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Features

Studies: Political Ties and Tax Evasion Go Hand in Hand in Iran

May 17, 2021
Behnam Gholipour
4 min read
Huge economic and religious institutions linked to Ayatollah Khamenei are among those contributing to Iran's worrying tax gap
Huge economic and religious institutions linked to Ayatollah Khamenei are among those contributing to Iran's worrying tax gap
The deepening cost of living, improved literacy, rise in digital transactions and growth of the informal sector are among the factors contributing to tax evasion in Iran
The deepening cost of living, improved literacy, rise in digital transactions and growth of the informal sector are among the factors contributing to tax evasion in Iran
Out of 120 companies listed on the Tehran Stock Exchange, 35 percent were found to have direct links to political actors and paid lower rates of tax on the whole
Out of 120 companies listed on the Tehran Stock Exchange, 35 percent were found to have direct links to political actors and paid lower rates of tax on the whole

Two recently-published studies in Iran’s quarterly Journal of Tax Research have emphasized the relationship between nepotism, sanctions and tax evasion in Iran.

The first, entitled The Impact of Economic Sanctions and Political Relations on the Tax Gap, took in the eight-year tax records of some 120 companies active on the Tehran Stock Exchange.

The second, Estimating the Rate of Tax Evasion in Iran, took in a nexus of socio-political factors that had a bearing on the level of tax evasion by individuals and institutions in the country.

Both studies come after years of concern about the tax gap in Iran: the difference between the total amount of tax collected and what the total ought to have been.

Among the largest institutions known to contribute to the tax gap are economic and religious foundations linked to Supreme Leader Ayatollah Khamenei, but even municipal councils struggle to recoup what is due to them. The result is an annual loss of revenue to the treasury that could have been invested in vital services for the people.

Sanctions Aggravating the Tax Gap

The first study looked at tax payments by 120 companies listed on the Tehran Stock Exchange over the past eight years, during which sanctions were lifted in 2015 and then reimposed on Iran by the US in 2018.

Overall, the average recorded eight-year tax deficit of companies in Iran stood at 0.24 percent. But both economic sanctions, and political relations inside Iran, were found to have widened the tax gap and reduced the takings by government.

According to the researchers’ calculations, for every 0.01 percent increase in sanctioned business activity, the corporate tax gap increased by a significant 0.1 to 0.15 percent.

Since the re-introduction of sanctions, the authors said, more companies in sectors from petrochemicals to tourism to ICT had turned to “underground” means to avoid taxes so as to “keep cash in the company”.

Furthermore, the study found a direct correlation between companies’ political connections and a diminished level of tax paid. Around 35 percent of the companies examined had clear links to senior political actors or groups.

"In companies with greater political connections,” the authors wrote, “accruals [unpaid assessed taxes] are more widespread. Managers also use their authority to manipulate and reduce [stated] profits to lower their taxes."

They added that some firms were actively engaged in creating a permissive culture in the government toward tax evasion. “Companies with broad political ties will encourage the government to raise large cash reserves through cheap financing and lower taxes, and the managers of these companies will then adopt bolder tax [evasion] policies.”

The Roots of the Tax Gap

The second study, Estimating the Rate of Tax Evasion in Iran, tried to establish the country-wide tax gap as a percentage of GDP at various points over the past 45 years. The known rate of tax evasion, authors found, had fluctuated wildly with the years.

In 1976, the overall tax deficit was found to be 8.2 percent of GDP for the year and the lowest recorded rate of tax evasion was in 1987, standing at 3.1 percent of GDP. A peak level of 21.97 percent of GDP was recorded in 1995, dropping the following year before surging again in 2008.

Overall, the authors calculated that year-on-year average missed tax revenues in Iran amounted to a deeply worrying 10.9 percent of GDP. The study also listed an array of factors that had had a bearing on tax evasion down the years, including trade restrictions, rising inflation and living costs, unemployment, shrinking per capita income, and cultural, legal and social changes.

Researchers said that improved levels of literacy in Iran, as well as an increase in business deals conducted by phone, were creating the conditions for further tax evasion in Iran during a turbulent economic period.

"As the underground sector expands,” they warned, “and the formal sector of the economy shrinks, tax evasion increases.”

Taken together, both studies shed some light on the extent of the tax gap in Iran and the issues aggravating it today, including the macroeconomic policies of the ruling clergy. On top of this, public distrust in the Islamic Republic to appropriately spend the revenues it does receive, and non-transparency in that expenditure, is creating a vicious cycle by encouraging more Iranians not to put their hard-earned cash in Iran's vulnerable state coffers.

Related coverage:

100 Iranian Citizens and Corporations Owe 40% of Unpaid Taxes

Can Khamenei Lead with Reduced Oil Revenue?

Iran's Local Government Stitch-Up, and How to Resolve It

The Plague of Bribery

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