph one of the section
"C" of the Note 11 states that 5% of sale price of the crude oil
produced in the country will be designated as the tax on oil turnover and will
be recorded as such in the books of the Oil Ministry and its relevant
affiliated companies.
But the tax so
computed is an on-account figure and the final amount will be determined after
examination of returns and accounts on basis of ordinary procedure of such
examination. The same section "E" of the Note 11 of the budget law
refers (in paragraph 4) to that point and states that if the ordinary
examination under the provisions of the tax law would show a higher result as
the tax applicable to oil operations, then the same higher amount will be
applied. The text of the budget is composed in a way that one may deduce that
the same rule will not apply if examination would reveal lower result, namely a
lesser amount of applicable tax.
Beside the tax
described above, an amount equal to 4.5% of the same selling price of crude oil
is to be designated as dividend payable to the government who is direct or
indirect owner of those public companies.
2. Paragraph
11, section "E" of the Note 11 is of special importance and deserves
a separate examination. First let us give a translation of some points of its
text:
"As far
as the payment of dividends and different kinds of taxes are concerned, the
financial and legal relations between the government (ministries and state
institutions) and the Oil Ministry, which operates through its affiliated
companies, will be governed exclusively by the rules of this section and other
regulations provided under the Notes of this law [budget law], the Direct Taxes
Act of 1366 [1988] and its further amendments, and also the law of 1381 [2002]
concerning the imposition of duties and other payments on production of goods
and provision of services …"
That ruling is
of special significance, since it aims at bringing the taxation aspects of the
oil trade and oil industry within the general stream of tax law and tax
procedures. Nevertheless, the same part of the budget introduces later the
following sentences:
"The
by–law for execution of this section and the mechanism for settlement of
accounts between the General Treasury and the Oil Ministry, which operates
through its affiliated companies, shall be approved by the Council of Ministers
on basis of a proposal to be submitted jointly by the Oil Ministry, the
Ministry of Economic Affairs and Finance, Plan and Management Organization and
the Central Bank…"
So, one may
infer that the accomplishment of regulations described above (regarding
taxation of public oil companies) would depend on preparation and approval of
the latter by-law.
Note 13
Note 13 of the
budget law relates to transportation issues on the one hand and environmental
policies on the other hand. A series of measures are predicted for protection
of the environment, among which the green taxes are very rare and negligible.
More exactly speaking, the only measure envisaged in this respect is a duty
that will be charged at time of numbering the cars and giving them number plate
for the first time. That duty is to be determined on basis of some factors
among which the degree of pollution any car may create and also the level of
their consumption of fuel can be attributed to environmental considerations.
Altogether, little attention is paid in this country to environmental taxes,
while the harmful effects of pollution is felt, at least in majority of big
cities.
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Working hours of banks
An excuse for presentation of a novel tax that was frustrated
By: M. T. Hamadani
The story of
working hours of banks is well known to everybody in this country. Our
discussion does not pertain to the story itself, but relates to the idea of
laying down a new tax that was proposed during
the parliamentary debates on that subject.
As
it can be understood from the parliamentary deb ates of January 3, 2007 (Official
Gazette No 18035, dated 24 Jan. 2007), the parliament had previously approved a
draft in which the banks had been required to start their daily work at a
certain hour of the morning. But the Guardian Council of the Constitution found
the draft to be contrary to the Constitution, since according to the Council it
gave rise to interference of the legislature with the work of the executive.
Therefore the draft came back to the parliament for reconsideration, and the
parliament dealt with it at the aforesaid session.
Four
proposals were submitted by the members of the parliament for redrafting the
law. The first one was taken back by those presenting it. From the remaining
proposals, one pertains to our discussion; therefore we deal with the same first,
and then will give a summary account of the two others at the end of this writing.
The
MP who put forward the proposal (Mr. Mohammad Mahdi Mofatteh) while trying to
remove the point of objection of the Guardian Council, introduced a new, better
to say a novel, taxation idea for understanding of which let us narrate the
very wording of his suggestion:
"To
determine the working hours of all companies and economic institutions,
including the banks, is a right of those legal entities that will be decided by
their boards of directors. But if the activities of those institutions in some
hours of day or night would entail social costs (like traffic problems, air
pollution and other social coasts), then the government may submit to the
Islamic Consultative Assembly [Parliament] a draft of law for compensation of
the same by introduction of a special tax"
So,
the proposal had two parts, both of which can be considered initiative and
novel, at least so far as this country is concerned. The first part concerned
the assignment to all enterprises (including banks) the right of fixing their
own working hours, and the second, possibility of taxing the same enterprises
for compensation of social costs that their decision may entail. As regards the
first part of the proposal, it is better to see what the proposing MP had
himself said for justification of his view:
"The
proposal I submitted for removal of the Guardian Council's objection provides
for the idea that the right of deciding upon the working hours of companies
belongs to themselves. Any economic institution has, from the beginning of its
activity, a series of rights including the right of determining its own working
hours. The same is true in respect of banks. Presently an atmosphere of
competition governs the working of banks, which is quite good and admirable.
Then no problem if the same competition would extend to their working hours, so
that more convenience is provided to the people. Let each bank be free to
allocate more working hours for giving services to its clients and the people
avail themselves of those services more conveniently and during a longer
time"
Even
in case of government banks and companies the same reasoning is considered to
be right. Though the government may, as owner of those institutions, take any
decision regarding their working hours, but it also will be required to have in
mind its economic interest, since in such an atmosphere it would face with the
private sector's competition.
Taxation issue
Our
discussion relates especially to the taxation aspect of the proposed draft of
law. The logic behind this part of the proposal is quite understandable under
the prevailing circumstances of today's world. As a witness we may refer to the
example of
Problems
encountered by inhabitants of our own capital city can be referred to as
another example. Daily transportation of millions of people would facilitate
the economic activities. But the social costs and problems created by the same
process (air pollution and traffic jam in particular) are also well known to
every body.
Now
the question is how the negative aspects of the issue can be dealt with.
Different solutions may be searched for and found. But beside that, a fact is
clear and is to be adhered to. Those who create problems must accept a share
for compensation of it. The Iranian civil law has also provided for a similar
rule. Causation is the title used by the law in this respect. Anybody causing
damage, even if unintentionally, should indemnify for the losses so incurred
(Civil Code, Article 331).
By
referring to the civil law we would not obviously mean that the indemnification
of social costs caused by economic activities must be sought under the regulations
of the said law. The purpose is to point out that idea of compensation of
damages is well rooted in recognized legal rules of all nations. That being the
case, much more significance is to be attached to indemnification of great and
tragic losses caused by pollution and similar factors. The thought of
confrontation with effects of pollution and similar calamities is properly
established in many countries. Among the instruments resorted to for such
confrontation, taxes play an important role.
The
very thought of changing the bank's working hours was raised as a measure to
alleviate the problems of traffic and air pollution. Of course both problems
have gone so far that measures of this type may not improve the situation.
While imposition of a percentage of damages on those who have caused it not
only seems to be logical and justified, but even may bring about positive results
in respect of the same problems, if applied vastly and properly.
Nevertheless,
the outcome of voting was negative and the proposal was rejected. In spite of
that, the very start of discussion in this regard can be considered a novel and
useful step. It may hopefully open the door to further deliberation on measures
of that type as an effective way for mitigating the effects of the aforesaid
social costs.
As
we said earlier, two other proposals were also put forward in the same session
of the parliament. The first one demanded the case to be postponed for a period
of one month. That proposal was also rejected. The last proposal which was
approved finally reads:
"The
government is required to arrange the working hours of banks in a way that they
would start their work before the beginning of the work of government offices
and organizations"
The
End
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