Iran’s State Tax Organization (STO) last month made its ambitions clear: in 2004/05 it is aiming to gather enough tax revenue to cover almost half of government expenditure. To achieve this it needs to record a 38% year-on-year increase in tax collection, or total revenues of almost $11 billion.
Around 10% of the increase is intended to come from the planned introduction of a flat-rate 7% value-added tax from 2005. The STO also hopes that some of the increase will come from a crackdown on tax avoidance among both the general population and the quasi-state charitable foundations known as the bonyads.
Built essentially on businesses that were expropriated following the 1979 Islamic revolution, the bonyads are active in practically every economic sector and are estimated to constitute 10% to 20% of the economy.
Run by religious hardliners and their lay allies from the traditional merchant class, they operate as independent corporations, although their management is usually appointed by the supreme leader.
Although little is known about the bonyads’ finances, it is thought that many of their businesses are loss-making. Mostazafan and Janbazan Foundation (foundation of the oppressed and disabled war veterans) is one of the largest and, together with its affiliates, runs more than 400 major companies and factories. In a shift towards more profitable activities, it is reportedly repositioning itself by buying shares in privatized energy companies.
By western standards, though, doing business in Iran still appears fraught with dangers. “Political risk is the biggest obstacle to attracting FDI – there’s no question about it,” says McCormack. Concerns about project ownership, payment guarantees and extremely labour-friendly employment laws also abound. In consequence, foreign investment will for the foreseeable future remain focused on the oil and gas sector. Even here, however, outside involvement is limited.
Given the state’s overwhelming dominance of the economy, the sale of public Mostazafan and Janbazan Foundation (foundation of the oppressed and disabled war veterans) is one of the largest and, together with its affiliates, runs more than 400 major companies and factories. In a shift towards more profitable activities, it is reportedly repositioning itself by buying shares in privatized energy companies.
As part of its tax reform efforts, the economy and financial affairs ministry has said that from this month onwards it is abolishing the bonyads’ extensive economic privileges, such as tax and customs duty exemptions, refunds and discounts. If it manages to overcome resistance from vested interests and actually enforce the plan, the ministry will significantly diminish the bonyads’ economic strength, and could force many of the more unprofitable foundations to close.
The main aim, however, is to fill the government’s coffers. According to James McCormack, at Fitch Ratings: “Given the bonyads’ wide-ranging activities, if they start paying taxes it should generate substantial revenues for the government.” Nevertheless, they are not expected to give up without a fight, and tax reform could prove to be one of the fourth five-year development plan’s more difficult provisions to implement, particularly given the changed political complexion of Iran’s legislature.
