A Shortcut to the Iranian Tax System 2015 16-12-1393

8/18/2019 A Shortcut to the Iranian Tax System 2015 16-12-1393

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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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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



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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



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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

Documents

A Shortcut to the Iranian Tax System 2015 16-12-1393