Taxation in Iran

According to the Expediency Council, more than 60% of economic activity in Iran evades taxation: 40% of the economic activity falls under an exemption and the remaining 21% are conducted off-the-books (2012).[7] Iran is losing between $12–20 billion a year through tax avoidance and evasion.[10] However the Iranian National Tax Administration only identified and collected through audit unpaid taxes worth 184 trillion rials ($1.5 billion) in FY 2018.[11] Starting in 2015, Iran's parliament decided to tax Setad and the Islamic Revolutionary Guard Corps.[12]

Tax evaders typically are either involved in activities in the gray sector of economy or in the underground market which they do not divulge. Others are engaged in smuggling and the black market.[10] The loses are equivalent to 20% to 25% of the country's gross domestic product revenue.[10] In 2014, international medias reported Iranian nationals to be listed among the tax evaders in Switzerland.

In 2019, Iranian tax revenues increased by 35% because of reported taxation evasion crackdown.[13]

In addition to these mandatory taxes, as of 2007, Islamic taxes were collected on a voluntary basis. These included an individual's income tax (Arabic khums, “one-fifth”); an alms-tax (zakat), which has a variable rate and benefits charitable causes; and a land tax (kharaj), the rate of which is based on the principle of one-tenth (ushr) of the value of crops, unless the land is tax-exempt.

Al Khums or the Fifth of excess income paid as a form of Zakat (alms-giving), which is usually reserved for Aal-Al-Bayt, Prophet Mohammad’s Household. The black turban of Khamenei signifies that he belongs to Imam Ali Ibn Abi Talib and Fatima’s household and being Al Wali Al Faqeeh (guardian of Islamic jurists with full control of the society's affairs) gives him the majority share of the Fifth, as was the case with Ayatollah Khomeini. The amount is worth hundreds of millions of dollars accrued annually and added to Setad’s revenues.[19]

As of 2009, Iran has no capital gains tax on the sale of real estate assets. However, a capital gain tax will be introduced with the implementation of the 2010 economic reform plan.[21][22]

• Capital gain: no tax (bonds or equities).[17][26]
• Interest income: no tax.[26]
• Participation papers: Profit and awards accrued are tax exempt.[17]
• Listed companies: 10% tax exemption, companies holding 20% free loat shares are provided 20% tax exemption.[24]
• Foreign investors: Foreign investors in TSE are tax-exempt.[27]

Taxation in Iran generates particular unease among foreign firms because they appear to be arbitrarily enforced[30] – tax bills are initially based on 'assumed earnings' calculated by the Finance and Economy Ministry according to the size of the company and the sector in which it operates. Factors such as the quality and location of a company's offices are also widely believed to affect tax assessment.

All foreign investors doing business in Iran or deriving income from sources in Iran are subject to taxation. Depending on the type of activity the foreign investor is engaged in, various taxes and exemptions are applicable, including profit tax, income tax, property tax, etc.[31]

Generally speaking, Iran has two types of laws concerning foreign companies. The first are laws that address issues concerning foreign companies directly such as the Foreign Investment Promotion and Protection Act (FIPPA) and the second are general laws of which certain articles or by-laws address foreign companies, for instance the Taxation Law and the Labor Law. The Tax Act had divided the source of income earned by foreign companies either direct or through their branches in Iran into three main categories:[32]

• Income earned in Iran by way of contracting operations
• Income earned from Iran by way of royalties and licensing fees
• Other activities - trading operations, etc.

[Note: The Amendment has introduced certain changes in the tax treatment of the above activities.]

Foreign legal entities must pay taxes on all taxable income earned through investments in mainland Iran or from direct or indirect (through agents, branch offices, etc.) activities in mainland Iran, at the flat rate of 25% as mentioned in Article 47 of the Amendment law.[33]

Income from royalty and licensing fees received from industrial and mining companies, government ministries and municipalities, and income from film-screening rights are subject to a deemed taxable coefficient on income of 20 per cent. All other income from royalties and licences from foreign companies is subject to a deemed taxable coefficient on income of 30 per cent. The coefficients are based on the standard corporate tax rate of 25 per cent, so that the effective tax rate is either 5 per cent or 7.5 per cent.[29]

[Note: The Amendment has removed the confusion surrounding 'technical assistance contracting' by including 'technical assistance' and 'transfer of technology' in contracting operations subject to tax on the basis of 12 per cent of annual fees.]

The same corporate and profit taxes will be applied to the taxable income of branches of foreign companies (contractors, consultant engineers, et al.)

Other income earning activities of foreign branches will be subject to taxation on an actual basis, i.e. based on their income tax return as filed and supported by their statutory accounting books.[29]

Expenses incurred in Iran by Iranian registered branches and representative offices of foreign companies that are not authorized by their head offices to engage in any trading activity but are only authorized to conduct marketing and market research in Iran are tax deductible upon presentation of receipts from their head office.

• Income tax exemptions are available to new factories established in "special areas", and last from four to eight years, from the first day of operations. In addition, 80% of the reported profit of all manufacturing, mining, assembly plant and related engineering companies are exempt from income taxes. Tax incentives, meanwhile, are available to manufacturing, mining, agricultural activities, exports and investment in special areas.[32]
• In the agricultural sector, by virtue of Article 81 of[34] the revenues of activities in the fields of agriculture, animal husbandry and livestock, pisciculture, apiculture, raising poultry, hunting, fisheries, sericulture, and restoration of forests, pasturage, orchards, trees and palms of whatever kind are exempted from taxation.
• The income of rural, tribal, and agricultural cooperative societies and those of fishermen, laborers, employees, students and their unions are 100% tax exempt.
• The revenues from hand woven carpets and handicrafts and the related production cooperative companies and unions are exempt from taxation.
• The revenues of inventors or discoverers from their innovations and discoveries are exempt from taxation. Also revenues of research and development activities of institutes which have obtained licenses for such activities from the relevant ministries will be exempt from taxation for 10 years as of the entry into force of the Amendment, according to the provisions of the relevant circular of the Council of Ministers.
• Profit and awards accrued to participation papers are tax exempt.
• All housing production projects for the low-income groups and housing production in the dilapidated urban fabrics will enjoy a discount of around 50% on construction tariffs and construction density fees. The remaining amount can be paid in installments and will not be subject to any commission fees.[20]
• Starting in 2014, foreign investors, who establish production lines in Iran and export 30 percent of their products, will be entitled to tax exemptions.[35]

Location requirement for tax-exemption:

1. If investment located out of a 120-kilometer radius from the center of Tehran,
2. If investment located out of a 50-kilometer radius from the center of Isfahan,
3. If investment located out of a 30-kilometers radius from the centers of provinces (except for the Industrial Estates within this radius)

The exemptions on exports of manufactured and agricultural goods remain in force, but an ambiguity has occurred in the amendment regarding exemptions extended to the public sector (Iranian Government owned entities). Government owned enterprises and their shares in the private sector entities were excluded from all exemptions granted under the Tax Act.[36]

This exclusion has been removed from the relevant texts in the amendment. Until clarification is provided, it is not certain whether or not the government minority shares in the private sector manufacturing, mining and exports activities would enjoy the exemptions granted.[36]

The 50 per cent tax exemption previously granted to tourism enterprises has been extended to include five-star hotels.[36] Since 2014, foreign companies who set up business in Iran will receive corporate tax breaks of up to 50%, if they export at least 30% of their products.[37]

Losses sustained by all taxpayers engaged in trading and other activities, who are required to keep proper books of account, provided they are accepted by the tax authorities; will be carried forward and written off against future profits for a period of three years.[29]

List of countries that have a double-taxation avoidance agreement with Iran (as of 2014):[8]

Algeria, Austria, Azerbaijan, Bahrain, Belarus, Bulgaria, China, Croatia, France, Georgia, Germany, Indonesia, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Lebanon, Malaysia, Oman, Pakistan, Poland, Qatar, Romania, Russia, Serbia, South Africa, South Korea, Spain, Sri Lanka, Sudan, Switzerland, Syria, Tajikistan, Tunisia, Turkey, Turkmenistan, Ukraine, Uzbekistan, Venezuela.

The Amendment has for the first time after 1979 reintroduced the concept of the tax audit to be undertaken by 'official accountants' and their designated firms. The taxpayer or the tax administration can choose to appoint an official accountant or a designated firm of official accountants to examine his records and report to the tax authorities.

The accounting profession is not particularly organized in Iran. However, the influence of the foreign accounting practices implies an evolution and a relation between the Iranian accountants training and the American one. Thus, an increasing number of accountants and Iranian auditors receives an American training and apply it in Iran. This will contribute to strengthen the harmonization of Iranian book-keeping systems with international standards. Iranian banks use interest-based transactions and retain the accounting standards of conventional banking.[38] Following international sanctions, KPMG, PriceWaterhouseCoopers, RSM, Crowe Horwath and Grant Thornton have suspended their activities in Iran in recent years.[39] The main professionals and representative organization in Iran is the Iranian Institute of Certified Accountants.

Starting in FY 2017, all Iranian companies are required to prepare their financial statements based on International Financial Reporting Standards (IFRS).[40]

In 2008, sales tax rate in Iran was 3%.[41] Value Added Tax Act (VATA) was put into effect since mid-year 1387 (2008).[42] Its implementation was suspended following 10 days of widespread demonstrations across Iran in October 2008.[43] This Act has substituted all previous laws and regulations dealing with indirect taxes (including sales tax). According to the VATA, supply of commodities and services, as well as their imports and exports, shall be subject to the provisions of this Law.

According to article 16 of this Act, the VAT rate is 1.5%, but the VAT rates of certain goods such as "cigarettes and tobacco products" and "gasoline and jet fuel" are respectively 12 and 20%. In addition to the VAT rates just mentioned, article 38 of VATA levies the following duties on goods and services which are subject to this Act:[17]

The fifth development plan stipulates that VAT is to be increased by 1% each year, in order that it reaches 8% by the end of the plan (by 2015). As of 2010, VAT for goods and services (except oil and tobacco products) was 3%.[44]

VAT will not apply to free trade zones in Iran. However, goods and services entering Iran's customs territory will be subject to payment of VAT according to the law.[45] Articles 12 and 13 stipulate that supply and importation of some commodities and services including the following shall be exempt from the VATA:

• a) Unprocessed agricultural products;
• b) Livestock and live poultry, aquatic products, honey bees and silkworms;
• c) All types of fertilizers, pesticides, seeds and saplings;
• d) Bakery flour, bread, meat, sugar, rice, cereals and soya, milk, cheese, shortening and baby formula;
• e) Books, press, notebooks and all types of printing papers, writing pads and papers and press papers;
• f) Passenger goods for personal use, as exempted under the Export-Import Regulations ;
• g) Immovable property;
• h) All types of medicine, medical consumables, medical services (human, animal or plant) as well as rehabilitation and other supportive services;
• i) Services subject to payment of salary taxes envisaged in the Direct Taxation Law;
• j) Banking and credit services rendered by banks, credit institutes and cooperatives, authorized interest-free loan funds and cooperative funds;
• k) Public transportation services and urban and inter-city roads, railway, air and sea passenger transport services;
• l) Hand woven carpets;
• m) All types of research and training services, as stipulated in a By-Law to be approved by the Council of Ministers;
• n) Animal and poultry feed;
• o) Export of goods and services from official exit points. Any tax paid on account of such exports shall be reimbursed (as regards commodities) upon submitting a certification of the customs certifying the export of goods. Value Added Tax (VAT) does not apply to free trade zones (FTZ) in Iran. However, goods and services entering Iran's customs territory from FTZs will be subject to payment of VAT according to the law.[45]

This tax only applies to companies, which are subject to a municipal tax at the rate of three per cent of their taxable income (2006).

Neither the Electronic Commerce Law of 2004 nor any other Iranian legislation deals specifically with taxation arising from e-commerce.[46]

Iran's trade balance (2000-2007). For the first time, the value of Iran's non-oil exports is expected to reach the value of imports by 2012.[48]

Iran import tree map (2012)

.

Iran's balance of payment (2003-2007). Its capital account (both long and short term) has been decreasing during that same period.[49]

As of 2015, there are a variety of items which are exempt from taxes being imported into Iran, such as:[50]

• unprocessed agricultural products
• flour, bread, sugar, rice, milk, cheese
• machinery
• livestock and animals
• feedstock and pesticides.

As much as 70% of Iran's imports could be substituted by domestically produced products. Iran has passed a law that bans the import of foreign goods and services when similar products or capacities already exist in Iran.[51][52][53][54] The government says that 200 thousand new jobs are created with every one billion dollar reduction in imports.[55] Reported issues are increasing the quality of domestic products, more research and development needed, adaptation by domestic suppliers to the Iranian consumer tastes and marketing.[56] As part of the resistive economy, the Supreme Leader of Iran has urged Iranians to consume more domestic products over imported ones.[57]

In 2019, Iranian media reported that foreign firms were dumping their medicines in order to hinder the development of competing domestic pharmaceutical firms.[58]

In an effort to streamline and harmonize the customs procedure with other governmental and private partners, the Government of Iran has selected ASYCUDAWORLD as a tool for its customs administration in order to move toward e-commerce and e-customs. This project is a technical cooperation project between the Islamic Republic of Iran Customs Administration (IRICA), United Nations Conference on Trade and Development and UNDP.[59] As of March 21, 2010, all imported goods must have barcode stickers Irancode that meet the national and international standards.[60]

Value added tax (VAT) will not apply to free trade zones in Iran. However, goods and services entering Iran's customs territory will be subject to payment of VAT according to the law.[45] In accordance with Article 12 of the Export-Import Regulations Act, the pre-exportation entry (temporary importation) of materials and goods to be used in producing, finishing, processing and packaging of exported goods are exempted from all import duties.[17]

One third of the imported goods in Iran are delivered through the black market, underground economy, and illegal jetties.[61] Iran is modernizing the customs to prevent the smuggling of contraband in and out of the country worth $12 billion annually.[62] Other estimates put the value of smuggled goods into Iran alone at $5.5 billion-$6 billion annually. In 2010, Police in Iran estimated about $16 billion worth of goods is smuggled into Iran each year. $12 billion worth of goods are illegal to have or own in Iran, with the remaining $4 billion being legal goods that are legal to own in Iran.[63] In 2013, smugglers imported $17 billion of goods. Nearly $3 billion of goods were also imported, using tariff exemptions, while the total import reached $50 billion in value.[64] Less than 1% of smuggled goods are intercepted by the authorities.[65]

Largest black markets in Iran are those of:[63][66][67]

• Drug smuggling ($8.5 billion),
• Petroleum smuggling (over $3 billion); 20 million liters of fuel per day as of 2014,[64]
• Alcohol smuggling ($912.5 million),
• Cigarette smuggling ($2 billion),
• Prostitution,
• Arms trafficking,
• Corruption,
• Unlicensed imported films and software packages,
• Cash ($1 billion),[68]

One Majlis member recently stated that IRGC black-market activities alone might account for $12 billion per year.[61] Iranian commander Mohammadreza Yazdi has stated that all IRGC economic activities are legitimate.[69] Besides the IRGC, rogue elements within the Government of Iran, Bonyads and the Bazaar are allegedly involved in the smuggling activity.[70]

Dubai and Khasab in the Persian Gulf are important foreign centers of smuggling into Iran.[70][71] These imports enter Iran through major ports such as Bandar-e Abbas or free trade zones such as the islands of Kish and Qeshm.[70] A total of 750,000 unlicensed small shops serve as conduit for the distribution of those goods throughout Iran.[65]

Excessive import tariffs (for items such as clothing for example) also contributes to smuggling in Iran.[70]

Up to 80% of the goods enter the country through unregistered ports and jetties in the Persian gulf, thus undermining the domestic industries in energy, agriculture, garment, textile, electronics, home appliances (which account for 13% of all the goods smuggled into Iran/or one third of all home appliances in Iran).[72][73][74][75][76][77][78] As of 2014, 75% of the cell phones in the market were smuggled into the country.[79]

As per 2010 Iranian customs report $14.43 billion worth of goods were smuggled in and out of Iran out of which $13.25 billion was the value of goods smuggled into Iran leading to loss of some 600,000 jobs.[80]