Taxation in Iran
Mardom Salari, Daily Newspaper, Vol. 1, No. 25, Feb. 24th, 2002, Page 9
By : Zivar Hatamizadeh & Alireza Gheibi
The taxation system in Iran is an indirect system and for the same reason it is not transparent enough. The only case where the law stresses on collection of direct tax is the tax on employees' salaries and workers' wages. On the whole taxes in Iran are divided into five categories, namely:
1. Taxes on companies
A criterion by means of which the power of government's financial policy tool is measured is the ratio between taxes and gross domestic product. This index demonstrates the efforts of the taxation system and tax collection with respect to value added created in the country. Furthermore, the same above ratio determines the government's withdrawal from economic sources and its injection into economic sectors in order to achieve the objectives of taxes. In post revolution years, due to various transformations in the economic system such as recession in production activities, outbreak of the (1980-88) war (with Iraq), political tensions, economic sanctions, and financing for reconstruction, etc, the above figure fluctuated widely decreasing from 8.6% in 1979 to 3.92% in 1995. As a result of improvement and extension of the economic activities, positive changes are observed in trends of the above ratios, and it increased form 5.26% in 1996 to 6% in 2000. It is worth mentioning that this ratio is high in the developed countries, for example in 1995, in France, the Netherlands and the UK it was 38.02%, 43.02% and 33.53% respectively.2- Composition of taxes
Composition of tax revenues shows that prior to 1975, indirect taxes always constituted a large portion of tax revenues. Following improvement of the economic activities and higher dependency on oil revenues, composition of tax revenues tended toward income generating sources. As a result the share of direct taxes rose from 22% in 1959 to 56% in 1975. During these years the taxation system underwent transformation. Ratification of the Direct Taxation Law in 1966 and making it more regular caused policy direction to tend toward collection of direct taxes. Following the (1979) revolution and the war (that started in 1980) tax revenues fluctuated. Along with the negative growth of effective economic variables in the tax base, such as imports, gross domestic products, and oil revenues, the tax revenues went down too. Fundamental actions carried out at the beginning of the revolution such as requisitioning and nationalization of big industries left a great impact on the taxation system so much so that even after the lapse of two decades, its effects are still noticeable in the taxation system, particularly in company taxes. In any case after amendment of the Direct Taxation Law in 1987, and positive changes in some macro economic variables, the share of indirect taxes came down and the share of direct taxes went up, so that the share of direct and indirect taxes changed from 59% and 41% to 60% and 40% respectively. Important tax items are discussed now. 2.1 Company Taxes: This tax is applicable to governmental and nongovernmental legal persons' incomes and profits, and taxation rates and exemption vary depending on the types and nature of the company. For example governmental companies are taxable, after deduction of 10% of company tax, as is provided in Article 131 of the Direct Taxation Law; whereas in the case of private companies, 10% company tax is deducted but the rate varies depending on whether it is joint stock, mixed and/or cooperative company. Based on classification of the budgeting system, company taxation is divided into two groups of taxes on governmental and nongovernmental companies. According to Article 4 of the Public Auditing Law, all companies whose at least 50% of capital belongs to the government, are considered to be governmental companies.
Nongovernmental companies are of two kinds: Namely private and public companies. Public companies benefit from governmental facilities, and are under government supervision in some cases. The companies affiliated to the Industrial Development and Renovation Organization (IDRO) and the National Industries Organization are of this type. In the actual taxation structure, company taxes constitute an important source of tax revenues.
There are two schools of thought as regards collection of company taxes. Some believe that in view of the legal personality of companies and the impact of their activities on allocation of economic resources, realization of taxation justice requires application of different rates to companies. Moreover tax is a tool with which one can control the activities of a company. Opponents of this stand believe that taxes on company profits are double taxes that are levied on and collected from company profits and shareholders' dividends. This idea is based on the thesis that taxation on company profits would in fact lead to a reduction in its shareholders' income. From this point of view the question of transfer of the taxation burden of the company to consumers and wage earners is overlooked. It is clear that when such transfers are taken into account the negative impacts of taxes on reduction of net profit of companies would be tempered. This type of taxes in the economic structure of the country, enjoying wide economic basis, would be able to play a potential role in generating tax revenues. Various tax exemptions, increasing number of rates, existence of channels for tax evasion, various duties and inefficient tax executive system are among the reasons that render it impossible to collect company potential taxes. In addition to that, some factors out of control of the taxation system, including inefficient governmental management, taking uneconomic advantage of large capitals of governmental companies, not only cause some taxes not to be collected but some of the government revenues are earmarked for compensation of losses of governmental companies.
According to studies carried out only 11% of companies' potential taxes are collected and the remainder is, due to tax exemption and evasion, left out of the sphere of tax assessment and collection. Composition of taxes shows that during 1963 to 2000, on the average 54.7% of direct tax revenues pertained to companies. The shares of governmental and nongovernmental companies out of total company taxes during the period under investigation were 52% and 46.7% respectively. In principle, as taxes levied on government companies are not collected from government sources, so they are not considered as a part of tax revenues, nevertheless on account of their distributive and allocation effects, they may be heeded in the decision making and policy devising process. In addition to the factors mentioned above as obstacles for collection of company potential taxes, inefficiencies of the accounting system and recording of assets and properties are considered to be foreign factors that leave impact on the taxation system and prevent real taxes from being collected. Under this system no unified method is followed for appraisal of annual amortization and costs of the capital and at the same time it is not clear what method is used in the present accounting system to deal with changes of foreign exchange rate and apply accounts on that basis. Furthermore due to the fact that company assets are not evaluated and reviewed, financial statements give a wrong picture of company financial capability and will also entail reduction of company taxes. Another question that must be discussed in the case of company taxes is tax evasion of services companies. In fact the companies that do not have tangible products, and considering that their economic conditions and rates of the services they render may be concealed it is difficult to assess taxes and it is easy to evade taxes. This question together with progressive rates would double the financial burden of the companies that operate in the industrial sector.
2.2 Occupation taxes: Occupations tax is another part of direct tax. This tax is based on the income of commercial, restaurant, hotel keeping, financial, fiscal, public services and other activities. According to Article 93 of the Direct Taxation Law, the income gained by a real person in Iran through his occupation will be taxable after taking account of the prescribed deductions. The taxpayers in this section are divided into two categories: The first group are obliged to keep a legal book (according to Article 96, under 18 occupation titles) and the second group are not obliged to do so (according to Note 5 Article 100). Therefore occupation taxes are determined either through investigation of legal books or directly.
Notwithstanding their high income and liquidity, occupation taxpayers have a smaller contribution to the tax income. Lower degree of expertise, high level of profit, possibility of tax evasion, and the speed of converting money into goods and goods into money are among the factors that lead to propagation of these occupations. With due regard to deficiencies of the assessment system, more than 4 million files were investigated in occupation tax districts in 1999, but yielded low results despite use of great deal of government facilities and resources.
It is noteworthy that despite profitability of occupations, the tax paid by each file in that year is estimated to be 681 thousands rials. It must be borne in mind that about 40% of the manpower for tax assessment and collection personnel are engaged in occupation tax area. About 10.4% of direct taxes were secured through occupation taxation during 1958 and 2000, whereas the contribution of salary taxes was about 17.3%. Calculations carried out about the basis of occupation tax reveals that the ratio of the occupation taxes collected to the potential calculated tax is about 7%. In summing up it can be said that the gap between the potential and actual amounts collected in companies and trades may be attributed to three factors. Firstly, the sources that have been recognized, but in effect the government does not have a share in their profits (such as companies affiliated to foundations), secondly sources that have been recognized but are covered by legal exceptions (mostly on the basis of Articles 132 and 138 of Direct Taxation Law), thirdly sources that have tax files but because of inefficiency of the tax offices their files are not active in the tax system. The inactivity of these files is mostly due to their large volume and inability of tax officers to assess the real taxes accurately. This means that a large number of sources would not be identified. The guild units without license are deemed to be among unidentified sources of the tax system of occupation. The important reasons for establishment of this kind of units are partly difficulty in obtaining license, and also the difficulty in having the authorization. In order to obtain trade license, each guild has its own laws about which some guild units have problems. For example some guilds, in order to obtain license, must allocate special areas for their jobs.
As they are mostly in the services occupation and because of the inefficiency of the assessment system, they can easily evade tax payment. Guild units that do not have license, which are more than 500 thousands, refrain from paying taxes and so produce adverse effects on optimum allocation of economic resources. Policy devising about discovery and identification of tax sources of occupations and prevention of tax evasion in this section requires, in addition to amendment of the taxation system, removal of inefficiencies that are imposed beyond the taxation system. Among such cases, references may be made to activation of guild associations, regularization of guilds, amendment of the distribution system, elimination of intermediaries, prevention of false jobs, etc. In recent years, the section of occupation taxes has had not so noticeable transformations as far as executive matters were concerned. District classification on the basis of guilds and geographical classification were among the projects enforced in 1995 to 1999. With the enforcement of the first project, the problems of the occupation section were aggravated and consequently the responsible officials considered a change in tax district on the basis of geographical locations. Despite these changes structural problems of this section still remain. It is worth mentioning that occupation taxes constitute the most important income items in the developed countries. In order to get some information about occupation taxes in some of these countries reference will be made to some indices. The ratios of occupation taxes to total revenues for five industrialized countries, namely the USA (1995), Canada (1994), Denmark (1995), Japan (1993), and the UK (1995) are 40.9%, 40%, 35.6%, 30% and 26.5% respectively, whereas for Iran (1994) it is 1.4%. Moreover, the average ratio of occupation tax to value added of services for 1980 to 1994 in Iran was O.6%, whereas it was 14.5% and 20% for the US and Italy respectively. The tax rates are also clear indications in this respect. In the developed countries (Greece, the US, Spain, Canada, France, the UK, Sweden, Austria, Italy, Norway, Denmark and Germany) occupation tax rates are between minimum 13% and maximum 37%, whereas in Iran it is between 12% and 54%. In any case, if the taxation system can direct occupation taxes to its potential capacity through amendment of the tax structure (including rates), exemptions, identification of tax sources etc. it will be able to achieve several important objectives simultaneously. Firstly as occupation section is involved mostly in unproductive activities such as brokering and acting as intermediaries, so through improvement of the taxation system unproductive savings can be directed to employment generating fields. Secondly, assessment and collection of taxes from real income of this section will help with amelioration of income distribution of the society. Transfer of unproductive resources from the services sector to productive sectors will be made possible during a short period.
2.3 Salary tax: According to Article 82 of the Direct Taxation Law, the income earned by a real person in return for his work is subject to income tax. The basis of this tax is salary (individual and principal remuneration), and the fringe benefits related to the job, whether permanent or otherwise, as well as incomes in kind, such as housing, cars etc. on the basis of a specific rate. According to Article 85 of the Taxation Law, the rates of salary taxes follow Article 131 of the same law, and payments made by persons other than principal payers of salary, wages etc. will be taxed by 10%. Salary and wage earners of public and private sectors are such taxpayers. Wage earners of the public sectors, who constituted 29% of the employees of the country in 1996, paid 56% of salary taxes, whereas the private sector's contribution, despite its higher number, was 44%. In comparison with other tax items, salary tax is least susceptible to evasion and also entails the lowest cost for its collection. Still as payers sometimes refuse to give information unreal payments are made. As in the private sector, it is possible for employers and employees to collude with each other about insertion of salary in the relevant list, so tax evasion is possible. During 1976 to 2000, the average shares of salary earners in the public and private sectors in the total wage earners' tax were 46.1% and 53.9% respectively. In recent years on account of ratification of the law on uniform payments, the above ratios have tended toward greater contribution of salary taxes in the public sector. In 2000, 51.5% of the total salary tax was secured from the public sector.
2.4 Consumption and sale tax: In the case of consumption and sale tax, the prices or quantity of goods or services are taken as the bases of taxation. Hence in the case of all goods and services supplied by the government to the people this tax can compensate for the costs. For example the income accrued from the tax levied on cars can be spent on the renovation of roads, and this tax may be collected as soon as goods and services are transferred to the market. In view of the fact that the price, quantity and weight of goods are specified, the taxes can be collected easily. Under this system, tax exemptions are established mostly for extension or restriction of various economic activities. For example tax on tobacco products may be levied to diminish the harmful effects of smoking. In any case, consumption and sale tax was put into effect for the time in Iran following enactment of the Urban Vehicles Taxation Law in 1909. It was extended later following extension of a tax base and introduction of new goods and services. With ratification of the Tax Law in 1966, collection of goods and services taxes entered a new phase, and some goods, such as gramophone records, cars etc. were covered by indirect tax. At present consumption and sale taxes have various legal bases. Moreover, according to legal documents, some tax items are based on production units, so that the annual price increase of goods and services would not lead to changes in tax revenues. For example when liter is used for taxation of oil derivatives, or piece of cigarettes is used for taxation on cigarettes, then price increase of any of the above items would not be taken into account in the tax income. In the Second Development Plan, it was prescribed that, through revision of indirect tax tariffs, this type of taxes should be exercised on the basis of price of goods. But this policy did not reach implementation stage during the Second Plan. Obviously extensive improvements in financial and taxation systems are required to make this plan operational. Exercise of tariffs on the basis of price of goods requires fixation of the system for obtaining duties. As long as the double taxation system continues due to prevalence of such duties, improvement of the tax levying system on the basis of price of goods would not be efficient and may lead to an increase in production costs and hence in increase in the price of goods. At present in most countries of the world a new kind of taxation called "tax on value added" has taken the place of consumption and sale tax. This kind of tax does not involve double taxation of sale and consumption, and as its tax base is wide and its rates are small, it would lead to an increase in tax revenue and improvement of the tax system. In any case during 1963 to 2000, consumption and sale taxes constituted, on the average, 30.6% of indirect taxes. Its share has increased in recent years due to expansion of the tax base on consumption and sale and introduction of new taxable goods, and its shares have risen to 37.3% and 40% in 1999 and 2000 respectively.
2.5 Tax on imports: This tax is directly related to quality and quantity of imported goods. In other words, the more the volume of imports of goods that are subjected to taxation rates, whether profit or tariffs, the higher the amount collected. For example during 1986 to 1988, the volume of imports declined as compared with the previous years and at the same time the share of taxation on imports from indirect taxation got down to the minimum. Since 1989, the share of this tax has been increasing owing to a rise in imports of goods. In view of the fact that the financial resources from exports into Iran are mostly attributable to foreign exchange earnings accrued from oil exports, hence the value added of oil and gas sector is the main factor of fluctuations in import tax.
The share of import tax in the total indirect tax during 1963 to 2000 was 69.4%. Imports tax in line with protection of domestic industries, causes a rise in the price of imported goods, and entails expansion and development of industries producing goods similar to foreign ones and hence reinforcement of domestic labor market. As compared with direct taxes, this kind of taxation is easier to collect from administrative point of view and its execution cost is more limited. In the present taxation system of Iran, there is a wide gap between the potential and actual imports taxes. Investigations reveal that the effective rate of commercial profit is 7.2% whereas the average applied rate is about 3.2%. In this system use of tools of customs duties and commercial profits was more for the purpose of securing higher tax revenues and less for bringing about improvement in economic activities. The maximum share of import tax in total indirect tax was 81.7% in 1996 and its minimum was 42.8% in 1988. As regards exemptions of import taxes references may be made to the following cases:
* Exemptions that are granted to some institutions and organizations within circulars of the Council of Ministers. These exemptions, without any economic justifications, are directed mainly to achieving economic objectives of special groups in the society. In this connection reference is made to three circulars: the circular dated Jan. 19, 1992 concerning a 10% reduction in tariffs of commercial profits of goods subject of ECO (Economic Cooperation Organization) protocol; decree dated March 19, 1992 concerning a 30% reduction of commercial profits tariffs of goods imported into Abadan and Khorramshahr ports; decree dated Nov. 30, 1989 about exemption from payment of 30% commercial profits of catering equipment of the Civil Aviation Organization.
* Exemptions that are established through laws and regulations of exports and imports or the number of existing tariffs in various chapters of the Law. It is to be noted that some goods that are imported to meet the needs of some organs or agencies are either exempted from import tax or lower taxes are levied against them.
In recent years, in most developing countries and along with the idea of structural adjustment, extensive reforms have been affected in import tax. These reforms that originate from adjustment programs of the World Bank, focus on reduction of average level of tariffs, reduction of dispersion of tax rates as well as reduction of exemptions. Experiences of reforms in six countries (Ghana, Colombia, Bangladesh, Korea, Egypt and Brazil) show that these countries have reduced the imports-related number and rates of tariffs and duties, simplified tariff structures and considerably lowered down dispersion and average level of tariffs. The most successful reform method was affected in Ghana and Colombia, and has decreased financial deficits in these two countries. The ratio of financial deficit to gross domestic products in these countries during the reform period, as compared with pre reform period, was reduced from 2.4% to 0.9% in Colombia and from 6.5% to 0.4% in Ghana.Summary and conclusion
1. The index of ratio between taxes to gross domestic products, as a criterion to measure the efficiency of the taxation system in recent years, has fluctuated widely, reaching the figure of 6% in 2000. This ratio sometimes reaches 50% in the taxation system of advanced countries.
2. The general sketch of the tax system shows that composition of taxes is not desirable. Consequently other companies must bear the burden of taxes, and those engaged in occupations pay lower taxes despite the fact that they face lower activity risk and earn higher profits.
3. During the period under investigation the main portion of tax revenues was secured from indirect taxes, but in recent years, direct taxation constituted more than 50% of tax revenues.
4. Potentially there is an extensive capacity in the taxation structure of the country, which is realizable through reform in the taxation system and in the sectors related thereto.