MRC Mulls Deposit Interest Tax

As President Hassan Rouhani aims to reduce his administration’s dependency on oil revenues, one major way to do that is through taxation and the research arm of Iranian Parliament has conducted studies on the possibility of levying taxes on savings interest.

Arguing that the move is unlikely to prompt a deposit flight from banks, the think tank advocates levies on interest incomes. However, due to the polarizing debate that surrounds the issue, the body also weighs the pros and cons of the proposal as it concerns different sectors of the economy.

Majlis Research Center’s report on its website begins by noting that in Iran, the public and businesspeople regard interests offered by banks–capped at 15% for one-year accounts–as completely risk-free as apposed to risks emanating from investments in other sectors of the economy.

Therefore, collecting taxes from interests on fixed deposits is a viable option for boosting government tax revenues and supporting investments in other economic sectors.

“Levying such a tax would instill transparency in bank deposits, which is one of the main instruments of promoting economic development and curbing corruption,” notes MRC, adding that the proposed tax would act as a policymaking tool for the government, with rates potentially devised in the annual budget as part of the value added tax.

As to other advantages of paying tax on deposit interest, MRC points to a gradual reduction in bank interest rates–a goal vigorously pursued by the Iranian banking system.

This would stabilize banking resources and optimize their management, says the body, adding that the proposed tax plan would not drive away deposits from the banking system as many fear, because they remain attractive and other markets retain high risks.   

  Experiences of Other Countries   

The think tank mentions similar schemes implemented by G20 countries, in addition to six other countries, namely Switzerland, Ireland, New Zealand, Singapore, Malaysia and Afghanistan, dividing them into three categories based on the extent they have implemented the scheme.

The first group comprises Indonesia, Argentina, Italy, Germany, Japan and Turkey as well as Switzerland and Afghanistan where a portion of bank interest on fixed deposits are deducted as compulsory tax.

Australia, South Africa, the US, the UK, Brazil, China, Russia, France, Canada and Ireland treat the tax on deposit interest as income tax that must be declared at the yearend to the tax authority.

The third classification, denominating countries that employ a compound method, includes India, Mexico, South Korea and New Zealand.

Tax on deposit interest is basically considered general income tax in the compound method, but for a variety of reasons such as generating income for the government throughout the year, a mandatory tax with a fixed rate is charged with the difference being calculated later.  

This leaves Saudi Arabia and Iran as the only nations whose people are currently exempt from paying tax on deposit interest.

  Pros and Cons

MRC outlines the advantages and shortcomings of each method.

The mandatory tax approach, it says, is easy and cheap to implement as it does not need tax declaration, reduces the possibility of tax evasion and fraud, and creates a yearlong income flow for the government as opposed to the income tax method.

On the other hand, even as the income tax method is more transparent and avoids public backlash, it only considers a person’s incomes and not their expenses while it also requires widespread structural reforms and complete transparency on bank deposits and taxation, a goal that is yet to be achieved in Iran.

The compound method endeavors to employ the best of both methods, but it also means that its effective execution would be that much harder.

  Conclusion

After evaluating arguments for and against devising a tax system on deposit interest, the parliamentary research center probes potential destinations for the obtained tax and identifies the foremost as reimbursing government arrears to the banks themselves, which would incentivize them to cooperate with the scheme.

“Following all the aforementioned considerations, it is proposed that a tax is obtained from the deposit interest of all natural and legal persons possessing foreign exchange and rial accounts with banks and non-bank credit institutions,” it said.

Since Iran is currently devoid of the required infrastructures to calculate income tax of all persons, MRC proposes that “the tax on bank interest for fixed deposits be devised as mandatory and with identical rates for natural and legal persons”.  

According to the think tank, the first step for implementing such a scheme could be by levying tax on deposits whose owner identity remains unknown.

It also calls for collecting taxes from people with deposits exceeding a certain amount so that a majority of people with small savings would be exempt from the scheme in the first phase, as only large deposit-holders will be taxed.