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Maliyat Journal, No. 9 - Summer 1995
IN
THE NAME OF GOD
FROM
THE PRESIDENT
Today's
world is characterized by increasing role of taxation as the most basic element
of the public financial structure. The realm of taxation is becoming so
expanded, and its operation so complicated, that no government would ignore the
urgent need for restructuring the conventional methods of tax administration.
Divergence
of businesses and economic activities is another widespread trend in the
country. This development has led to increasing prosperity of certain groups of
citizens. The market mechanism and relations have also been substantially
changed, to sustain all these drastic alterations in the social and economic
life of the society. We have to take into consideration one more significant
factor, namely the shifting in the financial policy of the government: It has
been unanimously accepted that the country should abandon the old tendency of
relying on oil revenue, and the best and safest alternate to that source of
revenue is taxation.
Such
a knotty complex of interwoven circumstances challenges the tax organization,
and there is no doubt that the customary procedures of tax administration are
not adequate devices for coping with the requirements of this big challenge.
Many countries have chosen to use the electronic data processing technology for
taxation purposes, and to cope with the severe circumstances referred to above
through the use of computers. Management of a modern tax system without
computerization would not produce desired results. Computer is an essential
tool, a means of rationalization, and a provider of information in the service
of taxation. It would aid the assessment and collection of taxes, and would
also reduce the possibility of arbitrariness, mistakes, and discrimination in
handling the tax cases.
Based
on this reasoning, every tax system has to develop a clear and viable strategy
in the field of computerization. As far as
But
the scope of automation is not to be restricted to the area of data gathering.
The relevant strategy must be planned and implemented in a manner that more and
more phases of tax administration - and the phase of tax assessment in
particular - could be covered by an adequate system of computerization.
Dr.
Aliakbar Arabmazar
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TAX PROBLEMS FACED BY
THE OWNERS OF PRIVATE WORKSHOPS
A
Special Interview with authorities of the Association of the Unions of Workshop
Owners
INTRODUCTION
Maliyat journal had an
interview with Mr. Mohammadali Khansari Atigh,the Executive Secretary, and other
members of the Central Board of the Association, an extract of which will be
presented in this article. The Association is the central organization of 64
guilds or unions, each of them representing one or more branches of crafts and
small industries. Tens of thousands of workshops are being registered as the
members of these unions all around the capital city
FILING OF RETURNS
Taxation of workshops
is subject to the provisions of Chapter 4 of the Direct Taxation Act (DTA). All
other businesses are also governed by the same chapter. (Only the enterprises
registered as legal entities are subject to a different section of the Direct
Taxation Act.) Almost all these taxpayers should file annual tax returns, and
the tax assessors have to examine and verify the returns, and to assess the
correct income tax in each case. Taking into account the number of business
units (engaged in the fields of production, distribution and services) one could
infer easily how enormous is the task put on the shoulders of tax officials.
LACK OF JUSTICE
The mission is
impossible, and the impossibility has led to a situation where less than one
fifth of all business units - at best - file their tax returns. In some years,
this figure does not exceed even the tenth of all those who are supposed to
submit tax returns.
Then the officials
would concentrate on the tax returns they have actually received. They are
obliged to collect a minimum amount of taxes, and this would enforce them to
put pressure on those who have complied with their tax obligations. The
majority of businesses, on the other hand, may find the opportunity to escape
taxation, since there are not enough personnel available to the tax organization
for investigating all cases of tax evasion.
Such course of action
would, unintentionally, lead to transfer of tax burden from the majority of taxpayers to a minority
who preferred to abide by the law.
ASSESSMENT
DIFFICULTIES
The job of tax
assessment is very difficult, even in the case of tax returns actually
received. There are more than 130 branches of businesses, that are scattered
all around the city. The tax assessors perform their duties on basis of
geographical divisions, and each of them is allocated his own separate area, or
district. Suppose there be only 50 - out of 130 - kinds of businesses in the
locality assigned to a given tax assessor. How could one person in his position
become specialized, or even gather minimum necessary information in respect of
all these professions and businesses? Acquisition of such vast knowledge and
experience is undoubtedly beyond the power of the majority of tax assessors.
ASSESSMENT IN PRACTICE
What mentioned above
is not a mere logical inference. The actual day by day practice of tax
officials demonstrates its reality. Tax assessment is realized, by and large,
arbitrarily and no reference is – in most cases - made to the books and
documents of taxpayers.
The interviewees
emphasized on the expenditures of business units in particular. They had in
mind both the current and capital expenditures, and believed that this factor
should be taken into account in assessing the relevant taxes. The tax assessors
- according to the interviewees - not only neglect the items of expenditure in
computing the taxable income, but also consider them as criteria of prosperity
of the business owners and tax them accordingly.
APPEAL AND
ADJUDICATION
Procedural law in the
field of taxation constitutes an integrated part of the Direct Taxation Act
(DTA). It provides, essentially and basically, for administrative adjudication
of tax disputes. The principal body in charge of this duty is the Board of
Settlement of Tax Disputes (BSTD). Each BSTD consists of 3 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 unions and other specialized agencies, depending on the cases.
The interviewees
pointed out that the representatives of the Justice Administration do not – in
majority of cases - take part in deliberations of BSTDs. The only thing they do
is to sign, at a later time, the decisions taken by the Board.
Participation of the
judge is very important for securing the impartiality of BSTD. First member is
appointed by the Finance Ministry, and would naturally take the Ministry's
side, and the third member, namely the representative of guilds, would also
look for the interest of his principals. It is only the second member, that is
the judge, who could play the role of an impartial arbitrator, and to secure an
equitable and unbiased judgment.
The final result of
this process is that the fate of the Board may remain in the hands of one
person only, that is the Ministry's representative.
THE RULE OF 20%
Under such
circumstances, the chance of taxpayers to obtain a favorable verdict from the
BSTD is not - according to the interviewees - very high. Nevertheless, in most
cases a reduction of tax amount - up to 20% - is obtainable from BSTDs. This
practice is due to the fact that giving relief more than 20% would entitle the
tax assessor to appeal against the Board's decision to a higher body called the
Appellate BSTD. The guilds consider this practice - as well as the reason
behind it – unacceptable and illogical. BSTD should examine the case and render
its decision on basis of the facts and evidence provided by the relevant
parties, even if the decision so taken would become appealable by the taxpayer
or the tax assessor.
PROPOSALS
The participants put
forward the following proposals for rectifying the present situation:
1. Note 6 to Article
100 of the Direct Taxation Act empowers the Finance Ministry to determine the taxable
income of the members of the unions with the help of relevant guilds. The
Ministry is authorized also to accept tax returns without verification of the
books of taxpayers concerned, and only by investigating a few of declarations
picked up on random basis (Article 158, DTA).
Resorting to these
regulations would help the Ministry to avoid the unbearable burden of examining
hundreds of thousands of tax returns. The Association strongly recommends the
application of these regulations to all member guilds, and declares its full
readiness and willingness to assist the Ministry for realization of this
objective.
Cooperation between
the Association and the Ministry, and sincere implementation of the aforesaid
regulations would increase the number of registered taxpayers, in proportions
unthinkable at the present. Collecting moderate, but equitable, taxes from a
great number of taxpayers would undoubtedly be much more profitable for the
government, than to put pressure on a few who dared to file tax returns, and
thus became known to the authorities.
A side benefit would
be the dissemination of a feeling of justice and equity between the mass of
taxpayers. Such feeling is a psychological prerequisite for achieving the goal
of voluntary tax compliance, which by its turn constitutes the cornerstone of a
successful tax system of our time.
2. The participants
recommended also more adherence to the spirit of the Article 248 of DTA. This
article requires that the judgment of BSTD should be based on explicit and
justifiable reasoning, and such reasons and grounds should be clearly mentioned
in the rendered decision.
3. The Association
called the attention of the authorities to the necessity of active
participation of judges (representatives of the Justice Administration) in
deliberations of BSTDs.
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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, ejection, 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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Tax News in Brief
REFUND OF EXCESSIVE TAX
Under Article 243 of
the Direct Taxation Act the taxpayers can apply for refund of taxes paid by
them in excess of due amounts. The applications will be considered by tax
officials, and should they reject them, the taxpayers can (within 30 days from
the date the rejection has been notified to them) lodge an appeal to the Board
of Settlement of Tax Disputes (BSTD), whose decision shall be final in this
regard. The Corporate Tax Department of the Ministry of Economy and Finance
submitted the following questions to the Supreme Council of Taxation (SCT) for
ruling:
1. What action should
be taken if the taxpayer would not apply to BSTD within the period of 30 days,
as described above?
2. Are the relevant
tax officials allowed to revise their decisions, even if the taxpayers would
not appeal to BSTD in due course?
The SCT reviewed the
matter in its Plenary Board and gave the following answer on the questions:
- If the taxpayer
would not apply to the BSTD in due time, he would lose his right of appeal, and
the decision of the tax official would become binding and final.
- The tax official in
charge of the case is allowed in all circumstances to reconsider his decision,
if he would realize that excessive tax was paid by the taxpayer. Then the extra
amount so paid should be refunded to the taxpayer according to procedure
described by the law.
In other words, the
tax officials are responsible for proper implementation of tax law, and if they
find cases of inexact assessments, they are obliged to correct their mistake,
whether or not a request being submitted for that purpose.
TRIBAL COOPERATIVES
Tribal cooperative
societies and the unions of such societies are 100% tax-exempted under the
amended Article 133 of the Direct Taxation ACT (DTA).This amended article has become
effective as of March 21, 1989. Before that, no specific exemption had been
provided for tribal cooperatives, but they could take benefit from general
exemptions enumerated in Article 81 of the same law. This article states that
any kind of income derived from agricultural activities is exempted from
taxation. Since tribes and their cooperative societies concern, more or less,
with agricultural business, they can avail themselves from the said tax
exemption.
A circular letter has
been recently issued by the Finance Ministry in this regard. The circular
refers to the said articles 81 and 132 of DTA, and announces emphatically the
urgent need for assisting the farmers and tribesmen. It declares:
"...The tax
assessment officials and the Boards of Settlement of Tax Disputes should
observe the tax equity and take into consideration the special situation of
tribes. They have to offer the utmost lawful helps in assessing and reviewing
their taxes, of course by paying attention to the realities of each case. They
should excuse and exempt all the fines imposed on them, and arrange for
settlement of their liabilities by installments spread over the longest period
allowed by the law."
OCCUPATION MORTGAGE
Mortgage is defined as
pledging of property to a person, and thus giving security for payment of a
debt. Sometimes the mortgage contract grants the mortgagee the right to occupy
the mortgaged property. In such cases the mortgagor shall be liable to taxation
according to provisions pertaining to the real estate income tax (Chapter 1,
Book 3, Direct Taxation Act.)
In the meantime the
Article 55 of DTA (from the same Chapter 1, Book 3) stipulates a case where
proprietors let their houses or apartments to other people, and take some other
properties on lease. In these cases the rental paid by the proprietor is to be
deducted from the rent he received from his tenant, and the balance will be
taxed according to the law.
The Technical
Directorate of the Finance Ministry put the following question to the Supreme
Council of Taxation (SCT) for ruling:
Do the provisions of
the Article 55, DTA (as described above) cover the following cases: 1. where
the owner of a residential house or apartment pledges his property to
occupation mortgage, and takes another house or apartment on lease
2. where the owner
lets his house on lease, and dwells in another property as occupation
mortgagee.
The case was reviewed
by the Plenary Board of SCT, and two different opinions were given by the
majority and minority members of the Board. The Majority held that the Article
55 of DTA refers to the lease agreement only, and no reference to the mortgage
has been made by it. The Article 53 of DTA (that makes the occupation mortgage
subject to the provisions of real estate income tax) does not - according to
the Majority - justify the extending of the scope of Article 55, so that to
cover the occupation mortgage.
The Minority on the
other hand answered the question in affirmative. They ruled that the occupation
mortgage is considered by the law (Article 53) equal to lease agreement. For
this reason a person who pledges his property to occupation mortgage and then
takes possession of another property under a separate mortgage contract, he
should be considered as a taxpayer who lets his house to others and takes
another property on lease. Therefore, in such cases the mortgagor can enjoy the
facility provided under the aforesaid Article 55 of DTA.
INTENTION OF THE
TAXPAYER
Chapter 7 of the
Direct Taxation Act (DTA) provides for certain rewards payable to taxpayers who
abide by tax regulations and fulfill their duties on time. Article 190, for
instance, stipulates for an award equal to 4% of tax amount paid by the
taxpayer before expiration of the time limit prescribed by the law. On the
other hand the payment of tax dues after that time entails the imposition of a
fine equal to 2.5% of unpaid tax for each month of delay.
A question was raised
by the Technical Directorate of the Finance Ministry as to the applicability of
the said Article 190 to withholding taxes. If the taxes due are deducted from
the income received by the taxpayer and delivered on time to tax offices, would
then the taxpayer deserve the aforesaid 4% award?
The question was
referred to the Supreme Council of Taxation, and the following answer was given
unanimously:
The aim of the award
foreseen by the law is to appreciate the taxpayers' adherence to their duties,
and thus giving them, as well as the other people, appropriate incentive to
follow the same way of action in the future. As far as the withholding taxes
are concerned, the duty of paying taxes rests on persons other than the
taxpayers, and what those other people do is nothing more than to pay money out
of the other people's pocket. Since the intention of taxpayers has nothing to
do in this course of action, no awards would accrue to them.
TAXATION REGIME OF
FREE ZONES
The Law on
Administration of Free Trade Zones provides for exemption of economic
activities from taxation. The Supreme Council of Taxation (SCT) was asked to
rule on the applicability of the said tax exemption to the following cases:
1. Wages and salaries
paid to employees in free tax zones.
2. Business income
derived in the zones.
3. Properties left in
the zones after the death of persons engaged in economic activities in the same
areas (inheritance tax).
4. Formation of, or
increase in capital of legal entities in the zones (stamp duty).
5. The tax applicable
to the last term operations of legal entities that are on the verge of
liquidation.
The SCT considered the
subject in its Plenary Board and delivered the following opinion:
"...Any kind of
economic activities of natural and legal persons in the free zones is exempted
from taxation, provided the activities are performed within the limits of the
relevant work or business permits, and establishment or exploitation
licenses,... The assets and properties of the same persons are also tax
exempted, if they are located in the free zones and are held in connection with
economic activities performed there."
As it can be seen from
the above text, the SCT's opinion is of general character. It does not deal
with each point of the question separately. This way of action is contrary to
the tradition of the SCT, and does not seem to solve the problem encountered by
those asking the questions.
GOODWILL FUTURES
The word 'futures'
means anything bought or sold to be delivered or received in time to come.
Goodwill, on the other hand, means the commercial advantage of a place of
business due to some economic factors, as reputation, location, patronage, etc.
Using the word
'futures' for the term 'goodwill' is a bit unusual, but it would sound less
unusual if one would take into consideration the current realities of the
market in this country. Some people invest colossal capitals for building
dwelling and business centers. They sell shops and other business units, even
before the construction phase of the project has begun.
The agreement between
the parties to such transactions is called 'gholnameh'. A literal translation
of this word is 'letter of promise'. Although a 'promise' has not the force of
a transaction, but this kind of selling and purchasing is so vastly in use,
that the practice has found its way to the case law, and the courts consider
such agreements binding and enforceable.
As far as the tax law
is concerned, the gross income derived from the transfer of goodwill is subject
to progressive rates of 4%, 8%, and 12%. But the tax law is basically designed
for situations where the business units under transaction have already been
constructed. So we can not find a clear reference in the law to the cases of
'goodwill futures'.
Therefore the Supreme
Council of Taxation (SCT) was asked by the Finance Ministry to rule on the
subject. The Plenary Board of SCT could not reach unanimous decision in this
field and two separate views were expressed by the majority and minority
members of the Board.
The Majority held that
the agreements on goodwill futures are nothing more than a mere promise of
transferring the goodwill in the future. No shops or other business units
existed at the time of transaction, and transfer of goodwill- which is the
factual basis of taxation- did not take place.
Therefore, the
provisions of tax law on transfer of goodwill are not logically applicable to such
cases. Only when the business units are ready for delivery and they are
actually delivered to tenants, or the lease agreement has been concluded
between the parties, then the said provisions and the tax under discussion could be applied.
The Minority took a
different position and stated that the transaction on goodwill futures is an
independent and wholly enforceable agreement. Both parties have to abide by its
provisions, and the courts have considered, in many occasions, such
transactions binding on the parties. In the meantime, none of the parties to
such transaction would deny the validity of his or her obligations and rights
under the agreement. Therefore the transfer of goodwill has been realized, and
the owner should be taxed at this very stage.
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BOOK
REVIEW
EUROPEAN TAX HANDBOOK
1995
Published by: IBFD
The 'European Tax
Handbook' is a classic reference work published annually by the IBFD
Publications BV, the publishing arm of the International Bureau of Fiscal
Documentation. It contains extensive, up-to-date summaries of the taxation of
corporations and individuals in 36 European countries.
Information on corporate
taxation includes: national corporate income tax, other income taxes, net worth
tax, payroll taxes, social security contributions, value added tax, withholding
taxes (plus treaty charts listing withholding rates) and non-resident
corporations.
Information on
individual taxation includes: national income tax, wages tax, other income
taxes, net wealth tax, social security contributions, inheritance and gift
taxes and non-residents. Income taxes applying to corporations and individuals
are covered in detail. Corporations: residence, depreciation, group
transactions, capital gains and non residents. Individuals: residence,
remuneration, investment income, capital gains, fringe benefits, pensions,
expatriates and non-residents. Throughout the book particular attention is
given to non-residents and relief from international double taxation. Current
tax rates are also included. Information on taxation in the EU includes adopted
and proposed direct taxation measures and the most significant indirect
taxation measures relating to companies.
For further
information contact: IBFD Publications BV, Sarphatistraat 600, 1018 AV
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 in both
English and Persian sections of Maliyat Journal.
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ABSTRACTS OF PERSIAN ARTICLES
EDITORIAL
The subject of automation
in the field of tax administration is being addressed in this issue of the
journal. The same has been dealt with in the editorial of the English section.
SPECIAL INTERVIEW WITH
THE AUTHORITIES OF THE ASSOCIATION OF THE UNIONS OF PRIVATE WORKSHOP OWNERS
The Executive
Secretary and other members of the Central Board of the Association were
interviewed by this Maliyat journal. The interview focused on the tax problems
faced by the guilds and their members, namely the owners of various crafts and
workshops around the capital city
WHAT HAPPENED TO THE
DECREE NO 23974, DATED SEPTEMBER 30, 1992 OF THE COUNCIL OF MINISTERS
Under the aforesaid
decree the public entities are required to refrain from transacting with the
agents of foreign enterprises, unless they are registered as permanent
establishments in this country. The article focuses on the financial aspects of
the issue and concludes that the tax compliance by those agents had been a main
objective of the decree. That is why the Decree is addressed to the Finance
Ministry. Then the author examines the actual happenings after the adoption of
the Decree, and comes to the conclusion that meager results have been achieved,
and the level of tax evasion is high as far as the agents of foreign entities
are concerned.
AN ANALYTICAL SURVEY
ON VALUE ADDED TAX
Value added tax is not
in use in
DISCREPANCIES IN WORD
CHOOSING AND TAX TERMINOLOGY
The author examines
the significant subject of terminology in domain of taxation. Ambiguity and
inconsistency of legal terms would entail contradictory interpretations, and
arising of disputes between taxpayers and tax officials. Reference has been
made in the article to several cases of terminological inconsistency in tax
regulations, and certain steps for removing such discrepancies are being
recommended.
COMPARATIVE STUDIES:
CORPORATE TAX RATES
This series of
articles is presented in the journal with the aim of examining corporate tax
rates in different categories of countries, and to compare them with the rates
currently in force in
MODERN TAX
ADMINISTRATION
Different aspects of
contemporary tax administration are dealt with in the article. Developments in
the sphere of information technology, and socio-economic conditions of
societies have led to transformation of
methods and procedures of tax management. These factors and many other
characteristics of the modern tax administration are discussed upon and
analyzed by the author.
TAX GLOSSARY
Several tax terms and
expressions are presented and defined in
each issue of the journal.
Detail explanations follow
the definition of the terms.
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 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 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
TAX NEWS AROUND THE
WORLD
A number of
international tax news are 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.
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.
FEW WORDS ON TAX
CULTURE
The third 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 End
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