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Maliyat Journal (Iranian Tax Review)
No. 8, Spring 1995
IN THE NAME OF GOD
FROM
THE PRESIDENT
This
journal will now begin the third year of its publication. During the period
that passed, we met with many obstacles and difficulties; and had to devote
considerable effort and resources to cope with them. In spite of that, we never
stopped attempting to improve the quality of this journal; and made our best to
objectify the ideas that we had in mind at the time of embarking on this
important project. The contents of
different issues of the journal demonstrate the truth and correctness of this
statement.
Among the
most important achievements, we may refer to the fact that we managed to
maintain the professional character of the journal and to prevent it from
diverging to the fields outside the domain of taxation.
Providing
taxpayers with knowledge on the subject of taxation has always been the most
important concern of this journal. We can say with satisfaction that the
activities fulfilled in this respect have been considerable and unprecedented
in this country. The topics discussed and commented on are proof of the variety
and importance of the areas dealt with in the journal. They include inter alia:
economic aspects of taxation; legal analysis of laws and regulations;
organizational and managerial problems facing
the tax administration; procedural issues in domain of tax litigations;
international dimensions of taxation; theoretical concepts of the contemporary
tax studies; comments on selected tax cases; tax inquiries of our readers; tax
news and reports, and many other similar subjects.
It is
enough to look at the remarks made by our readers to become aware of the
interest arose by the topics discussed in the journal. We must express our
sincere gratitude to them for all their valuable comments and their sympathy
for the work of this publication. To their support and favor we owe most of our
achievements.
It is a
great honor for us to have the enthusiasm of the readers with us, but it must
not make us inattentive to the shortcomings of our work. We have always tried
to overcome the points of weakness and to pursue the path of excellence and
perfectness. The assistance our readership can afford in this regard will be of
great worth. We invite the taxpayers, tax officials, tax lawyers and
consultants, academicians, researchers, accountants, and auditors, to avail us,
as before, of their views on the current tax issues of Iran and other regions
of the world. That would bestow more vitality to the work of this unique tax
publication of the country.
Dr.
Aliakbar Arabmazar
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TAX AVOIDANCE, TAX EVASION
AND CASES OF HIDDEN TAX EXEMPTION
By the Division of Tax Research, College of Economic Affairs
INTRODUCTION
In this country, as
many other countries of the world, the cases of tax avoidance and tax evasion
are not uncommon. One has to add a third item to these two tricky activities,
and that is a kind of windfall tax exemption enjoyed by many large and well-off
taxpayers. The latter exemption is realized without the need to insert
considerable effort or to devise sophisticated voidance schemes. It is achieved
simply through the negligence – or more exactly speaking the artificiality - of
the law itself. Sometimes the taxpayers would not suffice to choose only one of
these methods of escaping the tax burden, but combine two or three of them at
the same time. We will examine some cases of such activities and will try to
propose the ways of counteracting them.
IMMOVABLE
PROPERTY TRANSFER TAX
According to the
Direct Taxation Act (DTA) the transfer of real estates is taxed on the basis of
"transactional value." The rates applicable are 4, 8, and 12 percent
of the value, which are applied progressively to the slices of
"transactional value" of the property (Article 59, DTA). It should be
noted that the term "transactional value" is somehow misleading,
because it conveys the meaning of prices actually used in transactions. The
term "Taxable value" is a better and more exact expression, since the
price under discussion is in fact a price applied by the tax authorities solely
for the purpose of determining the amount of taxes due. The said transactional
(or taxable) value is determined by a committee composed of representatives of
some ministries and two experts in the field of property assessment. The values
so determined are to be taken into account by all tax officials,
notaries-public, and taxpayers in computing the taxes on real estate transfers.
Nothing is wrong with
that procedure, but what is questionable is the final food cooked by the
committee. Transactional values are disproportionately lower than the market
prices. Market value in majority of cases is approximately 12, or even 15 times
higher than the transactional value. In the meantime prices in the market grow
fast, much faster than the transactional values. Some people earn tremendous profits from real
estate transactions, but the tax they pay on such transactions is so meager –
in proportion to their earnings - that one cannot afford to consider it void of
economic or social logic.
The pinnacle of such
over-enrichment of the real estate owners can be seen in case of some
tower-like apartment buildings. Some of these apartments are sold for a price
between 1'500'000 to 4'000'000 Rials per square meter. It is true that the
transactional value is multiplied by 6 in case of such properties, but even in
that optimal situation, the price determined for tax purposes is not higher
than one fifth of the market value, whereas the margin of the owner is
something between 30 to 60 percent of the cost price.
Such is the ground
prepared by a deficient law for freeing a class of large and rich taxpayers
from the burden of appropriate taxation. They do not have to resort to
tax-avoidance legal tricks, and they do not need to commit tax evasion. The tax
law itself put things ready for them. In one word, they take benefit from a
windfall tax exemption.
Who is to be blamed?
The answer is very clear: the legal term of "transactional value." This
term is the heritage of a period when the prices of crude oil and oil products
were continuously rising, and oil producing countries thought that the scenario
will last for a long time. Based on this assumption, they ignored the vital
importance of taxation, and loosed the rains in many respects, including the
case of real estates transfer tax. Now that everything has been changed, and
day dreams turned to be quite illusive, it is advisable - and urgent – to
introduce adequate amendments to the relevant regulations. The unrealistic
concept of transactional value should be replaced by a price that would reflect
the realities of the market. Where a small taxpayer, a salary receiver, has to
reveal all and every part of his income, and is taxed on his real earnings, why
should we tax huge profits, as those mentioned above, on basis of an artificial
and unbelievably lowered price?
TAX ON RENTAL INCOME
The rent paid for
houses and other buildings is taxable as the income of the owner of the property.
Rental amount is ascertained on basis of official leasing agreement. (Documents
registered by notaries-public are considered as official.)
Where no official
agreement exists, the rental should be assessed by tax officials. In so doing
they have to take into account the rental applicable to similar properties
(Articles 52 and 54, DTA). Shortage of housing in
This state of affairs
led the greedy landlords to ask dollar or similar foreign currencies for their
apartments. Some modern buildings in uptown areas are actually rented on basis
of dollar. Dwellings let to embassies and foreigners are mostly rented in this
manner. In one case a rent of $ 20 was asked for each square meter of the
building.
Assessment of taxes
As it was mentioned
earlier, the rental is ascertained on basis of official leasing agreement. A
landlord who receives an annual rental of $30'000, may conclude an official
agreement (in national currency) for a sum equal to one third (or even less) of
that amount. The only thing he has to do is to persuade the tenant to sign such
official agreement, and this is not very difficult. Here again the blame should
be put on the law. Article 54 of DTA that gives priority to the official
agreement, is consistent with a principle introduced by the Law concerning the Registration
of Documents and Real Properties. According to that principle the contents of official
documents (including the documents registered by notaries-public) must be considered
valid and binding.
This again pertains to
the time when the government (more than half a century ago) decided to
introduce a new system of registration into the legal system of the country and
put an end to the shakiness and instability of legal relations between the
people.
Though the principle
under discussion is logical and useful in some fields, but as far as this
particular section of the tax law is concerned, it is an impediment to
realization of proper tax revenue, and a hindrance in the way of fairness and
equity. This situation has to be rectified and the first step to this end is
the amendment of substantial, as well as the procedural, regulations in
conformity with the actual and objective conditions of the market.
INHERITANCE TAX
In cases where the
inheritance of the deceased person comprises some real property, the basis of
evaluation is again the transactional value. The heirs, who inherit immovable properties
of great value, would enjoy a hidden tax exemption that is very large in
extent. Suppose that inheritance comprises of a big house, a large piece of
land, a bank account with a considerable balance, and some precious personal
properties.
The bank deposit is
completely exempted from taxation, and the heirs would not disclose the precious
personal properties (like antiques and jewelry). As regards the real
properties, transactional value (as described above) is the base of tax computation. In other words, a very inconsiderable percentage
of market prices would constitute the tax basis. The overall result is that the
heirs (for example a spouse and two children) would pay an inheritance tax not
exceeding three percent of market price of the inheritance. This was another
example of hidden tax exemption, which - in case of antiques and jewelry -
combined with tax evasion as
FOREIGN
EXCHANGE TRANSACTIONS
Fluctuation of exchange rates in recent years prepared the ground for evolving of an unofficial exchange market and mushrooming here and there of a group of voracious speculators. The damage this group is inflicting on the national economy, and the huge windfall income earned by them is well known to everybody. They do not, moreover, pay taxes on their income; otherwise what they pay is trivial in proportion to their real income.
C0NCLUSIONS
The instances of
hidden tax exemption are not restricted to those mentioned above. We had dealt
with another example in the fifth issue of this journal (see the article:
Salary taxes of Foreign Employees, Maliyat, No. 5, summer 1994, p. 3). For rectification
of all these undesirable situations, appropriate actions must be taken in three
directions. The most important step is to amend the law and to remove all cases
of uncertainties and unrealistic presumptions that has led to the present
situation (One important case is the concept of "transactional" value
of immovable properties.) Modernization and development of tax information
system is the second urgent step that should be taken for eliminating the
causes of hidden tax exemption and tax evasion. Reformation and restructuring of
procedural methods of tax administration is another important measure required
for achieving the aforesaid goal.
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Tax News in Brief
A COURSE OF STUDY IN THE FIELD OF TAX CONSULTANCY
We are approaching the
centennial of Iranian constitutional reform and establishment of modern
administrative - including taxation - system. During this long time the tax consultants
have always been active, but never this profession was officially recognized,
and no serious attention was paid to regularization of it in accord with a
definite plan or scheme. This sate of affairs has led to a situation where the
profession is open to all, and no specification is required for those
practicing the job. The attitude of tax officials to these circumstances is not
optimistic, and tax advisors have to encounter unfriendly atmosphere in most
occasions. This deficiency of tax system was studied by the
ABSENCE OF THE THIRD MEMBER OF BSTD
The Board of
Settlement of Tax Disputes (BSTD) is vested with the authority to review all
tax disputes. 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 in participating 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, either in the Board's deliberations, or in
rendering the verdict. Considering these happenings, the Ministry of Economy
and Finance decreed that all BSTDs are under obligation to invite 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.
PUBLIC NON-GOVERNMENTAL INSTITUTIONS (PNGIs)
PNGI is a new creature
of the Iranian law devised to encompass various entities and organizations that
evolved during the decade of eighties (after the victory of Islamic Revolution).
The title includes establishments like the Foundation of the Oppressed, Foundation
of the Martyrs, Foundation of Fifteenth of Khordad, and so on. Some other organizations
and entities outside the said category of institutions are also included under
the title of PNGIs. This recent group includes the Organization of Social
Security,
National Iranian
Committee of Olympics, Organization of the Red Crescent, as well as the
municipalities and their affiliates. In the meantime under the Note to Article
84 of the Direct Taxation Act (DTA) the employees, whose salaries are paid by
government organizations and municipalities, or out of the public budget, are
granted certain additional tax exemption (in comparison to other employees).
Since PNGIs have a position not wholly similar to that of the either private or
public sectors, a question was put to the Ministry of Economy and Finance,
regarding the applicability of the aforementioned extra tax exemption to their
employees, and the Ministry ruled as follows: Only one category of PNGIs,
namely municipalities are subject to the provisions of the Note to Article 84
of DTA, and no reference has been made by the said article to any other PNGI.
Therefore they can not take benefit of the extra exemption provided under the
Note. Nevertheless in special cases where the salary of any PNGI's employees is
paid out of the government budget, the extra exemption of the Note would be
applicable by virtue of the stipulation made by the same Note.
TRANSFER OF DUTIES
The assessment or
estimation of taxes due is made, as a rule, by the tax authorities of different
district tax offices. Each of these district offices - or "houzeh"s
as they are called in Persian - is responsible for administration of tax
affairs of its district. At the same time the Ministry of Economy and Finance
vested with the power to establish special tax offices, or "howzeh"s
for examination of some taxable activities, which the Ministry considers to be suitable
for such specialized administration. An example is the special tax office
created for the owners of motor vehicle businesses. In the meantime a special
business has been developed during the recent years in this country. Some
owners of private cars work - on a full or part time basis - for the rent-a-car
agencies. The earnings belong to the owner of the car, and the agency receives
certain percentage of it as its commission. This business of the owners of
private cars has also been recently assigned to the special motor-vehicle tax
offices. It is worth-saying that these tax offices are located in, and supervised
by, the General Directorate of Indirect Taxes. Thus a duty pertaining to the Direct
Taxation Act is handled by a department responsible for indirect taxes.
Since the
nationalization of water resources certain public organizations have been setup
to deal with the duty of exploitation of water resources and water supply. One
activity performed by these organizations is to sell irrigation water to those
engaging in agricultural activities. The Vice Minister of Energy (in charge of
the water resources management) asked the Ministry of Economy and Finance about
the tax exemption status of the income derived from selling of irrigation water.
Under the Article 81 of the Direct Taxation Act (DTA) income derived from agricultural
activities is exempt from taxation.
The inquirer wanted to
know whether the exemption under the said article would be applicable to the
selling of irrigation water. The case
was examined by the Plenary Boar of the Supreme Council of Taxation, and the majority
members of the Board rendered an affirmative opinion. They based their view on the
former taxation law of 1967 (that was replaced by the current taxation act of
1987). Article 109 of that law provided for exemption of agricultural
activities in general, and Article 106 stipulated tax exemption for selling of
water in particular. In the verdict of the Majority no evidence has been given,
and nothing has been mentioned, as to how they inferred from the text of
current taxation act that the business of selling irrigation water might be
considered an agricultural, and thus a tax-exempted, activity. The Minority
objected the view rendered by the Majority on the following grounds:
1. No indications can
be inferred from the wording of Article 81 or any other part of the current
taxation act to show that the tax exemption provided under the said article is applicable
to the activity of selling irrigation water.
2. As far as the
regulations of the taxation law of 1967, as cited by the Majority, are concerned,
one can see that the Article 109 provides full exemption for all agricultural activities.
Nevertheless, the Article 106 provides separately the same exemption for the business
of selling irrigation water. The introduction of the latter independent and separate
article in respect of water selling is a clear indication that this business
could not be considered as a branch of agricultural activities. Otherwise,
there had been no need to legislate two separate articles for one and the same
subject. The Minority concluded that the business of selling irrigation water
is subject to taxation, and the tax exemption under the Article 81 is not
applicable in this regard.
UNJUST ENRICHMENT
According to statutory
and case law the tenant of leased business estate is entitled to receive compensation
when he/her is ordered by the court to evacuate the property. That compensation
equals to the value of what the lawyers call "goodwill." The term
used in taxation law for the same conception is "the consideration for
transfer of location."
Goodwill is an
intangible asset. It is the excess of cost of an acquired firm or property unit
over the current or market value of net assets of the acquired unit. In case of
leased real estates the ownership of this intangible asset belongs to the
lessee, and if he/she evacuates the leased property without receiving price of the
goodwill, then the lessor should be considered as being enriched at expense of
the lessee. A case enshrining the latter situation was brought to the attention
of the Supreme Council of Taxation for reviewing. The SCT was asked to decide
whether the lessor had been enriched as a result of not being obliged to pay
the value of the goodwill, and thus had earned an income that was taxable under
the Article 119 of the Direct Taxation Act. According to that article the
income earned gratuitously under any title is subject to taxation at specific
rates stipulated for incidental (or windfall) earnings.
The case was
considered by the plenary Board of SCT and two different opinions were delivered
by the majority and minority members of the Board. The Majority argued that the
court had ordered the lessee to evacuate the property, but it did not decide that
he should be compensated for the value of the goodwill. This, according to the
Majority, means that the lessee has lost his right to the goodwill, and
therefore nothing is acquired by the lessor to be regarded as subject to
taxation. The Minority (only one member of the Board) was of the opinion that
the goodwill did exist in reality, and the lessor actually acquired it without
paying the price. The verdict of the court, according to the Minority, could
not change these factual realities. Therefore the income thus earned by the
lessor did constitute a taxable earning, even if the court had not obliged him
to compensate the lessee. The very fact that the lessor earned a gratuitous
income suffices to consider him liable to taxation.
WAR-HIT REGIONS
Taxpayers in
war-stricken areas of west and south of the country enjoy certain tax abatements
and exemptions described in the Note to the article 165 of the Direct Taxation Act
(DTA). Considering these regulations, the Plenary Board of the Supreme Council
of Taxation was asked to rule on the following question: Is the exemption
provided for in the Article 165 of DTA pertaining exclusively to the taxpayers
who are resident in the aforesaid war-stricken regions, or else it covers any taxpayer
who engages in economic activities in those areas, even if he/she does not
actually reside in those regions? The Board ruled as follows:
The wording of the
Note to the Article 165, DTA is clear in this respect. It refers to "the taxpayers
in war-hit regions of West and South." This means that only the taxpayers living
and resident in those areas are entitled to the relevant tax facilities.
Therefore and since the emphasis of the law is on the people, and not on the
type of activities, the taxpayers living in other areas would not enjoy the abatements
granted by the law under discussion.
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ABSTRACT OF PERSIAN ARTICLES
EDITORIAL
The beginning of the third year of publication of Maliyat Journal, and its achievements are addressed in the editorial. The same has been dealt with in the editorial of the English section.
SPECIAL INTERVIEW WITH ENGINEER DARIUS IRANBODI, THE FINANCE UNDERSECRETARY IN CHARGE OF TAX REVENUES
The mandate of the
position to which Engineer Iranbodi has been appointed is to supervise the
organization of tax administration, all over the country. The interview
(exclusively provided to this journal) concerns the major issues of taxation, including:
role of taxation in the economic development; major plans and programs of the
Finance Ministry for reaching budgetary objectives in respect of tax revenues; evaluation
of the current system of taxation in the country; tax compliance; and the like.
ORGANIZATION OF TAX ADMINIS- TRATION IN
The author takes a critical
look on the organizational aspects of the Iranian tax system. The original aim
of the law was, according to him, the establishment of an organization on basis
of geographical considerations. The district tax offices constitute the core of
this organization, and they are competent to deal with all and every kind of
taxes within the district accorded to them. An exception to this general rule
is provided under the Note to Article 221 of the Direct Taxation Act. It
permits the Finance Ministry to organize specialized tax offices, as well. This
permission -- which should be considered as an exception to the general rule --
has been vastly used, and overused, by the Ministry. Many specialized tax
offices have been created, so that a trend towards the specialization of tax
organization is taking place. This situation is examined and criticized in the
article.
TAX MEASURES FOR THE IRANIAN YEAR OF 1357 (1995-96), A
COMMENT ON THE BUDGET LAW
The Budget Law
consists of two sections: regulations and figures. The regulations cover various
subjects, including taxation. The author takes a critical look at the tax regulations
of the law, and suggests that a major shift in legislation policy in the field
of taxation is taking place. Resorting more and more to the provisions of
Budget Law, instead of amending the existing tax code, is going to become a
general practice. He examines also an innovation that has been introduced through
the budgetary regulations into the taxation system. It is for the second year
that some restrictions are being applied in respect of certain provisions of
the Direct Taxation Act. Those provisions would consequently cease to be
applied to special taxpayers during a fixed period of time. The author
considers this procedure illogical.
TAX COMPLIANCE
In recent years there
has been growing attention paid to the subject of tax compliance. Ways and
means are sought for encouraging taxpayers to comply with their tax
obligations. One effective way to achieve this purpose is to reform compliance standards
and to remove deficiencies in the current compliance regime. This article addresses
the same subject and, as an example, reviews the steps taken by the
COMPARATIVE STUDIES, CORPORATE TAX RATES
The theme explored in
this article has drawn the interest of many: the legislators, the tax practitioners,
the economists, and, of course, the corporations themselves. Most of them consider
the rates of corporate tax very high, and are of opinion that they should be lowered.
Meanwhile the revenue from corporate tax has always been very high in comparison
with other items of tax revenue. It amounts to something around two thirds of
the aggregate tax revenues. This situation is, according to criticizers, quite
discouraging for promotion of productive activities. The purpose of the article
is to examine corporate tax rates in four categories of countries, and to
compare the results with the rates currently in force in
ASSIGNMENT OF TAX REVENUE, A HISTORICAL SURVEY
Assignment of tax
revenues to private assignees had been a common practice for centuries. Kings,
grand viziers, chancellors of finance, and some high level authorities in charge
of financial affairs issued special orders called "havaleh" – meaning
assignment. These "havaleh"s were granted to either the creditors of
the government against the debts owed to them, or to the influential people and
their family as a favor. The assignees presented their havalehs to local tax
authorities and demanded the payment.
The historical
background of this practice is reviewed in the article. Photos of some "havaleh"s pertaining to first and second decade of the
present century are printed on the third page of the cover.
FEW WORDS ON TAX CULTURE
The second part of
this series of articles is presented in this issue of the journal. The term "tax
culture" is used to reflect the state of public awareness of their
responsibility and their preparedness to comply with tax obligations. The role
of education, and repercussions the behavior of authorities might have on
taxpayers, are discussed in the article.
READERS INQUIRIES
We take care of tax
inquiries of our readership. Questions are reviewed by high quality tax
experts, and answered with utmost accuracy. The readers in other countries are also
invited to address their tax inquiries to us. Space permitting, the answers
will be published in the journal, otherwise they will be sent directly to the
inquirers.
REGULATIONS AND RULINGS
The text of latest
laws, regulations, decrees, and opinions of the Supreme Council of
Taxation is 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 submit 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
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.
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.
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.
The End
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