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

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

4. Combination of Tax Revenues (1989-2012) The share of “tax on properties” in the total direct taxes collected has decreased from 15% in 1989 to 6.4% in 2012. The share of “individual income tax” in the total direct taxes collected has also decreased from 34% in 1989 to 24.8% in 2012. 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.

5. Combination of Tax Revenues (1989-2012) The share of GST (Goods & Services Tax) in the indirect taxes collected has decreased from 34% in 1989 to 22% in 2008. 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 2012. 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 2008. 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.

6. Trend of Tax Revenues (1989-2012) 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 1989838350 1,188 1997130554,289 17,345 20059862035,954 134,574 19901193502 1,695 1998142554,432 18,687 200611181539,806 151,621 19911813952 2,765 1999200265,805 25,831 200714299648,819 191,815 199225301,245 3,776 2000248947,948 32,842 200818305256,689 239,741 199329381,123 4,061 20012716111,635 38,797 200923748162,554 300,035 199442071,284 5,491 20023417816,409 50,587 201020664277,884 284,526 199560631,250 7,313 20034269822,401 65,099 201128052278,930 359,452 199696262,934 12,560 20045133433,087 84,421 2012 32187476,000 397,874

8. T/GDP Ratio (2005-2012) A review of T/GDP ratios during 2005-2012 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%.

9. Tax/GDP Ratio Year20052006200720082009201020112012 T/GDP (Including Tax on Imports) 7.36.7 7.17.86.66.76.1 T/GDP (Excluding Tax on Imports) 5.34.955.46.14.85.24.9

10. Tax to Government’s Current Expenditure Ratio (2005-2012) The increase rate of government’s current expenditure during the period 2005-2012 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.

11. Tax to Government’s Current Expenditure Ratio (2005-2012) Year 20052006200720082009201020112012 Tax to Current Expenditures Ratio 40.736.545.542.547.143.243.643.7 Growth of Current Government Expenditures 42.725.71.333.85.411.025.09.2 Growth of Tax Revenues59.412.726.525.016.61.826.310.7

12. Ratio of “Tax Revenues” to the “Total Resources of the Government’s General Budget ” (2005-2012) 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.

13. Ratio of “Tax Revenues” to the “Total Resources of the Government’s General Budget ” (2005-2012) Year20052006200720082009201020112012 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 2926312933293037

14. 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

15. 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

16. 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

17. 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)

18. 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

19. 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

20. 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.

21. 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

22. 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