Development of existing free trade zones (FTZs) and establishment of new FTZs is currently one of the major economic approaches of Iran and in a bid to attract more investments to these zones Iranian government offers various incentives to the investors.

Tax exemption is one of those incentives which has been offered for more than a decade to the investors in the free zones.

This incentive has been recently criticized by some officials and economists, while there are still many supporters of this exemption.

Mohammad-Ali Dehqan Dehnavi, the deputy minister of finance and economic affairs, is one of the leading opponents in this due.

He says, “At the moment, we are facing many criticisms about the non-effective exemptions; so we should change the way and improve our approach through eliminating the exemptions.”

Among the tax exemptions offered in the free zones, value added tax (VAT) exemption is the most criticized one.

Most of those opposing the tax exemption believe that it reduces the government’s income on one side while prepares the ground for corruption on the other side; therefore, they are seriously calling for omitting VAT exemption in the free zones.

Exemptions pivotal factors in FTZs

But Morteza Bank, the secretary of Iran’s Free Zones High Council, is of the opinion that tax and customs exemptions are the most pivotal factors in terms of the free zones, and it is not something just in Iran but also all over the world.

“A 20-year tax exemption period is mentioned in Iran’s free zones law, but the exemptions will be reduced after the mentioned period. It is while many countries, like Turkey, consider permanent exemptions for their FTZs, and maybe Iran is allocating the shortest period of exemptions”, according to the official.

He says that free zones are established for attraction of investors and tax exemption is one of the incentives necessary for facilitating investment attraction; this exemption is mentioned in Iran’s free zones law and if it is omitted “Free Zone” will have no meaning.

Excluding exemptions impedes investment attraction

Adel Mo’atta, a director in Free Zones High Council, says that many companies and investors are currently negotiating with free zones organizations across the country and excluding tax exemptions will prevent them from making any investment in these zones.

It will also make Iran’s free zones less competitive compared to those of its neighbors, because when there are some incentives such as permanent tax exemptions in those countries, foreign companies prefer to make investment there, according to Mo’atta.

The official says that any change in the investment regulations concerns the investors; they want stability for the long-term planning; so it makes sense that they react to the changes about tax exemptions.

He strongly stresses that eliminating tax exemptions in the FTZs damages these zones’ potentials.

Exemptions can lead to corruption

But Hadi Sobhanian, an economist, believes that tax exemptions in the free zones have had no result rather than corruption.

He says huge amount of commodities have been already purchased through Iran Mercantile Exchange (IME) under the name of free zones.

Many companies have been registered in the free zones and have their offices there, but they are practically active in the mainland, and enjoy the exemptions allocated to the free zones; so these exemptions can be a source of corruption, according to Sobhanian.

Tax required to minimize sanctions effects

To minimize the effects of the U.S. sanctions on the country’s economy, Iran is adopting some new economic approaches and the main important one is to reduce reliance on the oil revenues.

In order to materialize this objective, the country has collecting taxes more systematically on top of its economic policies.

Finance and Economic Affairs Minister Farhad Dejpasand had said that reducing the current year’s budget dependency on oil exports is the most important economic objective in the country; and his ministry is seriously following up defined tax policies to this end.

The minister has also stressed that an efficient tax system should be a priority in the government’s policy making.

And now, referring to this approach, those who believe that tax exemptions should be excluded from the free zones law, say that these exemptions contradict the government’s policy of higher tax income.

No change in law to develop investors’ confidence

Despite all debate about the tax exemptions in the free zones, the secretary of Free Zones High Council has said that the exemption regulations will be sustained as the government does not agree any change in the law.

On Monday, Morteza Bank said, “We follow up the government’s policy of reducing reliance on the oil revenues and moving toward other incomes like tax revenues instead; but the credibility and governance of law for FTZs is undeniable and cannot be damaged.”

The free zones law considers a 20-year tax exemption for the investors and it plays an important role in building the investors’ trust, which should be preserved and developed, the official definitely stated.