Maliyat journal (Iranian Tax Review)

No. 7, winter 1994-1995

IN THE NAME OF GOD

FROM THE PRESIDENT

An important factor discouraging tax compliance is the terminological inconsistency and lack of harmony in use of legal words and phrases. Accuracy and strictness in utilization of legal terms should be regarded as an imperative rule in drafting the tax regulations. Ignoring this significant rule would result in ambiguity and discrepancy of law interpretation. Under such circumstances the possibility would arise for nonobservance and neglect of taxpayer rights, or even the rights of the government. The outcome would be loss of public confidence on taxation system of a country, while such confidence is a must for every tax system, if it needs to be strong and successful.

Let us look at the subject from a different point of view. Tax simplification is a widespread and commonly recognized idea of our time. It is pursued by many governments around the World. The tax administrators in this country also are emphasizing the thought of tax simplification, and earnestly following up its realization.

Double-meaning and uncertainty of terminology are in contradiction with the very notion of simplicity. If we are after simplification of law, we should undoubtedly free it from susceptibility of different interpretations, so that it can represent a harmonious and homogeneous totality; reasonably enforceable and easily understandable.

The status of taxation laws should be appraised and reviewed under the light of the aforesaid considerations, with a view to undergo necessary amendments. The significance of the issue necessitates that a working group of qualified members be established for accomplishment of this task. They should examine, and even scrutinize, the law, so that they may discover all cases of discrepancy and lack of harmony in terminology. Such findings would provide a suitable basis for appropriate rewriting of the tax legislation.

Any survey of this kind would naturally include an overall research in the field of the case law. It is the task of the case law to work on ambiguities and complicacies of regulations with the aim of hammering out a logical and homogeneous picture of the law.

Therefore, the precedents of relevant verdicts and decisions, especially those of the Supreme Council of Taxation (SCT), should be systematically reviewed, in association with the text of the relevant taxation regulations.

The SCT is the highest organ of the country for reviewing the decisions of tax appeal bodies. Studying the previous parliamentary debates (relevant to the date of legislation of the law) might also be very useful for this purpose.

Such historical research is particularly advantageous for understanding the real purposes the legislature had in mind at the time of approving the law.

All these multidimensional and close investigations will provide a general and overall idea of the taxation system. It would help to apprehend the legal and executive structure of the system. Such kind of reviewing and rewriting of the law is obviously different from the common practice of ordinary law amendments, that are effected from time to time by the legislature.

What we have in mind is a particular, perhaps unprecedented, kind of amendment. We suggest an in-depth study of the law for discovering the cases of terminological disharmony, as well as the procedural and substantive discrepancies.

Based on such discoveries, the law will be carefully amended, so that a harmonious and homophonic code of regulations could be drafted. The final goal is to relieve the taxpayers, as well as the tax officials and practitioners, from difficulties of an ambiguous terminology.

The topic raised above is not an issue of the tax administration only, so that we would expect them solely to take the responsibility for redressing the situation. Academic institutions, research organizations, and also the publications dealing with tax questions, all have to play their parts as well.

This magazine, based on its fundamental goals and objectives, is hereby initiating this new field of terminological reform of tax laws. We hope that with participation of other interested people and organs a fruitful effort would be started in this interesting domain.

DR. ALIAKBAR ARABMAZAR

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ONUS PROBANDI

ON WHOM DOES IT REST?

By Dr. Mohammad Tavakkol

INTRODUCTION

Onus Probandi is a Latin legal term. The fact or facts that entitle a party to seek possession of some money, property, or privileges should be established by presentation of convicting and sufficient evidence. The onus or burden of proof rests on the party who claims or alleges a right or demand. This is a universal and very famous rule, which is sanctioned by the recognition of all civilized nations.

The essence of this logical rule is entirely consistent with natural reasoning as well. The rational status of affairs requires that the defendant be exempted from the burden of providing evidence. Unindebtedness and nonexistence of liability are negative matters, and proving a negative occurrence is essentially inconceivable. Presumption of innocence, a hollowed principle of criminal law, demonstrates a clear example of application of the same rationale. In criminal cases the justice administration has the burden of proving every element of a crime and the defendant has no burden to prove his innocence. A similar presumption governs the civil actions. Article 1257 of the Iranian Civil Code refers to this very important rule of evidence, and provides that: "Anyone who claims a right has to establish the same"

The same principle has been declared under the Article 356 of the Iranian Civil Procedure

"If someone alleges a right or claim against another person the burden of proof lies with the claimant, otherwise judgment shall be given in favor of the defendant." As mentioned above, the principle under discussion is called the 'Presumption of Innocence' in the criminal law. We can call it 'Principle of Immunity' where the problems of civil law or taxation regulations are concerned.

Tax Cases

Controversies involving taxation matters can not be logically excluded from the application of the aforesaid universal principle. In case of these types of disputes the litigants are the government and the taxpayer; the former being claimant and the latter defendant. The tax authority, as the agent and representative of the claimant, demands the payment of assessed taxes; and the contesting taxpayer takes the position of the defendant. It is the duty of the claimant, namely the tax authority, to produce convicting and sufficient evidence. Otherwise the taxpayer should be recognized as immune from taxation, without being obliged to produce evidence for establishing his unindebtedness.

Peculiarities of Tax Regulations

Though the truth and applicability of the principle of immunity in the case of tax litigations is undeniable, nevertheless we have to consider the subject under the light of some characteristics which are peculiar to the topic of taxation. Tax is one of the most significant tools and techniques of government. One can hardly imagine the existence and stability of a society without resorting to taxation. That is why the topic of taxation has been included in domain of public law, and governments consider it an activity in the sphere of their sovereign rights.

The position of the government as the party to tax disputes should be looked at from this particular point of view. In the field of tax disputes the government is not an ordinary claimant. Here the claimant is equipped with special powers and privileges.

The tax authority, as the agent of the government, has the power to oblige the taxpayer, as well as the third parties, to provide various and vast kinds of information and documents.

So, the defendant is compelled to present all kinds of potential evidence against himself and in favor of his adversary. In spite of such peculiarities, the rule of immunity of defendant does not lose the ground. The power of tax authority to obtain information from the taxpayer does not mean, in any way, that the claimant is free from the burden of proof. If no evidence could be obtained in spite of efforts exerted by the tax official, then the taxpayer must be regarded as absolved.

Status of Iranian Taxation Law The principle of defendant immunity has left its traces on the Iranian Direct Taxation Act (DTA). For instance the article 237 of the same law states that: "The tax assessment notice shall be arranged on the basis of accurate sources and adequate evidence and information and shall be prepared in such a way as will explicitly indicate all the relevant activities and the income derived therefrom, so that may be quite clear to the taxpayer."

The Article 248 is also very explicit in this regard: "The verdict of the Board of Settlement of Tax Disputes must comprise a justified and reasoned judgment concerning the complaint of the taxpayer. In case of deciding upon adjustment of the taxable amount, the reasons and grounds of such adjustment should be stated in the verdict."

These regulations leave no doubt that the principle of "immunity" is hundred percent applicable under the taxation law of this country. In spite of all the assertions made by the law, and legal sanctions ensured for observation of this eminent principle, one must not forget the delicacies of particular circumstances surrounding the atmosphere of taxation issues. Take into consideration that the tax authorities are responsible for collecting as more taxes as possible, and the law has given them considerable powers to accomplish this vital task. On the other side of the scene the taxpayers are performing fantastic maneuvers. Multicolor tricks and devices are invented and applied one after the another. The incoming temptations and allurements, malign be they or benign, should also be added to the ingredients of this multifold mixture.

Amidst such hectic environment, one must be too optimistic to expect no deviation from the rule of immunity would occur. There are always people who are induced to violate the axioms of fairness. It is the duty of the tax administration to check the cases of such deviations. The Iranian Ministry of Economy and Finance has recently paid special attention to the subject and issued two separate decrees aiming at rectification of the situation.

Ministerial Decrees

The first decree refers to the action of some tax assessors, who base their estimations solely on precedence (namely on the income earned by the taxpayer in previous years).

The Decree, signed by the Vice Minister for Tax Revenues, denounces this procedure and emphatically points out that all tax officials are obliged to do their best for gathering exact information and reliable evidence concerning the actual revenues and expenditures of every taxpayer. The officials are required to base their decisions on the facts and evidence, instead of resorting to unjustifiable presumptions.

The precedence, according to the decree, might be sometimes taken into consideration as supporting indication of the taxpayer's activity, but it is the facts and realities of the case that should be relied upon as the main foundation of tax assessment. The decree has drawn the attention of the tax officials to several regulations of the Direct Taxation Act, including the two articles quoted above (237 and 248).

The subject of the second decree is more specific. It concerns the taxation of physicians and owners of clinics, pharmacies, and laboratories. The decree refers to the actions of some tax assessors who resort to unfounded presumptions for estimation of taxable income of such taxpayers. For instance the assessor takes into account the average number of insured patients a doctor visited per day. Then he assumes that the same physician has visited an equal number of uninsured (so called private) patients as well.

The taxable income of our doctor will be assessed on basis of such presumption. It is worth mentioning that the employees of public organizations and majority of the private sector employees are covered by the social security arrangements, and the statistics pertaining to such insured people are quite easily obtainable from the Social Security Organization. The decree denounces the practice of such tax assessors and prohibits them from resorting to it any more. It describes a detailed systematic procedure of data gathering concerning the activities of this category of taxpayers, so that they can found their decisions on the formidable ground of facts and actualities. The officials are ordered to pay attention to the variations and differences that usually exists between the techniques and manners used by different physicians. Such differences would naturally result in different level of income, and it is unfair to presume a more or less equal condition for all of them.

Comment

Both ministerial decrees are indications of a growing tendency towards the creation of an atmosphere of confidence in the relationship between the taxpayers and tax administration. The position of taxation becomes more and more eminent in the economy of this country, and it requires the authorities to be much more mindful of the taxpayers' compliance. The tax compliance is beyond doubt the fruit of the mentality and attitude of the taxpayers. There is no stimulus higher than the feeling of justice and fairness for leading the mind of taxpayers to a more cooperative attitude. Such is the motivation of the authorities to take the steps like the issuing of the aforementioned decrees. The action is admirable by itself, although the success in its realization depends on the vigor and seriousness of the follow-up process.

TAX INQUIRIES

Readers who may have questions about the Iranian tax laws and procedures are encouraged to submit their inquiries for review. The inquiries will be reviewed by high-level tax specialists and, space permitting, the answers will be published (together with a summary of questions) in the journal. Otherwise, the answers will be sent directly to the inquirers.

TAX NEWS IN BRIEF

SERVING OF PROCESS

The procedure of serving the tax notices, summons, etc. originates from the regulations of the Iranian Civil Procedure Law. The latter dates back to the third decade of the present century, when the number of inhabitants of the country was much less than the third of the present day population. Everything was proportionately fewer and smaller, and easier to manage. Now in a country with enormously complicated and highly populated cities, the same formalities of serving of process are followed by the courts. One part of those old-fashioned procedures concerns the publication of notices in newspapers. Article 208 of the Direct Taxation Act (imitating the Article 100 of Civil Procedure Law) states that when the taxpayer's address is not known, a notice shall be published in one of the mass-circulation newspapers. Then it shall be deemed to have been served on the taxpayer.

Publication of notices in newspapers is a way to escape the impasse, but is not an effective way for attaining the justice. Some officials resort to this method to get rid of the deadlock without inserting any efforts. The practice is sometimes followed in case of very small amounts of taxes, or even in case of taxpayers who are apparently exempted from taxation. The cost of publication should be obviously born by the Finance Ministry.

This state of affairs compelled the Ministry to issue two consecutive circulars for stopping the cases of useless publication of notices. The main points of the circulars are as follows:

1. In cases where the assessed taxes are inconsiderable, or the taxpayer is exempted from taxation, no tax notices should be published in newspapers. The tax officers are required to do their best for finding the addresses of such taxpayers and serve the notices accordingly.

2. If the estimated taxes are considerable, the officials must firstly endeavor to find the taxpayers' addresses. In case of inability, the notices should be published in the press, so that the legal deadline of serving would not be expired. Then a list of such taxpayers, together with all available information must be sent to the General Directorate of Tax Information and Services for searching the whereabouts of them.

DEFERRED ANNUAL LEAVE OF EMPLOYEES

In the event of retirement or termination of the work of civil servants, they will be entitled to a payment called "the salary of unused leave." The term applies to the total salary that would have been payable to the employee, if he had made use of his accrued vacation. Meanwhile the pensions of the retired persons, as well as the lump sum payment made to them as the compensation for termination of work, all are exempted from taxation. The technical Directorate of the Finance Ministry submitted a question to the Supreme Council of Taxation (SCT) asking if the 'salary of unused leave' was tax exempted. The SCT reviewed the matter in its Plenary Board and decided that the payment was exempted from taxation. The Board argued that the salary of unused leave is paid exclusively when the receiver is retired or his employment relation is concluded. Therefore the payment has the same characteristics as the pension or the compensation for termination of work. The Ministry of Economy and Finance confirmed the same opinion in its circulation of 13 November 1994.

REVALUATION OF ASSETS

Market value of companies' assets is usually much higher than the purchase prices of the same, leave alone the book values. The companies are reluctant to update the relevant figures of their books, since that would result in a considerable amount of taxable profit. The outcome is unrealistic reflection of the financial structure of companies. Overwhelming majority of public companies is confronted with such an undesirable situation. Project of a law has been recently prepared by the Finance Ministry, according to which tax exemption will be granted to companies in respect of profits resulting from revaluation of their assets. Certain conditions are to be observed by the companies, including:

1. The value of assets will be assessed according to a formula mentioned in section 5 of the law. Cost value of the asset, wholesale index of goods, useful life and book value of asset constitute the elements of the formula.

2. The resulting increase in the value of assets must be placed in a special reserve, without being distributed between the shareholders. Otherwise the gains will be subject to taxation.

3. The increase of the value will be depreciable independently for a period of 10 to 20 years, and at rates to be determined by the Finance Ministry under a separate by-law. No depreciation is allowed with regard to the real estates.

4. In case of selling the relevant assets, the gain from the sale (minus the book value) will be subject to taxation, unless it is allocated for replacement of the sold assets.

5. The assets referred to above include real estates, machinery, and installations belonging to both private and public companies.

The project has been proposed to the Council of Ministers for consideration. Next step will be the approval of the Parliament.

LIST OF PRIORITIES APPROVED

Income of enterprises engaged in manufacturing and mining activities is exempted from taxation if they meet certain requirements. Article 132 of the Direct Taxation Act, which stipulates the exemption, provides that it is based on "priorities 1, 2, and 3." The list of priorities should (according to Note 1 to the same article) be drawn by the relevant ministries and approved by the Council of Ministers. The list of priorities has been prepared and approved in accordance with the said regulations. (This detailed and long list is available from the office of this Maliyat journal.)

FORESTRY AND WOODCRAFT

The State Organization of Forests and Pasturelands raised a question about the taxation of its affiliated corporation called: "Frame Wood Exploitation and Industries Company." The company "Frame" performs two types of activities. Firstly it produces direct products as firewood, timber, lumber, and the like. The second type of activity includes the fabrication of more complicated produces like table, chair, closet, wardrobes, etc.

The case was referred to the Supreme Court of Taxation for reviewing. The SCT considered the matter in its Plenary Board and delivered the following verdict:

The first section of the company's business is in domain of forestry activity, since the produces of such kind of activity can not be supplied in forms other than firewood, timber, cutin, lumber, and the like. Meanwhile the forestry activity is - according to the relevant regulations - a kind of agricultural activity. Therefore, and since the agricultural operations are tax exempted under the Direct Taxation Act, the first part of the company's business - as described above - is exempted from taxation.

But the second category of operations must be considered a manufacturing activity, and thus not deserving the tax exemption status foreseen for the agriculture.

UNDEVELOPED LANDS

The lands kept undeveloped inside the cities for more than a number of years are annually taxable at certain rates of their value. If the owner is prevented from utilization of land due to the actions of the government organizations or municipalities, they shall be exempted from this kind of taxation. It sometimes happens that the relevant municipalities or state organizations cease to prevent the owner from interfering in his property, nonetheless he continues to leave his land undeveloped. This particular situation is dealt with in a resent decree of the Finance Ministry. It provides that in such cases the period during which the owner was banned from utilization of his land, must be disregarded in calculation of the deadline, after which the undeveloped land becomes subject to taxation.

CONTRIBUTION OF ARTICLES

Comments and articles are welcomed. Written assurance must be given that the article has not been published elsewhere. The author will be notified of the acceptance, rejection, or need for revision as soon as possible. Please submit a brief description of your educational and professional background and, if possible, a photograph.

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ABSTRACTS OF PERSIAN ARTICLES

EDITORIAL

The editorial in this issue of Maliyat is devoted to the subject of terminological disharmony in the field of tax regulations. The same issue has been dealt with in the English editorial as well.

ROUND-TABLE DISCUSSION ON TAX ISSUES

By the initiation of the President, this journal hosted an interesting conference on 27 January 1995. The participants included representatives from various organizations and disciplines. Among them one could see legislatures, academics, high level tax authorities, and leading tax experts. The conference concerned itself with the issues which are facing this country in the area of taxation and tax administration. A summary of the topics discussed at the conference is presented to the readership of Maliyat in the Persian section.

NEW TENDENCIES: EMPHASIS ON THE PRINCIPLE OF THE DEFENDANT IMMUNITY IN TAX LITIGATION

This analytical article examines the principle of Immunity of the defendant from the burden of proof, firstly in criminal and civil actions, then in the sphere of the disputes arising between taxpayers and tax authorities. The same subject has been discussed in the English section of the journal under heading: "Onus Probandi, on whom does it rest?"

HIDDEN EXEMPTIONS

Some individuals and enterprises gain advantage from the loopholes and deficiencies of law or lack of effective control over their real income. What they are benefited by is similar to a special kind of tax exemption; an exemption that is not specified by the law, nor the legislature had in mind when enacting it. Several cases of such hidden exemptions are examined by the author, each presenting considerable amount of revenue losses to the government. One of those cases was reviewed in previous issue of this journal under the heading "Salary Taxes of Foreign Employees"

READERS INQUIRIES

This journal takes care of the tax inquiries of its readership. Questions are reviewed by high quality tax experts of the Technical Directorate of the Finance Ministry, and answered with utmost accuracy. The readers in other countries are also invited to address their tax inquiries to us. The answers will be published in the journal.

FEW WORDS ON "TAX CULTURE"

The term "Tax Culture" is a relatively new, but widely expressed word in this country. This expression has been invented to reflect the idea of public awareness of the phenomenon of taxation, and the preparedness of people to comply with their tax obligations. The author examines the meaning and scope of the term, and deliberates on the causes of taxpayers' failure to undertake and accomplish their tax responsibilities.

ROLE OF TAXATION IN OPTIMIZATION OF THE GOVERNMENT'S ECONOMIC ACTIVITIES

The Iranian government pays an increasing attention to the role of taxation as an important and healthy source of financing the public expenditures. The policies of the government in this field and the trends of tax revenues in the past are reviewed and analyzed in the article. The author concludes that the taxation would introduce a sound mechanism for qualitative improvement of social costs; and would create suitable conditions for optimization of economic activities.

SYSTEMATIC APPROACH AND PROBLEMS OF TAXATION SYSTEM

The history of development of system theories and their application to the social and administrative organizations is reviewed in the article. It reflects on the causes of failure of the tax administration to deal with its problems through an overall and systematic approach. This, according to the author, is the main reason why the authorities so frequently resort to piecemeal treatment of the relevant issues.

TAX EXEMPTION WITH RESPECT TO REVALUATION OF COMPANIES' ASSETS

In the section "Tax News in Brief" we referred to a project of law concerning the revaluation of real estates, machinery, and installations belonging to public and private companies. The same project has been analyzed and reviewed in a separate article in the Persian section of the journal.

REGULATIONS AND RULINGS

The texts of latest laws, regulations, decrees, and opinions of the Supreme Council of Taxation are reported in the Persian section of the journal. A summary of the same is provided in the English section under the heading "Tax News in Brief."

BOOK REVIEW

Authors and publishers are invited to send one copy of their books and publications to the Editor for review. In each issue we will review their works and introduce them to our readers in Iran and abroad.

TAX NEWS AROUND THE WORLD

A number of international tax news is selected and presented to the Iranian readership.

SELECTED CASES BEFORE THE TRIBUNALS

This section is also devoted to the international arena. Cases are selected so that to be of interest to the Iranian readership.

ABSENCE OF THE THIRD MEMBER OF BSTD

The Board of Settlement of Tax Disputes (BSTD) is vested with the authority to review all tax litigations. The Board consists of three members. The first member is a representative of the Finance Ministry, and the second one is a judge appointed by the Justice Administration. The third member is to be appointed by the specialized agencies and institutions, depending on the nature of tax cases. Decisions of the Board are valid when taken by the majority. The first and second members, namely the representatives of the Finance Ministry and the Justice Administration, should take part in the meeting, and if the third member is absent (in spite of being invited) the verdict will be issued by the first and second members. These provisions have created a ground for the failure of third members to participate in most of the Board's meetings, with the side effect of gradual diminishing of their role in the work of BSTDs. This state of affairs has been always criticized by different people and organizations (including this publication). Recently some taxpayers won cases before the Court of Administrative Justice by mere referring to the fact that the third member had not been invited to the meeting of the Board, and he did not actually take part, neither in the Board's deliberations, nor in rendering the verdict.

Based on these happenings, the Ministry of Economy and Finance decreed that all BSTDs are under obligation to convene the third members to take part in the meetings of the Board, and a copy of the invitation must be kept in the records. In cases where the third member would fail (in spite of invitation) to participate, the same should be mentioned in the verdict.

The End