A Report on the Status & Reforms of the Iranian Tax System

Combination of Tax Revenues ( ) The trends of changes in the combination of the Iranian tax revenues during the period indicates that the share of direct taxes in the total tax revenues has increased from 55.5% in 1989 to 62.9% in 2012.

Combination of Tax Revenues ( ) The share of “tax on properties” in the total direct taxes collected has decreased from 15% in 1989 to 6.4% in The share of “individual income tax” in the total direct taxes collected has also decreased from 34% in 1989 to 24.8% in In contrast, the share of “corporate income tax” in the total direct taxes collected has increased from 52% in 1989 to 68.7% in 2012.

Combination of Tax Revenues ( ) The share of GST (Goods & Services Tax) in the indirect taxes collected has decreased from 34% in 1989 to 22% in However, this trend has changed upon the introduction of the VAT system in 2008 with the above-mentioned share being increased to 48.6% in Moreover, the share of “tax on imports” in the indirect taxes collected has had fluctuations over time until 2008 with an increase from 66% in 1989 to 78% in From 2008 up to the present time, however, the above- mentioned share has experienced a descending trend being decreased down to 51.4% in 2012.

Trend of Tax Revenues ( ) Year Tax Revenues Tax on Imports Total Tax Revenues Year Tax Revenues Tax on Imports Total Tax Revenues Year Tax Revenues Tax on Imports Total Tax Revenues , ,289 17, , , , ,432 18, , , , ,805 25, , , ,245 3, ,948 32, , , ,123 4, ,635 38, , , ,284 5, ,409 50, , , ,250 7, ,401 65, , , ,934 12, ,087 84, , ,874

T/GDP Ratio ( ) A review of T/GDP ratios during shows that it has all the time fluctuated between 6-8%. During this period, Iran has had an average T/GDP ratio of 6.8%.

Tax/GDP Ratio Year T/GDP (Including Tax on Imports) T/GDP (Excluding Tax on Imports)

Tax to Government’s Current Expenditure Ratio ( ) The increase rate of government’s current expenditure during the period has mostly been bigger than the rate of tax revenues increase. Tax to Government’s Current Expenditure Ratio has increased from 40.7% in 2005 to 43.7% in 2012.

Tax to Government’s Current Expenditure Ratio ( ) Year Tax to Current Expenditures Ratio Growth of Current Government Expenditures Growth of Tax Revenues

Ratio of “Tax Revenues” to the “Total Resources of the Government’s General Budget ” ( ) The share of tax revenues in the resources of the government’s annual budget has increased from 28.6% in 2005 to about 37% in 2012.

Ratio of “Tax Revenues” to the “Total Resources of the Government’s General Budget ” ( ) Year General Budget Resources470,990574,989629,609814,235845,273971,1751,185,4861,077,000 Tax Revenues134,574151,622191,816239,742279,481284,528359,460397,874 Tax Revenues to General Budget Resources

An Analysis of the Status Quo of Tax System in Iran The Iranian tax system can be taken as consisting of three main components, each of which imply challenges ahead of the way towards a desirable tax system: 1) National production (and the way it is distributed) 2) Tax laws and regulations 3) The tax collection authority

Challenges of the Iranian Tax System from the Perspective of “National Production and the Way It Is Distributed” Inappropriate combination of national production and income distribution in the country The existence of a traditional distribution system and traditional business processes A high proportion of tax exempt sectors (limitation of tax bases) A relatively high volume of underground economy The existence of public institutions with high turnovers

Challenges of the Iranian Tax System from the Perspective of “Tax Laws and Regulations” Complexities of tax laws and regulations Low enforcement guarantees for tax laws Limitation of tax bases Broadness of tax exemptions and the low effectiveness of certain tax incentives Inappropriate structure of tax rates

Challenges of the Iranian Tax System from the Perspective of “the Tax Collection Authority” Shortage of expert human resources Shortage of financial and budget resources Lack of an integrated economic and financial database Inefficient tax processes Lack of an integrated approach to taxpayers Inefficiency of the tax assessment structure (dominance of a comprehensive tax audit system based on the audit of all cases)

Long-term Plan for the Improvement of the Iranian Tax System Resolving the challenges of the tax system requires long-term national planning. Some measures to be taken may be as follows: A) From the perspective of “national production”: Organizing and reinforcing the system of monitoring on money flows in the country Organizing and reinforcing the system of monitoring on commodity flows in the country Revising, reforming and improving business environment indices Increasing the costs of smuggling and informal activities Removing the tax discriminations already applicable to certain institutions and foundations and their subsidiary companies, and creating economic competitiveness Requiring the economic agents to use electronic money

Long-term Plan for the Improvement of the Iranian Tax System B) From the perspective of “national production”: Broadening tax bases (introducing new tax categories) Adjusting tax rates and removing tax discriminations Removing tax discriminations in respect of certain tax exemptions Reforming the structure of tax incentives (depreciations, amortizations and exemptions) Reforming and improving tax laws guarantees Simplifying tax laws and processes and making them transparent

Long-term Plan for the Improvement of the Iranian Tax System C) From the perspective of “tax collection authority”: Changing the structure of tax assessment from the current approach (comprehensive audit of all cases) into a modern approach (risk-based audit) Mechanizing the assessment system and promoting taxpayer services Promoting the self-declaration system in order to decrease tax collection costs and to increase mutual trust and respect between the tax authority and the taxpayers Enhancing taxpayers’ tax knowledge through trainings and improving tax information flows Promoting human resources development through comprehensive training programs Re-engineering the organizational structure and the institutional arrangements as well as improving the operational procedures in order to improve the efficiency of the Iranian National Tax Administration Equipping the Iranian National Tax Administration with modern IT technologies and mechanizing the operational processes in order to improve efficiency and satisfaction through the implementation of TARA Project Creating transparency in the performance of the Iranian National Tax Administration trough the establishment of an integrated tax audit system Enhancing the Iranian National Tax Administration’s financial resources and granting a budgetary independence to it.

Measures Already Taken in respect of Tax Reforms in Iran A) Legislative Capacities Created Preparing a directive for the exchange of information Preparing the By-law of Identity Database Requiring the taxpayers to use sales cashboxes Requiring the taxpayers to use Economic Code in their transactions Providing the preliminaries for using electronic signature

Measures Already Taken in respect of Tax Reforms in Iran B) Reform of Organizational and Administrative Structures TARA Project (Tax Automation & Revenue Administration) Introduction and implementation of VAT system Adoption of IT technologies and mechanization of many tax systems