Home Truth: Oil Bonanza Unsustainable, Pay Taxes

A prominent Iranian economist said tax revenues would become a dependable source of income for the country, if they increase to 12% of the gross domestic product in three to four years to reach 1,500 to 2,000 trillion rials ($37.5-50 billion) per annum.

“The incumbent government or future governments need to earn their revenues through taxation and that’s possible by eliminating tax exemptions and employing tax technology,” Saeed Laylaz, who is also a journalist and distinguished professor at Shahid Beheshti University, said in an interview with Khabaronline.

The authorities need to reach a consensus that petrodollars are not sufficient to run the country, no matter which government is in power.

“Oil exports are unlikely to generate additional revenues in the next 10 years, regardless of the extent of price volatility in the market. The necessary expenditures will exhaust the sum realized from oil sales,” he said.

Noting that best starting point for structural reform in the economy is by removing tax exemptions, the economist said, “A nation that doesn’t pay taxes can’t demand accountability from the government or expect democracy to reign in the country. With oil revenues at their disposal, governments tend to become unanswerable to people. Democracy is closely intertwined with equitable taxation regime.”

Laylaz stressed that tax exemptions and incentives, if any, should only be granted to economic sectors.

“The government might roll out clear, officially-sanctioned policies such as tax relief for exports and agriculture or exemptions for certain provinces, but it is not acceptable for the government to advocate tax breaks for a selected few,” he said.  

According to Chairman of Iranian National Tax Administration Kamel Taqavinejad, 20% of taxpayers in Iran pay 80% of all tax while about 65% of all taxpayers are either exempt or pay less than 10 million rials ($266) in tax.

“The economic status of manufacturing firms should be appraised fully before conducting a review of tax exemptions. In the meantime, we need to move toward efficiency, deregulation and real privatization, and pursue an agenda of combating rent-seeking and corruption.”  

Laylaz further said Iran’s economy is getting bigger by the day, so does the population and the demands of the government and people.

By the same token, the ratio of oil exports to population reduced to one-third over the past four decades, whereas the population has doubled. Per capita crude oil revenues have dropped to one-sixth of the fiscal 1976-77.

Stressing that all people should be taxed without any discrimination and pay their fair share just like civil servants and workers, he said, “With a 25% tax rate, Iran is one of the world’s tax havens.”

Thanks to a relatively moderate 25% corporate income tax and no domestic withholding tax on dividends, Iran is one of the emerging markets where locally created value and cash repatriation to the investor’s home country attract the lowest taxes.

Even though in benchmark countries, depending on the investor’s home jurisdiction, relevant double taxation treaties may mitigate withholding tax on dividends, this generally does not change Iran’s top rank. 

INTA’s figures show tax evasion amounts to between 140 and 300 trillion rials ($3.5 billion-7.5 billion) in the country due to the gray economy, smuggling and lack of transparency.

According to Taqavinejad, half the country’s budget is tied to taxes and tax-to-GDP ratio in Iran stands at around 8%, compared to 15-20% in neighboring countries.

Revenues associated with the sales of oil and petroleum products reached 331.8 trillion rials ($8.29 billion) during the first five months of the current fiscal year (March 21-Aug. 22), indicating a 97% rise compared with the same period of last year.  

This comes as the government’s overall revenues, including tax proceeds, amounted to 469.6 trillion rials ($11.74 billion), registering a 0.5% decline year-on-year.

Although tax revenues were projected to reach 494.5 trillion rials ($12.36 billion), they only fetched 367.5 trillion ($9.18 billion).