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Iranian National Tax Administration
A Shortcut to the
Iranian Tax System2015
Office for Tax Treaties & International Affairs
Deputy Department for Research, Planning & International Affairs
Iranian National Tax Administration (INTA)
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2
Book Title:
A Shortcut to the Iranian Tax System
Prepared By:
Dr. Alireza Khanjan, Deputy Director General
Office for Tax Treaties & International Affairs
Deputy Department for Research, Planning & International Affairs
Iranian National Tax Administration (INTA)
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3
CONTENTS
Acknowledgements 4
Foreword 5
Chapter I:
A General Background of Finance & Taxation in Iran 61 A history of finance in Iran 7
2 Objectives & major responsibilities of MEAF 9
3 A short history of taxation & its evolution in Iran 11
4 The Iranian National Tax Administration (INTA) 13
Chapter II:
A General Description of Taxes in the Iranian Taxation System 251 General description 26
2 Direct taxes 27
2.1 Income taxes 27
2.1.1 Real estate income tax 27
2.1.2 Employment income tax 30
2.1.3 Business and professional income tax 34
2.1.4 Corporate income tax 38
2.1.5 Tax on incidental income 52
2.2 Property taxes 54
2.2.1 Transfer tax 54
2.2.2 Inheritance tax 55
2.2.3 Stamp duty 59
3 Indirect taxes 62
3.1 Value-added tax 623.2 Tax on imports 66
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Acknowledgements
Many colleagues have contributed to the issues addressed in the present book. I hereby appreciate their professionalism and all their kindness.
First of all, I would like to express my deep gratitude for Dr. Alireza
Khanjan, Deputy Director General of Office for Tax Treaties andInternational Affairs, for all the sincere attempts and endeavors he has
made in compiling, translating and editing the materials presented in the
book. Then, I would like to mention my respect for the late Dr.
Mohammad Tavakkol whose outstanding English translation of the
Iranian Direct Taxes Act (along with its second edition updated by Mr. Morteza Mollanazar , Director General of Office for Tax Treaties and
International Affairs) has frequently been used throughout the book. I
would also like to thank Mr. Mohammadreza Abdi , INTA’s Deputy
President of Research, Planning and International Affairs, for his support,encouragement and oversight. And finally, I would like to thank Mr. Ali
Akbar Khademi Jamkhaneh, Head of Tax Databases and Research
Affairs Group at Research and Planning Office, for the coordination he
has already made with the publisher.
Dr. Ali Askari Iranian Deputy Minister of Economic Affairs & Finance
And President of Iranian National Tax Administration
February 2015
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Foreword
The present book is aimed at giving a brief outline of both the Iranian taxauthority, i.e. the Iranian National Tax Administration (INTA), and the
Iranian taxation system. The target audience may include but is, by no
means, limited to tax researchers, public finance experts, cross-countryfinancial analysts, real or legal entities interested in the Iranian
investment opportunities, politicians or government representatives who
are supposed to have bilateral negotiations with Iranian government bodies, and in short, anyone who is seeking an overall perspective of
taxation mechanisms and tax authorities in Iran.
The book consists of two chapters. Chapter I entitled A General
Background of Finance and Taxation in Iran starts with “a history of
finance in Iran” and goes on to focus on “objectives and major
responsibilities of the Iranian Ministry of Finance and Economic Affairs(MEAF)” and “a short history of taxation and its evolution in Iran”, and it
finally ends in introducing “the Iranian National Tax Administration
(INTA)”.
Chapter II presents A General Description of Taxes in the Iranian
Taxation System wherein both direct and indirect tax categories have been
briefly introduced according to the latest changes up to 2015. As for each
tax category, such details as “taxable persons”, “taxable income”,
“personal deductions, allowances, and credits”, “tax rates”, and tax
administration issues regarding “tax returns, assessment and payment”have been explained one by one.
Iranian National Tax Administration (INTA) hopes that the book in
hand will be of some help to the addressed audience and is willing to
receive appropriate feedbacks from readers.
Office for Tax Treaties & International AffairsDeputy Department for Research, Planning & International Affairs
Iranian National Tax Administration (INTA)
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Chapter I:
A General Background
of Finance and Taxation in Iran
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1. A history of finance in Iran
Since the Achaemenid era, the Iranian people have had a system to levy
taxes and to record the financial affairs of the country. During the
Sassanid dynasty, the taxation system developed further with the
introduction of three types of taxes: the land tax, the capitation tax andthe head tax.
The Safavi dynasty (1501–1736) enjoyed additional levels of revenuethrough the taxation of foreign trade and customs duties. This continued
to develop during the Afshari dynasty (1736–1796). During the Qajar era
(1794–1925), the financial conditions of the country deteriorated due to
the wars, royal excursions, and the corruption of the courts. However,
Amir Kabir 1’s hard work (1832) to adopt modern procedures for
collecting, maintaining, and developing a budget for the treasurysucceeded in stabilizing the economy. Prior to the Constitutional
Revolution, all the revenues were within the King’s jurisdiction and all
expenses were also within his authority.
A series of changes took place in the Ministry of Finance after the
Constitutional Revolution in 1906. The first legal council was formed
with the King’s approval and at his command. In those days, there was no
Majlis or Parliament. The king would appoint a chancellor of exchange to
regulate the budget for the entire country. Under his supervision, each
province had a state accountant or “ Mostowfi-al-mamalek ” with hisassistants or “ Mirza–Ghalam–Dans” who would, together, determine the
direction the office would take.
In 1910, seven departments were formed within the Ministry of Finance,
where the most important ones were titled as the Treasury General, the
Customs House, and the Revenue Collection. According to a law of the
year 1915, the Ministry of Finance was divided into nine departments as
follows: Ministerial Section; Discretion of Revenues, Land States and
Hard Cashes; Treasury General; Public Debts and Duties; Customs;Financial Trails; Bills Adjustment Commission; Personnel and Supplies;
and High Council for Official Trails.
Since 1921, many changes have occurred in the Ministry of Finance.About 40 government subsidiary companies were established or dissolved
and the whole Ministry was again divided into two divisions, the
1 Amir Kabir (1807-1852), also known as Mirza Taqi Khan, served as the Prime Minister of Iran under
Nasereddin Shah’s kingdom. Born in Hazaveh, a county of Arak, and murdered in 1852, he has eversince been widely respected by the Iranian as the ‘Iran's first reformer’. He was a modernizer who
attempted to bring "gradual reform" to the country.
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Financial and the Economic. The Financial and Economic divisions were
governed by two assistants and seven directors.
In 1950, the Ministry of Finance received approval from the National
Consultative Assembly. The last change took place in 1974 with theapproval of the Formation Law of the Ministry of Economic Affairs and
Finance (MEAF) by the National Consultative Assembly.
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2. Objectives and major responsibilities of MEAF
Major objectives and responsibilities of Ministry of Economic Affairs
and Finance in IRAN which have been confirmed by the State
Organization for Employment and Administrative Affairs, are as follows:
A) Objectives:
Adjusting the economic and financial policies of the country and
coordinating financial affairs, implementing tax policies, adjusting andimplementing economic cooperation and joint investments with foreign
countries.
B) Responsibilities:
•
Regulating economic and financial policies of the country and
coordinating their implementation;
•
Offering, receiving, studying and carrying out all issues related to
the investments of Iran in foreign countries and foreign investments
in Iran as well as giving technical and economic assistance to foreign
countries;
• Paying loans and credits to foreign states and foreign international
institutes as well as receiving and using foreign loans and credits;
• Regulating and implementing technical, financial and economic
cooperation of Iran with other countries and organizations as well as
international economic institutions in addition to supervising such
international relations and ties;
•
Supervising private sector economic and financial activities in order
to implement economic development plans;
•
Implementing duties concerning monetary affairs, banking, foreign
exchange and credit affairs which have been entrusted to the
Ministry of Economic Affairs and Finance according to relevantlaws and regulations;
• Providing facilities and required contributions to workers and
farmers in order to purchase shares of manufacturing units subject to
the Law of Development of Ownership of Manufacturing Units;
•
Concentrating the funds collected from revenues and other credit
supply resources mentioned in the annual public budget as well as
state-owned enterprises (excluding banks, credit institutes and
insurance companies) at the treasury accounts held with the CentralBank of the Islamic Republic of Iran and establishing required
arrangements to enable state-owned enterprises to use their funds at
proper times;
•
Concentrating deposit funds of ministries and state-owned
enterprises at particular accounts held with the Central Bank of theIslamic Republic of Iran;
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•
Opening bank accounts of ministries and state-owned enterprises and
Central Bank of I.R.I or branches of Bank Melli Iran both in the
capital city of Tehran and in other cities;
• Allocating necessary credits to current and development costs with
the cooperation of Planning and Budget Organization andcommunicating it to relevant organizations;
•
Paying approved credits of the annual public budget of the country
(both current and development credits) to bank accounts of the
ministries and state-owned enterprises as well as paying debts and
collecting credits resulting from implementing previous
Development Plans;
• Providing appropriate payment facilities for state authorities and
state accountants (through revolving funding mechanisms, for
example);•
Returning returnable deposits and funds collected to pre-determined
amounts; and
•
Issuing credit drafts in the annual public budget in order to help
current operations.
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3. A short history of taxation and its evolution in Iran
The first Iranian tax law which was approved by Majlis (the Parliament)
after the establishment of the Constitutional regime in 1876 was the Real
Estate Tax Law.
The second tax law approved in 1925 was entitled as Tax on Landlord
Properties and Livestock . The Law of Corporate and Trade Taxes, Etc.
was approved in 1930. According to this law, for the first time, taxeswere decided to be collected from both the Iranian and foreign
companies’ income with progressive rates of 3 and 3.5 percent. A 0.5
percent stamp tax was collected from banks, exchange businesses and
those transacting exchange.
In 1937, for the first time, the Law of Legacy Tax and Transfer Tax was
set. In 1938, the Law of Income Tax was reformed and hence the rate ofincome tax changed and, for the first time, withholding taxes wereintroduced. The Law of Income Tax in 1955 was revised regarding
previous regulations. Moreover, the Law of Farmlands Income Tax and
Real Estate and Stamp Taxes became more comprehensive than previous
laws.
In 1963, the government bill of tax organization was ratified. The Iranian
Direct Taxes Act which was quite comprehensive was approved in 1966.
Consequently, all regulations pertaining to income and property taxwhich had previously been set were evocated and, indeed, it was after the
ratification of this law that the Iranian modern taxation system was
established. The Iranian Direct Taxes Act approved in 1966 was modified
and revised on three different occasions before the victory of the Islamic
Revolution in 1979 and several modifications have also been made in the
mentioned law after the Islamic Revolution.
Moreover, several laws regarding indirect taxation have been ratified and
put into enforcement. In addition to taking into account certain tax
regulations in annual public budgets and in the First, Second, Third,Fourth and Fifth Economic, Social, and Cultural Development Plans,
several bills in regard with the reform of current laws on direct and
indirect taxation have also been approved by the Islamic RepublicRevolution Council and the Islamic Consultative Assembly from 1978 to
2001.
In recent years, following the country’s general economic policies
including speeding up the growth and development rates, improving the
investment levels, increasing the number of job opportunities, anddecreasing the country’s reliance on oil revenues, the expectations from
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the national tax system, as one of the major foundations of government
financial policies, were increasingly raised.
In the second half of the year 1997, in order to achieve a clear economic
perspective of the country during the implementation of the relevantDevelopment Plan, a first priority was given to the formulation of a Plan
for Organizing the Country’s Economy where the Ministry of Economic
Affairs and Finance was entrusted the responsibility to implement such a
plan. Protecting and integrating such macroeconomic variables as wages,
bank interest rates, taxes, tariffs, and currency rates were taken intoaccount in the mentioned plan aiming at increasing the share of taxes in
the budget and, in so doing, the followings were anticipated:
a)
Adjusting tax rates in a reasonable manner;
b)
Removing tax exemptions or making them logical;c) Adopting the self–assessment approach; and
d) Reforming the tax system structure.
Finally, the amendment of the Iranian Direct Taxes Act was ratified in
2001. The reforms stipulated in the act have all been made to leave an
impact on the economic situation of the country. Major elements andfactors affecting economic conditions of the country have been assumed
to be:
1) Promotion of production and investment levels in the line with theeconomic development of the country;
2) Submission of government financial management affairs to economic
institutions involved followed by an oversight of their observance of
financial disciplinary regulations;
3) Reform of tax administration procedures; and
4) Consideration of tax justice on the basis of tax rules and regulations.
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4. The Iranian National Tax Administration (INTA)
4.1. Introduction
In order to enforce Article # 59 of the Third Economic, Social and
Cultural Development Plan aiming at increasing the efficiency oftaxation system and removing the existing organizational obstacles as
well as concentrating all affairs regarding collecting taxes in one single
organization, the Iranian National Tax Administration (INTA), as a
government institution being under the supervision of the Minister of
Economic Affairs and Finance, was established in 2001 and,immediately, all previous authorities, duties, human resources, facilities
and equipments available to MEAF’s Deputy for Taxation and those of
tax divisions were transferred to this new administration.
4.2. Objectives, responsibilities, and authorities of INTA
According to the joint proposal no. 03/003-s 105/25410 dated June 3,2001 issued by the Ministry of Economic Affairs and Finance and the
National Management and Planning Organization and by virtue of the
clause (a) of article 59 of the Law of the Third Economic, Social and
Cultural Development Plan, the Council of Ministers ratified the
establishment of INTA in a session of August 26, 2001.
THE PURPOSE OF ESTABLISHING INTA
INTA is intended to provide all requirements needed for administratingtax plans and for doing legal duties concerning tax collection as
efficiently as possible. It will also be engaged in monitoring the
enforcement of tax laws and regulations and the creation of a proper basis
to achieve tax objectives, to increase the efficiency of the taxation
system, and to integrate all affairs regarding tax collection in one singleorganization. In this regard, the following articles seem to be worth
mentioning:
Article 2: This administration is a government institution affiliated to
Ministry of Economic Affairs and Finance and is established under thesupervision of the Minister of Economic Affairs and Finance.
Article 3: This administration is a legal entity and its annual budget will
be allocated separately in the annual public budget act.
Article 4: The headquarter of the administration is located in Tehran. In
order to carry out the legal duties and to achieve the objectives, the
administration will establish required divisions throughout the countryupon the agreement of the National Management and Planning
Organization (NMP).
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Article 5: The comprehensive organizational chart of this administration
consists of a headquarter office in Tehran plus tax directorate generals inthe centers of provinces and tax affairs divisions in other cities.
Note: To execute duties entrusted to the administration, upon the
confirmation of NMP, more than one tax directorate general can beestablished in some big provinces and all these directorate generals will
be under the direct supervision of the headquarter.
Article 6: The total number of the administration job positions will be
23700 which will be met by the existing positions of Ministry ofEconomic Affairs and Finance1.
Article 7: The headquarter of the administration will be in charge ofdeveloping policies and administrative strategies for collecting taxes,
planning, supervising, assessing the performance, formulating therequired instructions and by–laws, and doing research works. Other
duties and administrative activities will be performed by the
administrative divisions.
Article 8: The comprehensive structure of INTA in accordance with
articles (5), (6), and (7) of the articles of association thereof will beformulated by the president of the administration and will be put into
enforcement upon the proposal of the Minister of Economic Affairs and
Finance and the approval of NMP.
THE ADMINISTRATION’S DUTIES AND AUTHORITIES:
Article 9: The duties and authorities of INTA are as follows:
a) Being in charge of all affairs concerning the enforcement ofregulations of direct taxes, indirect taxes, and other taxes as well as all
related procedures such as identifying taxpayers, forming tax files and
drawing up tax identity cards, calculating and collecting taxes either in
legal or administrative ways, and doing other activities related to taxes
within the framework of tax laws and current relevant regulations;
b) Studying, investigating and recognizing existing obstacles to the wayahead the tax system and planning to remove them;
c) Commenting on tax issues and offering required recommendations in
regard with drafting taxes as well as making policies and strategies in
meeting relevant legal duties;d) Making administrative policies for collecting taxes in the country and
making constant efforts to supervise the execution of approved plans;
e) Adopting required measures regarding the enforcement of tax laws and
regulations through preparing required instructions and by-laws and
1 Later on, INTA managed to receive licenses required for the employment of more employees.
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designing administrative systems and procedures to assess and collect
taxes;f) Exact and full enforcement of tax laws and regulations and presentation
of amending proposals regarding them as well as supervising their
efficient enforcement;g) Designing, formulating and conducting research and administrative
projects aiming at the improvement of the tax system such as
reforming the tax structure, registering and guiding taxpayers, promoting self–declaration, auditing, doing collection and
enforcement processes in order to accelerate and scrutinize the tax
operations;
h) Doing research works regarding tax laws and regulations, entrusting
the authority to settle tax disputes and proposing or taking requiredmeasures to reform and complete tax policies through legal
authorities;
i) Doing comparative research on tax systems of selected pioneer
countries aiming at the improvement of the country’s tax system;
j) Studying and investigating in order to find proper strategies for findingnew tax resources and enhancing tax capacities and offering them to the
Minister of Economic Affairs and Finance ;
k) Gathering and processing data and making use of economic and
national tax numbers (TIN) and postal codes in order to discover tax
resources and those liable to tax laws and regulations in order to
achieve anticipated goals and to get to tax justice targets;l) Studying, investigating, optimizing and reforming the organizational
structure of INTA and employing human resources to carry out
entrusted duties and providing required human resources;
m) Designing, planning and implementing required educational programs
to improve the quality of the administration’s human resources
according to existing demands;
n) Designing, implementing and optimizing the country’s integrated tax
data system, establishing a mechanized data network and using new
methods and advanced tools to achieve tax revenue targets;o) Preparing required plans to increase profitability and quality of tax
activities, and reducing taxpayers’ compliance costs;
p) Studying, investigating and evaluating the performance of tax divisions
and their respective human resources, and directing them towards the
intended targets;
q) Training taxpayers and presenting a wide range of services to them in
order to familiarize them with their duties and to persuade thetaxpayers for observing their legal tax obligations;
r) Supervising and investigating the conduct and behavior of tax officials,discovering administrative violations or offences, prosecuting the
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violators, and being assured of tax fairness and of the soundness and
clarity of relevant laws and regulations;s) Commenting on the drafts of plans, bills and decrees proposed on tax
matters to the Minister of Economic Affairs and Finance or to other
relevant legal authorities;t) Doing research on finding appropriate ways of leadership and policy
making pertaining to tax affairs;
u) Undertaking economic research in regard to taxation and preparinganalytical and statistical reports on tax revenues in order to be
presented to the Minister of Economic Affairs and Finance aiming to
improve the tax system;
v) Cooperating with domestic and international institutions in order to
achieve the pre-determined missions within the framework of therelevant laws and regulations;
w) Planning to establish appropriate relations between tax collecting
officials and taxpayers, and to specify certain codes of conduct for tax
officials;
x) Drafting required by–laws in relation to tax laws and regulations to beratified by competent authorities;
y) Forecasting annual tax revenue figures to be presented to the Minister
of Economic Affairs and Finance in order to be included in the annual
public budget bill; and
z) Taking other necessary measures to achieve the administration’s
objectives.
Article 10: All authorities and duties mentioned in related laws andregulations, human resources, existing equipments and facilities available
to the Ministry of Economic Affairs and Finance which are being used in
the Tax Affairs Deputy offices and departments will be transferred to
INTA if the Minister approves so.
Article 11: The employees of INTA, in accordance with the relevant
employment regulations, are liable to the National Employment Law andthe Law for Equal Payments to Government Employees and its later
amendments, following the proposal of the minister and the confirmation
of the National Management and Planning Organization. The bonus of
employees will be ratified by relevant authorities (Salary and WageCouncil of the Council of Ministers) taking into account certain job
characteristics, the importance and the responsibilities of tax positions.
Article 12: The President of INTA will be appointed to this position
among educated, experienced people in the fields related to financial,
economic and fiscal affairs upon the proposal of the Minister of
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Economic Affairs and Finance and confirmation of the Council of
Ministers.
Note 1- The President of the administration is equal in rank with the
authorities mentioned in clause (A) note 2 of Article 1 of the Law for
Equal Payments to Government Employees. Note 2- The administration deputies will be appointed on the proposal of
the President and the confirmation of the Minister of Economic Affairs
and Finance followed by the issuance of a relevant decree by thePresident.
Article 3: The President holds the highest rank in the administration and
will be in charge of controlling the affairs within the framework of
pertaining regulations. He would also be in charge of representing the
administration in all legal gatherings and meetings with the right of
substitution and submission to arbitration and in necessary cases, presenting settlement proposals as well as supervising the execution of
the organizational duties.
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4.3. The structure of INTA
INTA, as the only tax administration body in the country, is one of the
most important sub-divisions of the Ministry of Economic Affairs and
Finance whose administrative procedures are determined by the law.
INTA is in charge of assessing, estimating and collecting direct andindirect taxes. It includes 48 directorates general throughout the country(including 17 directorates general in Tehran) which perform their duties
under the supervision of a central headquarter.
The administration headquarter locating in Tehran includes a vice-
presidency, 4 deputy departments and 22 offices/directorates general. It is
worth mentioning that directorates general consist of tax affairs offices
and are, in their own right, divided into several tax units as their smallest
branches. The directorates general located in Tehran, however, may havedifferent organizational structures in accordance with special functions
entrusted to them. As instance, some of them are in charge of assessing
and collecting certain particular tax categories. Large Taxpayers
Directorate General and VAT directorates general are in charge of
collecting tax liabilities of large legal entities and of collecting VAT
taxes, respectively. They have different organizational structures.
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Figure (1): INTA Organizational Chart (2015)
4.4. Human Resources
INTA started its activity with 16405 employees in 2002. In 2004, the
administration managed to get the required license for employing more
staff. Upon the implementation of the Third Economic, Social, andCultural Development Plan, the proportion of INTA’s educated
employees increased by a large number and such a policy was repeated
during the next two subsequent development plans. The administration
has currently about 29877 employees (up to January 28, 2015).
The following table reflects the changes in the share of higher education
degree holders in INTA’s total staff population:
Table (1): INTA’s Staff in terms of levels of education
Year Total
Staff
PhD
holders
Master’s
degree holders
Bachelor’s
degree holders
Associate’s
degree holders
High -school
diploma holders
Under
high -school
2002 16405 6 468 6680 1742 6253 1256
100% 0.03% 2.85% 40.71% 10.6% %38.11 %7.65
2015
(Up to
Jan. 28,
2015)
29877 16 3257 18954 2617 4015 1018
100% 0.05% 10.9% 63.44% 8.76% 13.44% 3.41%
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4.5. INTA’s mission declaration
INTA is in charge of proper implementation of tax laws and regulations.
This organization is determined, through making use of the most
appropriate procedures and technologies, to identify and collect thestate’s due taxes and to provide, through supporting continuous andcreative applied researches, the preliminaries of quantitative and
qualitative development of the Iranian taxation system and of the
promotion of tax culture in the country.
4.6. INTA’s vision statement
INTA is a leading organization in the region, which makes use of acommitted and powerful human capital, update technologies, and modern
taxation approaches and is determined to collect the state’s due taxes withthe lowest compliance costs and the highest precision, and to be
recognized as a leading, efficient, and creditable organization in respect
of maximizing the state’s tax revenues, presenting optimal high-qualityservices, and achieving the stakeholders’ satisfaction.
4.7. INTA’s core values:
• Transparency: a framework within which individual activities are
unmasked.• Accountability: We are continuously evaluating ourselves against
our responsibilities in respect of the taxpayers, the government, andthe society and are accountable with regard to the measures taken
and their outcomes.
• Honesty: We have all the time obliged ourselves to observe honesty
and credibility.
• Mutual respect : We respect others’ opinions and treat others fairly
and respectfully.
•
Cooperation: we believe completely in the cooperation betweenINTA and the taxpayers in respect of exact assessment of taxes.
•
Rule of law: We are required to observe regulatory requirements in
respect of all taxpayers as equally as possible.
• Professionalism: We believe in professional competence and
expertise and emphasize on achieving superiority.
• Innovation: we are always seeking for new ways of doing things.
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4.8. INTA’s Goals:
1) Increasing tax revenues;
2) Decreasing tax collection costs of different tax resources;
3) Enhancing satisfaction levels of taxpayers and beneficiaries of the tax
system;4) Making appropriate tax policies to remove poverty and to collect taxes
from high income groups of the society and from those with the
highest levels of consumption in order to redistribute incomes among
the society members;
5) Developing and expanding international relations;
6) Modifying the organizational structures of tax affair offices and
making reasonable the number of job positions on the basis of a
responsibility approach;
7) Modifying current processes and procedures;8) Developing human resources;
9) Establishing e-tax systems;
10) Promoting the culture of self–declaration and voluntary payment of
taxes;
11) Improving management procedures; and
12) Profit–making.
4.9. Perspective of an optimal taxation system
Although a great effort has recently been made to remove the barriers tothe way ahead of INTA, these efforts have mainly been restricted to some
modifications in taxation rules and regulations. It can be said that the
most serious governmental plan for a full modification of the Iranian
taxation system was launched in the 3rd
Development Plan. According to
article 59 of the 3rd
Economic, Social, and Cultural Plan, Ministry ofEconomic Affairs and Finance was assigned to modify the overall
structure of the Iranian taxation system. Modifying the regulations of
direct taxes in 2001, passing the Law of Toll Collection in the year 2002,
and creating an independent taxation organization were among some of
the major modifications stipulated in the 3rd Development Plan.
Having in mind the current problems of the Iranian taxation system, the
perspective of a comprehensive tax program focuses on identifying and
tracing the information flows of economic activities throughout the
country, processing the data gathered, assessing taxes, and finally
collecting the right taxes. However, the actual fulfillment of these
objectives necessitates arranging and taking other relevant supporting
measures. Bearing in mind the perspective of an appropriate tax situation
originating in the experiences of successful taxation systems throughoutthe world, to achieve a proper tax situation wherein tax collection costs
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decrease, taxpayers’ levels of satisfaction increase, tax evasion moves
down, and the tax income levels move up, will enhance the possibility ofan actual accomplishment in the Iranian taxation system.
Figure (2): Overview of To-Be Vision % & Recommendations
Unique taxpayeridentifier
More centralizedprocessing
Robust technologyinfrastructure
• Secure, multi-channelaccess for bothtaxpayers andemployees
Promote voluntarycompliance
• Improved taxpayereducation
• Consistent enforcementof appropriate penalties
• Streamlined tax rulesand processes
Overview of To-Be Vision and Recommendations
Cost of Administration
ManualProcessing
UnregisteredTaxpayers
Compliance
Appeals
Revenues
Cost of Administration
ManualProcessing
Compliance
OverdueTaxes
Revenues
What it will take to achieve To-Be Vision
Taxpayer
Focus
As-Is To-Be
Customer
Satisfaction
Integrated HR strategy
• Training
• Change management
• Performance management
Functionalorganization
• Focus on taxpayerand employeesatisfaction
Customer
Satisfaction
UnregisteredTaxpayers
Overdue Taxes
Appeals
Risk-based auditselection
• Automated businessrules
• Sophisticated reportingand analytics
Legislative alignment
• Aligned, clear tax laws
• Obligatory information
sharing betweengovernment agencies
Standardized processesacross regions / taxes
Better stakeholderrelationships
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4.10. Strategies:
1) Creating an integrated tax system
2) Promotion of using modern methods and technologies
3) Creating coherent databases
4) Mechanization and standardization of processes5) Making maximized use of tax laws and regulation
6) Development of INTA’s communication infrastructures
7) Smart identification of taxpayers
8) Promotion of tax culture & constant improvement of the society’s
attitudes towards INTA through making the procedures transparent,
and using quality control systems, informing taxpayers, prompt
propaganda, increasing the efficiency of public relations divisions, andmaking intangible the effects of tax revenues on increasing social
welfare & decreasing government budget deficits9) Structural reforms for optimal use of INTA’s resources through fitting
the organizational structure to INTA’s vision and strategies; entrusting
the authorities to operational tax directors in order to speed up the procedures; making clear the employees’ job descriptions
10) Application of effective methods for improving tax compliance
11) Extension of relationships with stakeholders and deepening such
relations
12) Extension of relationships with international professional institutions
and adopting other tax systems’ best practices13) Increasing the number of tax officials according to global standards
14) Application of incentive systems and control systems to decrease tax
lags
15) Improving the current situation of the staff training through modern
training methods16) Broadening tax bases and using optimal rates
17) Building capabilities, reinforcing incentive systems and improving
knowledge-based management
18) Regular monitoring and improvement of INTA’s performance indices
19) Employing and preserving expert and academic human resources
20) Providing the preliminaries of and affecting on reforming tax laws and
regulations
21) Attracting stakeholders’ participation in realizing INTA’s missions
22) Institutionalization of Performance Management System
23) Development of strategic thinking at the managerial levels of INTA
24) Re-organization of tax exemptions
25) Making use of private sector potentials
26) Making use of religious authorities’ opinions
27) Identification, ranking, and licensing real and legal tax advisors and
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introducing them to taxpayers in order to promote tax advisory
services
4.11. Tax policies:
Tax laws are centrally enacted and executed by the central government allthrough the country. According to the Iranian Constitution, the SupremeLeader of the Islamic Republic of Iran is the authority in charge of
defining general polices of the country which have generally been
reflected in the I.R.I. Perspective Document , documents of development
plans, and other overarching documents. In addition, according to the act
110 of the Constitution, taxes and tax exemptions/concessions are defined
by virtue of the law. Hence, tax policies seem to be feasible through
creating appropriate legal frameworks. In the cases related to tax
administration, some regulations are approved in the articles of therelated laws and others are presented to the Council of Ministers,
Ministry of Economic Affairs and Finance or INTA. Plans and strategies
adopted by the Iranian tax system are defined at different levels as
follows:
1) The I.R.I. Vision Plan for 2025:
The overall perspective of tax policies have been defined in the formof general economic plans by the Supreme Leader of the Islamic
Republic of Iran and the Expediency Assembly and have been
included in the I.R.I Perspective Document;
2) General Five–year Development Plan Policies:
General taxation plans are to be defined by the Supreme Leader of the
Islamic Republic of Iran and the Expediency Assembly in order to be
included in five-year development plans of the country;
3) Laws Related to Five-Year Development Plans:
Tax policies stipulated in the five-year development plans are then
rendered into administrative laws which are going to be somewhat
quantitative. In some cases, the intended strategies are also stipulated
in the articles of laws or in the documents thereof;
4) Other regulations such as "the annual budget of the country" which
defines short-term financial polices as well as absolutely quantitative
plans, and "the laws related to direct and indirect taxes" which specifytax policy management procedures are considered as another source of
tax plans and strategies; and finally
5) Approvals, regulations, instructions, by-laws, circular letters and
executive manuals which are within the responsibility of the Council
of Ministers and the Ministry of Economic Affairs and Finance arealso assumed to define some strategies to be adopted by INTA.
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Chapter II:
A General Description of Taxes
in the Iranian Taxation System
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1. General description
The Iranian tax regime is divided into two general categories of direct and
indirect taxes. There are two major types of direct taxes including
income taxes and property taxes. Each category of direct taxes, in turn, is
divided into sub-parts. Table 1 briefly shows various types of taxes in theIranian taxation system. Indirect taxes include taxes on imports as well asValue Added Tax (VAT). Taxes on imports are currently collected by the
Iranian Customs and are not within INTA's authority.
Table (2): The Iranian Tax Regime
DirectTaxes
Income Taxes
Real Estate Income Tax
Employment Income Tax
Business & Professional Income Tax
Corporate Income TaxTax on Incidental Income
Property Taxes
Tax on Transfer of Real Properties
Inheritance Tax
Stamp Duties
Indirect
Taxes
Value-added Tax
Tax on Imports
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2. Direct taxes
2.1. Income taxes
2.1.1. Real estate income tax
The income of real or juridical persons derived from the transfer of rights
in real properties situated in Iran, less the exemptions granted underDirect Taxes Act, shall be subject to real estate income tax.
2.1.1.1. Taxable persons
The taxable persons are owners (real or juridical persons) who haverented their real properties to other persons.
In case of the mortgage in possession, the mortgagor shall be subject totaxation according to the provisions stipulated below.
2.1.1.2. Taxable income
The taxable income of the leased real property consists of the total rent,
whether in cash or otherwise, less a deduction of 25% to cover expenses,depreciations, and commitments of the owner, with regard to the leased
property.
The taxable income in respect of the first hand lease of real properties
that are endowed or tied up shall be computed on basis of the above-mentioned method.
Where the lessor is not the owner of the leased property, the taxable
income shall be the difference between the rent that he receives and therent that he pays in connection with the same leasehold.
For the purposes of rental income taxation, each apartment unit shall be
deemed as a separate real estate.
Where some furnishings or machineries are leased in conjunction with areal property, the rental income attributable to such fittings and
machinery shall be included as a part of the income of the property, andshall be taxed under the present regulations.
Additions made by the lessee, in conformity with the lease agreement, to
the leased property for the benefit of the lessor shall be appraised on the
basis of taxable value of the date of delivery of the same to the lessor, and
50% thereof shall be treated as a part of taxable rental income of the
lessor for the year of such delivery.
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The expenses that are to be born, under the law or the agreement, by the
landlord, but are made by the tenant, as well as the expenses undertaken by the tenant in conformity with the terms of lease agreement, while
customarily are to be paid by the landlord, shall be appraised at the
taxable value of the date of occurrence of such expenses, and will beadded, as non-pecuniary rent, to the sum of the rental income of the yearin which such expenditures are made.
If the owner of any superstructures, created over a leased land, lets the
property, wholly or partially, the rental paid by him for the land, in
proportion to the estate he lets, shall be deducted from the rental hereceives, and the balance will be taxed.
Where the residential units belonging to housing companies are delivered
to buyers according to ordinary agreements, but not yet being transferred
in a final manner, and this situation is approvable by demonstrative
documents and records, such properties shall not be deemed to be
leaseholds as long as they are in possession of the buyers. In these cases,the buyer shall be treated, for the purpose of taxation, as the owner of the
property, provided the tax on final transfer of the property, as applicableat the date of possession, is paid according to the regulations thereof.
The owners of residential complexes with more than three leased unitsthat are constructed, or will be constructed, in conformity with the
consumption model of housing, as declared by the Ministry of Roads and
Urban Development, shall be exempt during the term of lease, from
100% of the tax on the income from lease of properties. In other cases,
the income of a person from the lease of residential unit or units shall beexempt from taxation up to a total acreage of 150 square meters of useful
substructure of the units in Tehran and up to 200 square meters in other places.
2.1.1.3. Personal deductions, allowances and credits
The rule of this tax category shall not govern in respect of the employer- provided houses belonging to legal persons, provided that their taxes areassessed on basis of statutory books of accounts.
The real properties that are put, free of charge, at the disposal of the
government organizations and institutions shall not be considered as
leaseholds.
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If the owner sells his dwelling place, and a respite is granted to him,
under the relevant transfer deed, for evacuation of the same without payment of rental, then the property shall not be deemed as leasehold up
to six months as long as the dwelling place is occupied by the ex-owner
during such period of respite. The same rule is applicable in case ofoptional sale as long as the sold property remains at the disposal of the
seller, unless it is proved, on account of some documents and instruments,that a rental is being paid.
Where the owner of a residential house or apartment lets the same out and
leases another place for his own residence, or dwells in an employer-
provided house, the rent he pays under an official deed or according to an
agreement, or the rent deducted from his salary by the employer, or the
amount of the same that is evaluated as the salary in kind for tax purposesshall be deducted from the taxable income.
2.1.1.4. Rates
The real estate income tax to be paid by individuals will be calculated at
the rates stipulated in Article 131 of Direct Taxes Act ranging from 15 to
35 percent (see Table 4 in Section II.2.1.3) but as for legal persons, a flatrate of 25% shall apply.
2.1.1.5. Tax returns, assessment & payment
The taxpayers subject to the real estate income tax are required to submit
their tax returns together with related documents to the tax affairs officeof the district where the property is situated, and to pay the applicable tax
in conformity with the relevant regulations. The said measures are to be
taken up to the end of Tir (21st day of July) of the following year.
As from the beginning of the year 1382 (March 21, 2004), the basis of
computation of the taxable rental income of real properties shall be the
rental value which will be determined by the Real Estates Committee
referred to in the Article 64 of Direct Taxes Act for each square meter of properties located within the boundaries of cities and villages.
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2.1.2. Employment income tax
2.1.2.1. Salary
The employment income of employees in both the public and private
sectors is taxed at progressive rates ranging from 0 to 20% after
deducting a basic annual exemption (i.e. IRR 138 million – for thecalendar year starting on 21 March 2015 and ending on 20 March 2016)
as presented below:
Table (3): Salary Tax Rates
annual taxable income rates
Up to IRR 138,000,000 0%
Up to IRR 966,000,000 10% of the excess over
Over IRR 966,000,000 20% of the excess over
The following income is specifically exempted from income tax on
salaries:
1) Salaries of foreign diplomats, embassy staff, etc. (subject to
reciprocal treatment) and non-Iranian members of UN delegations
and specialized agencies;2) Salaries of foreign experts sent to Iran on aid programs;
3) Salaries of local employees of Iranian embassies, consulates, etc.
subject to reciprocal treatment;4) Pensions, retirement allowances and termination of employment
payments;5) Service-related travel expenditure and allowances;
6) 50% of the salary tax of employees working in villages and
deprived regions;
7) Housing, on-site accommodation, food and transport allowances
and other non-cash benefits provided for manual workers;
8) Compensation from medical insurance, accident insurance, etc;
9) New Year bonuses and year-end allowances up to a maximum ofone twelfth of the base annual allowance;
10) Housing provided for civil servants;
11) Employees’ medical expenses met by employers;
12) Salaries paid to members of the armed forces, IntelligenceMinistry employees, war veterans and former prisoners-of-war;
and
13) Non-cash allowances provided to employees up to a maximum of
two twelfth of the base annual allowance.
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Note that the term “base minimum salary” refers to a minimum salary
under the Labor Code. The amount is reviewed annually by the Ministryof Economic Affairs and Finance.
In practice, the employment income of foreign workers has often beensubject to tax on the basis of a notional scale of remuneration rather than
by reference to the actual employment contract. On 11 May 1998, a
directive was issued requiring expatriate workers to pay income tax on
the total salary, allowances, and benefits earned during the employment
period in Iran with effect from 22 June 1998.
Expatriate employers are now required to submit full details of the
remuneration of their expatriates, plus details of any tax withheld andcopies of the relevant employment contracts to the local tax district
within 2 weeks of a request by said tax district. The report requirescompletion of a special specified form, which must be signed by both
employer and employee. In the case of non-resident foreign employers,
the expatriate is required to supply the information within 2 months of thestart of employment.
The employment contract must reflect all the benefits included in theemployment package. The contract must also be:
1) authenticated by the employer’s head office; and
2) verified by competent government authorities and by the Iranianembassy in the country where the employer’s head office is
located.
Failure to comply may lead to a tax assessment initially on a presumptive
basis using specified notional pay scales. If the tax assessed on the
presumptive basis later proves to be less than the tax due on the actual
remuneration, the additional tax will be assessed and penalties shall be
imposed. Tax will be refunded, if the actual remuneration proves to be
less than the notional figure.
The Council of Ministers also passed a resolution on 17 December 2000,
unifying the basis of expatriate salary charges, exchange rates of the
contract, withholding taxes and compensation for increases in statutory
charges. As a result, the following were implemented:
1) The salary tax and work permit charges of expatriates are now
computed based on the salaries and fringe benefits reported in the
employment contract. The employer is required to report such
amounts to the tax authorities, and to the Ministry of Cooperatives,
Labor and Social Welfare;
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2) If the expatriates salary and fringe benefits are not specifically
mentioned in the employment contract, the basis for computing thesalary tax and work permit charges will be via a "unified list"
which is to be prepared by the Ministry of Cooperatives, Labor and
Social Welfare together with the relevant ministry or employer.This list must also be approved by the Council of Ministers; and
3) The exchange rate to be used when computing the tax and work
permit charges is the rate stipulated in the employment contractunless the employer purchases the hard currency at a different rate,
in which case the actual rate will be used.
No expenses are specifically listed as deductible in arriving at income
subject to the tax on salaries. Direct Taxes Act does, however, provide for
the general deductibility of two categories of expenditure in arriving at
the taxable income of individual taxpayers. The two categories areexpenses incurred during the tax year on medical treatment of the
taxpayer himself, his wife, children, parents, brothers, or sisters and life
insurance premiums paid to Iranian insurance companies.
Also, as of 21 March 2001, employees may deduct from taxable income
any payments made for housing loans, provided:
1) the relevant home must be less than 120 sq m in area and must be
purchased or built between March 2000 and March 2004; and
2) the employer must be provided with a statement from the relevant
bank confirming the amount of the monthly installment paymentand the period of the loan.
The tax on salaries is collected by deduction at source. Employers areobliged to calculate and withhold the relevant tax on the basis of the
employee’s annual salary (where the payer of an amount subject to the
tax on salaries is not the payer of the recipients’ basic salary, wage, etc.,
he must deduct the tax at the rate of 10%.) The tax so deducted must be
sent to the local tax affairs office within 30 days together with a list of thenames and addresses of the payees and their respective salaries in the first
month. For subsequent months, only changes to the original list need to
be reported. Persons receiving a salary paid from abroad are required to
pay the due tax within 30 days of receiving it and to submit a tax return
by 22 July of the year following the fiscal year in which the salary has been received.
Exit visas and extensions of residence permits and work permits will only be issued to foreigners on production of a tax clearance certificate.
However, pursuant to a resolution issued by the Council of Ministers on
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17 December 2000, the employer is permitted to make a contractual
commitment to withhold and remit the expatriate’s tax liability to the taxauthorities, and the expatriate will not be barred from leaving the country,
when such a contractual commitment has been entered into force+, even
if the taxes have not been settled.
In cases where the salary tax is not accounted for in accordance with the
requirements outlined above, the Act provides for the making of
assessments to include both the tax due and the applicable penalties. Such
assessments are final and conclusive and the tax and penalties must be paid within 30 days unless an appeal is submitted in writing within the
same time limit. The penalty for failure to comply with salary tax
withholding requirements is a fine equal to 20% of the unpaid tax. In
addition, the employer or the director(s) of the employing enterprise may
be imprisoned for terms ranging from 3 months to 2 years. Claims for therefund of an overpaid salary tax must be made by the recipient of the
salary to the tax affairs office local to his place of residence.
2.1.2.2. Benefits in kind
The assessable value of benefits in kind is normally the cost to the
employer but in the following cases the assessable value is calculated as a
percentage of salary and other regular remuneration paid in cash (net of
deductions):
1) Furnished housing: 25%;
2) Unfurnished housing: 20%;3) Chauffeur-driven car: 10%; and
4) Car without chauffeur: 5%.
2.1.2.3. Pension income
Pensions, retirement allowances, and termination of employment
payments are exempt from taxation.
2.1.2.4. Directors' remuneration
Directors' remuneration is added to their annual salary obtained from
employment payments and is subject to tax.
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2.1.3. Business and professional income tax
Chapter 4 of Direct Taxes Act imposes tax on income earned in Iran by
individuals from professions and from all other sources not specified
elsewhere in the Act. The most important of these other sources is the
income derived from running a business. Civil partnerships, to the extentthey are comprised of natural persons, are also liable to tax on incomefrom such sources. A civil partnership has no legal identity separate from
that of its members, simply being an association of parties with a
common interest in a property.
Assessments are made either on the basis of the figures in the statutory
books of account (the journal and the ledger) or on a “presumptive basis”
(ex officio assessment) whereby the tax payable is based on a deemed
profit not on the profit reflected in the accounting books.
Individual business income is subject to progressive tax rates as stipulated
in Article 131 of Direct Taxes Act (Table below):
Table (4): General Individual Tax Rates
Annual Taxable Income (in IRR) Rate
Up to 30,000,000 15%
30,000,001 to 100,000,000 20%
100,000,001 to 250,000,000 25%
250,000,001 to 1,000,000,000 30%Over 1,000,000,000 35%
In accordance with paragraph (a) of Article 95 of Direct Taxes Act, anumber of kinds of concern are obliged to maintain statutory books of
account, among them are:
a) Holders of commercial card and all importers & exporters;
b) Owners of factories & producing units;
c) Exploiters of mines; owners of firms of auditing, book-kipping &
financial services and providers of management, consulting,informatics and computer services; owners of education and trainingcenters;
d) Owners of hospitals, maternity hospitals, sanatoriums, polyclinics and
old people homes;
e) Owners of motels and three-star & high level hotels;
f) Wholesalers and wholesale dealers, department stores, financial
middlemen, agents for distribution of domestic and imported goods
and warehouse owners;
g) Representatives of commercial and industrial enterprises;h) Owners of land, sea or air motorized transportation firms;
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i) Owners of engineering and engineering consulting bureaus; and
j) Owners of advertising and marketing agencies
(A new list of those required to maintain statutory books of account is
published annually).
Taxpayers who maintain statutory accounts (either compulsorily or
voluntarily) will generally be assessed on the basis of those accounts
although presumptive assessment may also be applied, for instance,
where time limits are not complied with or where the accounts cannot be
verified because of insufficient supporting documents. Where the
computation is by reference to the accounts, taxable income consists of
the total amount of receipts for sales or provision of services lessallowable expenditure (including depreciation) plus any other income.
In accordance with paragraph (b) of Article 95 of Direct Taxes Act, a
number of kinds of concern are required to register their business
activities in the books of income and expenditure. They are as follows:
a)
Owners of industrial workshops;
b) Owners of businesses in the field of construction, technical and
industrial installations, drawing, topography, and technical
calculations and supervision; owners of printing houses,lithographers, bookbinders, providers of printing services, and
graphic artists;c)
Owners of centers for commuter communications;
d) Attorneys, experts, official translators to the judiciary, legal
accountants, and members of engineering order organizations;
e) Researchers, scholars, and private experts engaging in preparationand provision of research projects;
f)
Brokers, commission merchants and agents;
g) Owners of cultural houses, vocational institutions and societies of
guilds and professions;
h)
Owners of cinemas, theaters, and entertainment and sport centers;owners of the businesses of filming, dubbing, assembling and other
cinematic services;
i)
Physicians, dentists who have clinics, and veterinarians practicing
veterinary medicine;
j) Owners of test laboratories and clinics for radiology, physiotherapy, ultrasound scan, electroencephalography, CT scan,
beauty salons and other providers of hygienic services;
k)
Owners of inns, guest houses, and lodgings;
l)
Owners of entertainment halls and restaurants, preparers of readymeal, providers of entertainment services, and lenders of utensils;
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m) Notaries public;
n) Owners of authorized repair shops and service stations;o)
Owners of car exhibitions and shops, estate agencies and rent-a-car
agencies;
p)
Goldsmiths, jewelers, and sellers of gold and jewelry; andq) Sales agents and sellers of ironware).
Legal costs of those taxpayers who are subject to paragraphs (a) or (b)
Article 95 of Direct Taxes Act (as listed above), in the event of
submission of tax returns in the due time, will be deductible (as perArticle 148 of Direct Taxes Act (see Section II.2.1.4.3.3 below). The
medical costs, however, will always be deductible.
With the exception of those which are available exclusively to
companies, the exemptions for individuals are the same as those listed atSection II.2.1.4.3.2 below. In addition, the following exemptions apply to
individuals only:
1) 150 times the base minimum salary for individuals; and
2) 300 times the base minimum salary for civil partnerships
(regardless of the number of partners) to be allocated equally to the partners.
Dividends payable from tax-exempt incomes by joint-stock companies
and joint-stock partnerships or other forms of legal entities to theirshareholders, partners, or members are exempt from tax. The exemption
is also preserved where such dividends are channeled through other kinds
of legal entity before being paid to the individual shareholders or
guarantor partners.
Deductible expenses are the same as those listed at 2.1.4.3.3 below.Depreciation is allowed as outlined at 2.1.4.3.5. The Act contains no
provisions regarding losses incurred by individuals.
Income of all sources taxable under Chapter 4 of Direct Taxes Act is
aggregated and taxed at the rates of Art. 131 (see Table 4 in Section
II.2.1.3 above).
All taxpayers must file a tax return by 22 July following the end of the
fiscal year which runs from 21 March to the following 20 March. All
returns must be sent to the tax affairs office local to the taxpayer’s place
of business or where there is no place of business to the office local to thetaxpayer’s place of residence. A single return suffices for a civil
partnership and also for a manufacturing concern with a number ofoffices or outlets.
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Taxpayers obliged to maintain statutory books of account are required to
withhold tax at the rate of 3% on sums paid by them in respect of a
number of items including medical fees, fees for arbitration, consultation,
administrative and fiscal services, construction work, and rental of plantand machinery. The tax so withheld must be paid to the Ministry of
Economic Affairs and Finance within 30 days and the name and address
of the recipient of the payment must be forwarded to the recipient’s local
tax affairs office within the same time limit.
Agents are required to withhold this tax both on their own account with
respect to commissions earned and on the account of their principals.
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2.1.4. Corporate income tax
Direct Taxes Act imposes a tax on the income of "legal entities", a term
which encompasses companies, partnerships, cooperatives and other
bodies of similar nature.
2.1.4.1. Type of tax system
The Iranian system of corporate taxation is a two-tier system, a
combination of both the classical and the imputation systems. On one
hand, the profits are first taxed at the corporate level and no credit is
granted at the shareholder level and on the other hand, dividends
distributed by the companies among the shareholders are exempt from
taxation.
2.1.4.2. Taxable personsIranian entities are subject to tax on all their income wherever earned.
Non-Iranian entities are subject to tax on income earned in or received
from Iran through the granting of licenses and other rights or through the
provision of training and technical assistance, and/or the supply of films.
Only government organizations and municipalities are exempt from tax.
2.1.4.2.1. Residence
The term resident means any person who under the laws of the IslamicRepublic of Iran is liable to tax therein by reason of his residence,
domicile, and place of registration, place of management or any other
criterion of a similar nature.
2.1.4.3. Taxable income
2.1.4.3.1. General
The aggregate income of companies, and also the income gained from the
profit-making activities of other legal persons derived from different
sources in Iran or abroad, less the losses resulting from non-exempt
sources and minus the prescribed exemptions, shall be taxed at the flat
rate of 25%, except for the cases for which separate rates are providedunder the Iranian Direct Taxes Act.
With regard to the Iranian noncommercial legal persons that are not
established for distribution of profits, should they engage in profit-making operations, the total taxable income derived from such activities
shall be taxed at the rate of 25%.
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Foreign legal persons and entities residing abroad shall be taxed at the flat
rate of 25% in respect of the aggregate taxable income derived from theoperation of their investment in Iran or from the activities performed by
them, directly or through the agencies like branches, representatives,
agents, and the like, in Iran, and also the income received by such personsand entities from Iran for granting of licenses and other rights,
transferring technology and/or providing training services, technical
assistance and cinematographic films. The representatives of such foreign persons and enterprises in Iran shall be subject to taxation with respect to
the income they may earn under any titles in their own account. There are
two exceptions in this regard:
• Foreign insurance enterprises earning income by acceptingreinsurance from Iranian insurance institutions shall be taxed at the
rate of 2% on their premium income and on interest on theirdeposits in Iran. Where the Iranian insurance institutions are
engaged in insurance business in the country of their foreign
reinsures, and enjoy tax exemption in that country on their own
reinsurance operations; the said foreign reinsures shall also beexempted from taxation in Iran.
• The tax charged on foreign airline and shipping concerns shall be
5% of all amounts received by them for the carriage of passengers,freight, etc. from Iran, whether such amounts are received in Iran,
at the destination or en route. Where the tax applicable to Iranianairline or shipping concerns in a foreign country is more than 5%
of the fairs received by them, and the situation is declared by the
respective Iranian organization, the Ministry of Economic Affairs
and Finance shall increase the tax of the airline and shippingconcerns of such country on par with the rates so applied to theIranian concerns.
At the time of computation of the income tax of legal persons, whether
Iranian or foreign, the pre-paid taxes shall be deducted from theapplicable tax according to the pertinent regulations, and any overpaidamounts shall be refundable.
The legal persons shall not be subject to any other taxes on the dividends
or partnership profits they may receive from the capital recipientcompanies.
In cases where some payments other than income tax are to be collected
on the basis of taxable income, the tax of relevant taxpayers shall becomputed after deduction of such non-tax charges.
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2.1.4.3.2. Exempt income
Eighty percent of the income of manufacturing and mining units that have production licenses issued after 27 April 1992 and are situated outside a
radius of 120 km from the centre of Tehran, 50 km from the centre ofIsfahan or 30 km from the centre of any administrative centre or city with
a population of more than 300,000 in any region will be tax exempt for 4
years. For units situated in a deprived region, the exemption is for 100%of income for a period of 10 years.
Amounts set aside from the declared profits of industrial and mining
concerns for renovation, development and completion reserves are tax
exempt provided that prior permission for each case is obtained from the
relevant Ministry.A hundred percent of income derived from export of industrial finished
products and 50% of income derived from export of other items will be
tax exempt provided they are included in an approved list.
Income generated from the educational activities of non-profit
universities, schools or vocational institutions is exempt from taxation.
Income from publishing, journalistic, cultural and art activities that have
received the appropriate permits from the Ministry of Culture and Islamic
Guidance will not be taxed.
Income of workshops, cooperatives and guilds engaged in production of
handmade carpets and handicrafts are exempt from taxation.
The following kinds of income are all tax exempt:
• Profit or bonuses accruing on fixed deposit, savings or currentaccounts with Iranian banks or non-bank credit institutions, but not
where the deposit is made by another bank;
•
Bonuses accruing on government and treasury bonds;•
Interest paid on overdrafts and fixed deposits by Iranian banks to
foreign banks provided that reciprocal treatment is given;
•
Interest payable on land reform bonds;
•
Endowments and donations received by sanctuaries, mosques,
hosainiyehs, takyehs1 and similar religious institutions;
•
Cash and non-cash donations received by the Red Crescent Society
of Iran;
1 Hosainiyehs and takyehs are two religious institutions for Shiite Muslims in which they mourn for
those imams who have been martyred at the beginning of the Islamic era.
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•
Cash and non-cash donations or payments received by pension
saving funds, the Organization of Health Services Insurance and
the Social Security Organization as well as insurance premiumsand pension contributions;
•
Cash and non-cash donations received by Islamic schools;• Cash and non-cash donations received by foundations of the
Islamic Republic of Iran;
• Amounts paid out of the State Fund for Development Endowments;
• Income of persons arising from benevolent contributions;
• Amounts paid out of public endowment funds and used for
religious, educational or scientific purposes or for the alleviation of
suffering as a result of a natural catastrophe;
•
Cash and non-cash donations received by charitable organizations
provided the amounts received are used for charitable purposes;•
Cash, non-cash donations and membership fees received by
professional associations, parties and non-government
organizations that are appropriately licensed;
• Endowments of donations to societies and missions of religious
minorities, provided these are approved by the Ministry of Interior;
• Publishing, journalistic, cultural and art activities performed on the
basis of a permit of the Ministry of Culture and Islamic Guidance;
• All income from agriculture and horticulture; and
•
Income from the export of goods that enter the country on transit basis and are re-exported unchanged.
2.1.4.3.3. Deductions
Expenses which are deductible in arriving at taxable income are listed in
Art. 148 of Direct Taxes Act. No other expenses may be deducted, except
that the Ministry of Economic Affairs and Finance may propose other
categories of expenditure which, if approved by the Council of Ministers,
will be deductible. Conversely, not all expenditure incurred in the listed
categories is necessarily deductible. From time to time, the Ministry ofEconomic Affairs and Finance prescribes limits on deductible amounts in
certain categories.
Expenditure must be supported, to a reasonable degree, by documentary
evidence and be exclusively connected with the earning of income duringthe fiscal year in question. Specific provisions allow the deduction of
reserves for deductible expenses related to the current year and of
deductible expenses related to previous years, payment of which becomes
due in the current year.
The categories of deductible expenditure listed in the Act are as follows:
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1)
The cost of goods and raw materials sold or used to produce goods
sold or to provide services;
2) Personnel costs including:
• Basic salaries, wages and regularly recurring benefits in cash and
in kind (the deductible amount for benefits in kind is the cost to theemployer);
• Payments which do not recur regularly such as New Year bonuses,
overtime payments and traveling expenses;
•
Health and safety expenditure and medical, accident and life
insurance premiums of personnel;
•
Retirement pensions and payments made in connection with
termination of employment;
•
Social security contributions;•
Funds reserved for financing the retirement pensions, supervisors'
pensions, termination of employment payments, dismissal
compensation and payments for buying-out of services of the
enterprise's employees up to the amount of the latest monthlysalaries and wages and the balance resulted from the adjustment of
the previous years' salaries. This rule shall apply to the reserves
already deposited in bank accounts as well;
3) Rental of enterprise's premises in case of being rented. The amount
of rental shall be determined on basis of the official deed (if any),otherwise within the normal range;
4) Rent of machinery and equipment;
5) Costs of fuel, electricity, lighting, water and communication;
6) Business insurance;
7) Royalties, duties and taxes paid. Income tax, withholding tax
imposed by Direct Taxes Act and fines paid to government bodies
are not, however, deductible;
8)
Research and development (R & D) and training expenditure;
9) Compensation paid for damages resulting from the operations or
assets of the business provided that the extent of the liability is
established and provided that no other party can be held
responsible and provided that the damages in question cannot
otherwise be recovered;
10) Cultural, sports and welfare expenditures paid in respect of
workers to the Ministry of Cooperatives, Labor and Social Welfare
up to a maximum amount of IRR 10,000 per each worker;11) Reserves against doubtful claims (in the event that the claims are
connected with the business) are unlikely to be recovered and the
reserve is administered under a special heading in the company
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accounts until the claim is either recovered or becomes a definite
loss;12) Losses of legal persons, if established according to their statutory
books of accounts and in conformity with the regulations. Such
losses can be carried forward and be offset against the income ofsubsequent year or years;
13) Small expenses incurred in connection with the premises of the
enterprise that are customarily borne by the tenant, in case the place of business is rented;
14) Expenses incurred in the maintenance and upkeep of the premises;
15) Transportation expenses;
16) Expenses related to the services of transportation of employees,
enterprise's teahouse and warehousing costs;
17) Fees paid in proportion to the services rendered such ascommission, brokerage, legal fees, consultation fees, conference
fees, auditors fees and fees for administrative and financialservices;
18) Fees paid or allocated to banks, cooperative funds and authorized
non-bank credit institutions for the carrying out of the
enterprise’s operations;
19) Price of office supplies and office equipment that are usuallyconsumed within one year;
20) Cost of repair and maintenance of machinery and equipment andalso the cost of replacement of spare parts, provided it would not
be considered as a basic repair;
21) Abortive mine exploration expenditure;22) Membership and subscription fees in connection with the business
activities of the enterprise;
23) Bad debts in excess of the reserve for doubtful receivables, if it is
proved by the taxpayer to be unrecoverable;
24) Currency exchange losses computed in accordance with accepted
accountancy practice, provided it is applied consistently fromyear to year by the taxpayer;
25) Normal wastage of production;
26) Reserve of payable acceptable expenses related to the assessment period;
27) Acceptable expenses related to previous years, the payment or
allocation of which is realized in the tax year under examination;
and
28) Expenses for purchasing of books and other cultural and art goods
for employees and their dependents, up to a maximum amount
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equal to 5% of the annual exemption threshold in respect of eachindividual.
• Note: Other expenses that are not mentioned in Art. 148 of Direct
Taxes Act, but are considered to be related to the earning of the
enterprise's income, shall be accepted as deductible expenses basedon the proposal of the Iranian National Tax Administration andapproval of the Ministry of Economic Affairs and Finance.
2.1.4.3.4. Valuation of inventory
The cost price method is used for the valuation of inventory. To calculate
the cost price, the companies are allowed to choose among the specific
identification method , FIFO, or weighted average.
2.1.4.3.5. Depreciation and amortizationDepreciation of assets is deducted in computing taxable income. Fixed
assets may be depreciated if their value is subject to a decrease arisingfrom wear and tear or obsolescence. An asset may not be depreciated
because of a decrease in the value simply arising from a price fluctuation.
Depreciation is computed on the basis of the cost of the asset (to which
expenditure on a total overhaul or refurbishment may be added) and is
calculated in a usable condition from the time when the asset is first at the
disposal of the business and. Assets fall into one of two categories fordepreciation purposes – those depreciated according to fixed percentage
rates and those depreciated over a set number of years. Assets falling into
the first category are to be depreciated using the declining balance
method. For assets falling in the second category the straight-line method
is to be used. When an asset is sold or becomes unusable, the
undepreciated balance, less any sale proceeds, may be debited to the profit and loss account in the year of disposal. Depreciation rates range
from 5% to 100% and the period over which assets may be depreciated
from 2 to 15 years. The following table represents a small sample from
the schedule of depreciation rates and depreciation periods:
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Table (5): Depreciation rates
Asset Depreciation
percentage
(%)
Depreciation
period
(years)
Power generators and power generating stations 10%
cooling towers, water treatment equipment, fuel
pumps and storage tanks
15
Machinery used for metal working, processing,
forging and moulding operations
10%
Trucks, lorries and trailers with a capacity up to 20
tons
35%
Production machinery used in spinning and
weaving industries
8
Machinery used for producing and packing of
pharmaceutical materials
10
Machinery used for processing and producing
acidic materials in chemical industries
6
Machinery used for processing and refining oil and
its derivatives
10
Machinery used for steel melting and moulding
operations
8%
Accelerated depreciation rates are also available where fixed assets are
purchased as a part of a renovation of production lines or as a tool to
develop enterprises.
2.1.4.3.6. Reserves and provisions
Provisions which are set aside as equal to depreciation costs are
deductible.
Reserves against doubtful claims are deductible in computing the taxable
income, provided that they are connected with the business, they areunlikely to be recovered and the