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Frequently Asked Questions on VAT in Iran

Frequently Asked Questions on VAT in Iran

 

1) What is the general status of the Value Added Tax (VAT) in Iran?

As per the Iranian VAT Act passed on the spring of 2008, any types of the supply of goods and services as well as their imports and exports are taxable, excluding the items exempted in Article (12) of the Act. The[m1]  business enterprises liable to the VAT system in accordance with the “Calls for Registration” announced by the INTA shall be obliged to register and collect their customers’ VAT and excise duties in the event of selling goods or providing services.

 

2) What are the goods and services exempted from the VAT in Iran?

The goods and services whose supply, provision and importation are exempt as per Article (12) of the Act include the following:

  1. various unprocessed agricultural products;
  2. live stock and live birds, aquatics, honeybees and silkworm;
  3. all kinds of fertilizers, pesticides, seeds and seedlings;
  4. food stuffs including bakery flour, bread, meat, cube sugar, sugar, rice, grains, soy, milk, cheese, vegetable oil and infant formula;
  5. books, presses, notebooks, and all kinds of papers used for printing, writing and publishing;
  6. goods donated free of charge to ministries, government agencies and non-governmental public institutions;
  7. goods imported into the Country by the passengers as for personal use, up to the given amount;
  8. immovable properties (land, buildings, etc.);
  9. all kinds of medicines, medicinal effects, health services (for humans, animals or plants) and rehabilitation and supportive services;
  10. services subject to tax on salary income in view of the Direct Taxes Act;
  11. banking and credit services rendered by authorized credit institutes and cooperatives and interest-free loan funds and cooperation fund, as well as transaction and settlement of securities and commodities in the stock exchange and OTC markets;
  12. inter-city and intra-city public passenger transportation services on road or railroad or by air or sea;
  13. handmade carpets;
  14. different types of research and training services;
  15. livestock, cattle and poultry feed;
  16. radar and navigational aviation equipments, particularly designed for airports; and
  17. items used exclusively for defense (martial and disciplinary) and security purposes.

 

3) What industries/businesses are subject to registration and collection of VAT in Iran?

In accordance with the “Calls for Registration” already announced by the INTA, all business enterprises, whether domestic and foreign, if they hold the following characteristics are considered as “VAT taxpayers" and shall be subject to registration and collection of their customers’ value-added tax on the sales of goods and services.

 

The First Call for Registration (implemented as of September 22, 2008):

  1. all Iranian importers and exporters of goods and services;
  2. all real or legal persons with a total annual sale of at least 3 billion Rials in 1386 (i.e. from March 21, 2007 to March 20, 2008), or at least 1,250 million Rials during the first 5 months of 1387 (i.e. from March 20, 2008 to August 21, 2008). Real persons under the supervision of the State Guilds Council have been excluded from the provisions of this Call for Registration.

 

The Second Call for Registration (implemented as of September 23, 2009):

  1. All real or legal persons involving in the following business activities:
  1. manufacturing factories and units for which establishments licenses or exploitation licenses are (or will be) issued by the relevant ministries;
  2. mine exploiters;
  3. providers of auditing, accounting, book keeping and financial services;
  4. certified public accountants and audit institutions, which are members of Iranian Association of Certified Public Accountants (IACPA);
  5. providers of management and consulting services;
  6. providers of IT services, including hardware, software and system design services;
  7. motels and three-star (or above) hotels;
  8. wholesalers, supermarkets, financial brokers, financial agents and agents for the distribution of domestic and imported goods and warehouse owners;
  9. representatives of commercial and industrial institutions, whether domestic and foreign;
  10.  motorized transportation and cargo institutions, licensed by the relevant land, marine and air freight authorities (excluding units engaged in the passenger transportation);
  11.  engineering and consulting engineering firms; and
  12.  advertising and marketing agencies.

 

The Third Call for Registration (implemented as of March 21, 2010):

  1. All real or legal persons, selling goods and providing services (exempt or non-exempt) with annual turnovers of at least 3 billion Rls. during the years 1387 (i.e. from March 21, 2008 to March 20, 2009) or 1388  (i.e. from March 21, 2009 to March 20, 2010); in this stage again, real persons subject to the State Guilds Council regulations are excluded.

 

The Fourth Call for Registration (implemented as of November 23, 2010):

  1. All real or legal persons, involved in one of the following professions:

1. owners of industrial workshops (under the supervision of guild unions or otherwise) with at least a 50 Ampere 3-phase electricity subscription);

2. jewelry sellers;

3. ironmongers;

4. owners of reception halls and restaurants;

5. owners of one/two stars motels and hotels, as well as hotel apartments;

6. owners of auto/car shows and auto/car shops and real estate agents;

7. owners of authorized car service centers;

8. owners of printing houses;

9. owners of notary public offices;

10. owners of computerized communication centers, communication services offices (mobile customer service offices and post agencies) and e-government services agencies (police +10), as well as City e-services offices;

11. owners of travel and tour offices; and

12. owners of cinemas, theaters, entertainment and sports centers.

 

The Fifth Call for Registration (implemented as of November 23, 2011):

  1. All legal persons with an annual turnover of at least 1 billion Rials in 1387 (i.e. from March 21, 2008 to March 20, 2009), 1388 (i.e. from March 21, 2009 to March 20, 2010) or 1389 (i.e. from March 21, 2010 to March 20, 2011);
  2. All legal persons created, established or registered before or after 1390 (i.e. after March 20, 2012), not yet subject to any Calls for Registration mentioned above, in case their total sales of goods or services (non-exempt or exempt) amounts to at least 1 billion Rials in 1390 (i.e. from March 21, 2011 to March 20, 2012) or the subsequent years, shall be subject to VAT from the very first taxable period, upon reaching the aforementioned threshold.

 

The Sixth Call for Registration (implemented as of March 21, 2015)

  1. Real and legal persons (regardless of the amount of their annual sales) engaged in the following activities:

- kebab shops, ordinary and traditional restaurants; and

- food chain stores under the same ownership or the same brand and trademark, regardless of the size and type of business units and the license type.

 

4) How is the VAT paid and collected in Iran?

By virtue of the provisions of Articles (19), (20) and (40) of the VAT Act, the liable and registered VAT taxpayers are required to issue an invoice or a statement (as the case may be) for any supply of goods or provision of services in accordance with the instructions already announced by the INTA, and collect the applicable VAT and excise duties at the date of occurrence pursuant to Article (14) of the VAT Act on the basis of the price of goods and services inserted in the invoice and remit the amounts thereof to the INTA’s accounts.

In addition, all business enterprises are required to fulfill the obligations stipulated in the VAT Act including the registration, payment of  the VAT and excise duties to the suppliers of goods and the providers of services at the time of purchasing taxable goods and services.

On the strength of Article (10), each Solar Hijri calendar year (March 21 of each year – March 20 of the next year) is divided into four tax periods and the VAT taxpayers are required to file their tax returns for each and every tax periods (quarterly periods) as per the arrangements stipulated in Article (21) of the VAT Act. Furthermore, taking into consideration the deadline for filing the tax return (maximum 15 days after the expiry of any tax periods), the taxpayers are given an opportunity of two months for paying the applicable VAT and excise duties, notwithstanding the fact that the supply of goods or provision of services have been made in cash or by credit.

 

5) What are the obligations of all business enterprises (real or legal persons), whether liable or non-liable, in respect of the VAT Act?

All real and legal persons including importers, manufactures, distributors and suppliers of the taxable goods and services, if required by INTA’s Calls for Registration, shall be obliged to register with the VAT system.

All business enterprises that are engaged in the importation or purchase of goods or services from other persons, who are subject to VAT, are required to pay the applicable VAT in addition to the price of the purchases of goods and services at the time of transaction. On the other hand, the VAT registered business enterprises shall be required, at the time of supply of goods and provision of services, to collect the applicable VAT in addition to the price of goods and services from the purchasers and retain the same by themselves as “tax liabilities” or “government credits”.

At the end of each three-month tax period, the VAT taxpayers shall be required to file a special concise tax return and settle, on behalf of the government, the difference with the INTA after deducting their own debts, for the VAT they have already paid, from the collected VAT kept with them. In such a case, if the balance of the difference shows a tax liability of the taxpayer, then the difference shall be remitted as payable VAT to the INTA’s account. But if the government’s debt to the taxpayer is greater than the taxpayer’s debt to the government, then the taxpayer can claim for a refund of the residual debt from the INTA.

In addition, as per Article (34), liable and registered VAT taxpayers shall be required to apply books of accounts, financial statements and other related forms, as well as cashier machines and other book-keeping equipment and procedures as determined by the INTA. The above-mentioned records and documents must be retained by the taxpayer for ten years after the relevant fiscal year in order to be submitted to tax officials when requested.

It is worth mentioning that based on the content of Calls for Registration for the VAT, the business enterprises that are not eligible for registration with the VAT system or are engaged in the supply of goods and provision of services that are VAT-exempted shall not be required to register, collect VAT and excise duties from their customers, or file VAT returns. They are required, however, to pay the VAT and excise duties chargeable under the VAT Act, whenever they purchase taxable goods and services from VAT liable and registered persons. It is obvious that those who supply a combination of taxable and non-taxable goods and have met at least one of the conditions mentioned in the Calls for Registration announced by the INTA shall also be required to observe the relevant legal obligations.

 

6) What is the role of invoices in selling and purchasing within the framework of the VAT Act?

According to Article (19) of the VAT Act, the taxpayers subject to registration and implementation of the VAT system are required to insert the amounts of the VAT and excise duties in the invoices they issue for the supply of goods and provision of services, and to collect the same from the purchasers of goods and services. In this regard, in accordance with the Directive on the Issuance of Invoices Pursuant to Article (19) of the VAT Act, the business enterprises (real or legal person) are required, when engaged in the supply of goods or provision of services, to make use of the sample invoices 1 and 2 (as the case may require according to the taxpayers’ needs and their claims for tax credit).

In this context, according to the Administrative Directive of Article 169 (bis) of the Direct Taxes Act, “all real and legal persons are obliged to register for obtaining a unique TIN number and issue, in accordance with the said Directive, invoices for their transactions where they are required to insert the TIN numbers of themselves and those of the other parties in such invoices, forms and papers, and submit the list of transactions they have made to the Relevant Tax Affairs Office”. The provisions of the above-mentioned Directive have already gone into force through the Address Instruction No. S/200/24468 dated January 17, 2014.

Accordingly, it is concluded that even business enterprises that are not considered as VAT taxpayers are bound to the VAT framework and general principles in accordance with relevant provisions, since the sample invoice forms envisaged through the Address Instruction on the Issuance of Invoices Pursuant to Article (19) of the VAT Act is identical to the form provisioned by Article 169 (bis) the Direct Taxes Act.

 

7) What are the VAT rates in Iran?

The rates of the VAT and the excise duties in the Iranian VAT system for the 1395 (i.e. from March 20, 2016 to March 20, 2017) tax year are as follows:

No.

Type of Goods and Services

Total

 

 

VAT Tax

Health

Tax

Excise

Duties

1

Public goods and services

5%

1%

3%

9%

2

Any kind of cigarettes and tobacco products

12%

-

3%

15%

3

Any kind of gasoline and aircraft fuels

20%

-

10%

30%

4

Kerosene and gas oil

5%

1%

10%

16%

5

Fuel oil

5%

1%

5%

11%

 

 

8) What are the communication channels for obtaining any further information regarding the taxes in Iran?

INTA’s English website: en.intamedia.ir

Taxpayers’ Electronic Operation System: www.tax.gov.ir

Iranian VAT System websites: www.vat.ir; www.e.vat.ir

 

9) What is the procedure for the registration of branches or agencies for foreign companies in Iran?

According to the provisions of Article (1) of the Administrative By-law of the Law Authorizing the Registration of Branches or Agencies of Foreign Companies in Iran, approved by the Council of Ministers on 30 March, 2008, the foreign companies recognized as legally-established companies, in case of reciprocity by the relevant counterpart state, may register their branches or agencies in Iran in accordance with the provisions of the said By-law and other relevant regulations.

 

10) In what manner may foreign companies act in Iran in the form of consortiums?

As clearly stipulated in Article (1) of the VAT Act, the supply of goods and services in Iran, as well as their importations (except those exempted pursuant to Article 12) shall be subject to VAT and excise duties, in accordance with the arrangements provided for in the Act and its subsequent directives. So, on the basis of the Destination Principle, the VAT is imposed on the domestic consumption of goods and the acquisition of services provided in Iran. In addition, in view of Articles (19) and (20) of the VAT Act, the liable and registered VAT taxpayers are required to issue an invoice (or a statement) for the supply of goods or services stipulated in the law including the details of the parties to the transaction and the transaction object, in compliance with the provisions of the Law of the Guild System and in accordance with the arrangements already announced by the address instruction issued by the INTA; they are also obliged to collect the applicable VAT and excise duties from the other party to the transaction and remit the same to the INTA’s account as per Articles (17) and (21) of the Act. However, notwithstanding their nationality, place of residence or VAT liability status, those persons who acquire non-exempt goods or services from taxpayers subject to and registered for VAT shall be required to pay the applicable VAT and excise duties to the suppliers of goods or providers of services, in accordance with the relevant arrangements and regulations.

According to the provisions of Article (107) of the Fifth Five-Year Development Plan of the Islamic Republic of Iran enacted on  January 5, 2011, the formation of economic groups for common interests with the participation of two or more real or legal persons in the form of civil partnership is allowed for a limited period and on the basis of a written contract in order to facilitate and expand the economic and trade activities, providing that the partnership is registered with the Companies Registration Department and that all relevant requirements and Islamic principles as well as the principles of being non-injurious to others and non-exclusiveness are met. Therefore, if business enterprises are engaged in contractual activities through participation where, in accordance with the content of the contract, the contract accounting operations are recorded in the books of accounts of each of the partners, then the observance of the regulations and performing the VAT obligations, such as issuing the invoice, inserting the amounts of VAT and excises duties on the invoice, and colleting the applicable amounts from the purchaser or work master shall be separately obligatory for any of the partners in proportion to their shares where the observance of such obligations by any of the partners shall not remove the other partners’ responsibilities. But in cases where, as per the above-mentioned Article, a joint-stock partnership is registered in the form of a civil partnership with the Companies Registration Department, then the share of each partner at the end of the contract period shall be in proportion to his ownership share. It is obvious that the civil partnership shall be required to claim and collect the applicable VAT and excise duties from the work masters or purchasers, for the goods supplied and the services provided with due regard to the legal arrangements and the relevant address instructions.

In view of the Administrative Directive of Article 169 (bis) of the Direct Taxes Act, all civil partnerships established pursuant to provisions of Article (107) of the Fifth Five-Year Development Plan of the Islamic Republic of Iran, all partners of civil partnerships subject to Note (3) under Article (100) of the Direct Taxes Act, as well as partnerships subject to the Note under Article (101) of the afore-mentioned Act shall be duly provided with unique TIN numbers.

It is therefore recommended that either the consortium consisting of a foreign company and an Iranian company be registered with the Companies Registration Department in line with the provisions of Article (107) of the Fifth Five-Year Development Plan of the Islamic Republic of Iran, or, rather, any of the partners fulfill their obligations separately in proportionate to their shares. The foreign partner, however, may also request the INTA VAT Deputy for the permission for a voluntary registration with the Iranian VAT system, and in the case the request is accepted, then that partner may also take any relevant measures for the implementation of the VAT provisions.

 

11) Are foreign companies and their branches liable to registration for the VAT system in Iran?

If, in the case of contracts of foreign companies, the place for the supply of goods and provision of services is located in Iran and the supplied goods or provided services are not VAT-exempt pursuant to Article (12) of the VAT Act, then the supplier of the goods or equipments and the provider of services shall be required to register with the VAT system and claim for collecting the VAT and the excise duties as per relevant rules and regulations, provided that, on the basis of the Calls for Registrations, they have already been recognized as liable to VAT .

Taking into account the provisions of Article (1) of the Administrative By-law of the Law for Allowing Foreign Companies to Register Branches or Agencies in Iran approved by the Council of Ministers on 30 March, 2008, there is no compulsion to require such taxpayers (i.e. foreign companies) to register a branch in Iran. Therefore, in case of non-registration of the branch and despite a registration in the Iranian VAT system, the VAT and excise duties paid by the foreign companies for the purchases they make in the course of their business activities in Iran including the VAT and excise duties paid by them on the country’s entrance borders cannot be taken as VAT credit to be consequently carried forward to the main work master and such amounts will inevitably be added to the finished price of the project.

In view of the abovementioned issues, if a foreign company is not willing to register a branch in Iran, it may, for the purpose of avoiding increasing the cost price of the project, request from the INTA VAT Deputy for a voluntary registration with the Iranian VAT system.

 

12) Are the branches and agencies of foreign companies involved in marketing and information gathering for the parent company subject to the Iranian VAT and excise duties?

As clearly stipulated in Article (1) of the VAT Act, the supply of goods and services in Iran, as well as their importations (except those exempted pursuant to Article 12) shall be subject to VAT and excise duties, in accordance with the arrangements provided for in the Act and its subsequent directives. Moreover, in accordance with the provisions of Article (5) of the said Act, providing services in Iran to others in return for a consideration, regardless of the provider’s and the receiver’s character, shall be subject to the payment of the VAT and excise duties. Therefore, on the basis of the Destination Principle, the VAT is imposed on the domestic consumption of goods and the acquisition of services provided in Iran. In this context, marketing services, negotiations with Iranian buyers and technical advices are all considered as the provision of services and shall be subject to the VAT and excise duties provisioned in the VAT Act.

On the strength of Note (3) to Article (107) of the Direct Taxes Act approved on  February 15, 2009, the branches and agencies of foreign companies and banks in Iran, which are engaged in marketing or gathering information for their parent companies without having the right to make transactions and receive some funds from those parent companies to cover their costs and expenses shall not be subject to income tax in Iran; however, the provisions of the Direct Taxes Act cannot be extended to the VAT system that is based on consumption. Therefore, taking into consideration the fact that branches are independent and referring to the provisions of Article (1) of the VAT Act, the provision of the above-mentioned services (i.e. marketing and information gathering) shall be subject to the VAT and excise duties provisioned in the VAT Act with due regard being had to any relevant regulations.

However, if based on the taxpayer’s books of accounts and documents as examined by tax offices, it becomes evident that the place for the provision of services has been located outside Iran, then such services shall not be considered as a service provided in Iran and shall not be subject to the VAT and excise duties provisioned in the Iranian VAT Act.

 
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