Domestic Economy

Tax Exemption for Companies Creating 50% More Jobs

Tax Exemption for Companies Creating 50% More JobsTax Exemption for Companies Creating 50% More Jobs

Iran National Tax Administration’s taxation overhaul is continuing with more details of it getting spilt out by government authorities. The recent plan is to offer tax cuts for companies that hire more people.

After streamlining personal income tax, corporate tax breaks, including tax exemption for exporters of processed goods, the newly drafted direct taxation code is offering more incentives for job creation.

However, the more we get to know about the changes to the tax code, the more we can spot trends in the government’s actions.

On the one hand, the government has suddenly been forced to discover the importance of an efficient taxation system to businesses and government pockets. Thus, it decided to cut tax loopholes and curb tax evasion to boost revenue by designing incentives to influence private sector business decisions.

But on the other hand, it seems the government is both overestimating its reach and also not considering the full effects of its shift in policy.

The reason for the newfound focus on taxes is the lean supply of petrodollars due to the ongoing slump in oil prices.

Oil revenues will be low even with Iran’s planned one million barrel per day increase in output due to the lifting of bans on Iranian crude exports. In the absence of a proper government debt market, taxes are the only option.

However, taxation has been neglected for so long that INTA has not developed the necessary tools for efficient taxation. Unsurprisingly, 60% of taxpayers are dodging taxes, according to vice president for legal affairs, Elham Aminzadeh.

Though the figure is not exact and various officials give varied estimates ranging from 40 to 60% of taxpayers.

“Only government employees and certified manufacturers pay taxes in Iran,” Aminzadeh said.

In response, INTA is quickly spreading its reach. It is getting more people to pay their dues with both the carrot and the stick.

INTA is offering incentives for on-time filing of tax documents and working with taxpayers to make payments easier.

It is also tightening the noose around tax evaders. In summer, President Hassan Rouhani ordered the establishment of a national database, which also accounts for money held in banks and other financial assets, to help identify fraudulent actions.

The government has so far been rather successful with its taxation plans. In last year’s budget, the government forecast it would make 620 trillion rials ($17.7 billion) from taxes.

According to INTA’a deputy chief, Mohammad Qasem Panahi-Rouz, the organization collected 512 trillion rials ($14.6 billion) in taxes in the 10 months of the current Iranian year which ends on March 19.

If the Rouhani administration manages to collect all the tax revenues it predicted, it will be a first in Iranian contemporary history. The government always underestimates its expenses and overestimates revenue, leaving it with a deficit at the yearend.

But the most recent change announced to the tax code looks rather ill-conceived. Businesses with over 50 staff members have been given a new tax incentive that will encourage them to hire more people. These businesses will get an additional year of zero taxes for every year that they can increase their workforce by 50%.

The new regulations will take effect from March 21, 2016, according to the head of the Iranian National Tax Administration, Seyed Kamel Taqavi.

If the government carries on with its decision, the law could change Iran’s labor market dynamics. The move will, at first glance, help small and medium companies lower the cost of expansion, especially in labor-intensive sectors. It actually helps bring down labor costs while adding more jobs.

But a 50% increase in staff each year is bordering on bubble-like growth. Unless a company is being set up with abundant financing, such an increase in staff is highly unlikely.

Also, if a company’s taxes far outstrip the cost of hiring more people, it may embrace the new law.

However, to prevent fraudulent hiring for getting tax cuts, if the workforce is laid off a year after getting tax cuts, the company will be taxed fully that year. This means companies have to retain the larger workforce for over one year.

Retirement and resignation of staff are not considered layoffs and do not carry the penalty.

The Labor Ministry must verify the list of employees and its changes. Seems like a lot of moving parts and procedures to create, and the more complex a plan, the more chance it has to fail.