EghtesadOnline: Government policy in Iran has a habit of creating Gordian knots for the private sector. One such area is Iran’s foreign exchange regime and its effects on taxation of exporters.
Throughout its execution, the multiple exchange rate regime has been a source of corruption and waste. It has even complicated taxation.
The Iranian National Tax Administration has finally addressed this issue after years of lobbying and pleas from exporters.
Based on a directive from tax authorities, any profit or loss made from the difference between booking transactions at official and market rates will be considered as profits or losses made from exports, and will be exempt from tax. Money made or lost from fluctuations in market exchange rates, however, will still be taxed.
“Members of the Tehran Chamber of Commerce, Industries, Mines and Agriculture, and economic activists that have tax cases in courts or dispute settlement councils can close their cases referencing the new directive,” deputy for business of the chamber, Fereydoun Talaiezadeh, told IRNA on Saturday.
According to Financial Tribune, the new regulations can be applied to tax cases from 2012 onwards.
In modern economies, foreign exchange rates fluctuate. There are rare instances when central banks defend the stability of their currency but much is left to the markets. Iran’s foreign exchange policy is different.
The Central Bank of Iran offers an exchange rate for the government and essential imports and exports. There is also a rate offered at the Foreign Exchange Transactions Center, which was created in response to the currency crisis of 2010—it started right after the intensification of sanctions against Iran’s nuclear program in 2010 and went on till 2012 when markets stabilized. During the period, the rial lost 70% of its value, damaging many businesses in the process.
There is also a rate that is decided more or less from trading between Tehran’s bureaux de change. However, this market rate is by no means free from CBI control.
Currently, the rate offered at Foreign Exchange Transactions Center is identical to the one offered at the central bank. But the FETC rate used to be 50% weaker than the CBI rate.
Market exchange rates have stayed relatively stable in the past three years, owing to heavy capital controls, trading by the central bank and low business activity, among others. The rial has actually recovered a bit of the value it had lost at the height of the crisis.
As for the gap between market rates and the CBI rate, the differential is now 4,147 rials for the dollar, meaning the central bank offers a 13% discount earmarked for specific groups.
The US dollar changed hands at 35,030 rials in Tehran’s markets on Monday, Tehran Gold, Jewelry and Coin Union’s website showed. The CBI only required 30,883 rials for a greenback.
Another major currency, the euro, was traded at 39,020 rials on Ferdowsi Street—one of the two centers of currency trading in Tehran. But the central bank’s exchange rate for every euro is 34,170 rials.
The new directive will offload the many tax battles faced by exporters and relieve them of one of their biggest worries. But the real issue here is the multiple exchange rate regime.
The rial should be floated with a single exchange rate. The CBI governor and the minister of economy had promised to abolish the system within six months of the lifting of sanctions. The promise was iterated and reiterated many times over in 2015. The sanctions were removed in January, as the nuclear deal between Iran and the West was implemented. Since then, the bank and the ministry have been mum on the matter.