Economic overview
With an area of 1,648,000 sq km, more than 80 million inhabitants and an administrative division into 31 provinces, Iran is the eighteenth world economy and the second in the MENA area (Middle East and North Africa). The abundance of hydrocarbons (the country owns 18% of the world’s natural gas reserves and 11.3% of oil reserves), the favorable geographical position and demographic trends are among the factors that contribute positively to the trend of ‘economy. According to IMF estimates, the nominal value of GDP should have exceeded 470 billion USD by 2022 with growth rates that, after a sharp slowdown in the years of tightening of sanctions, should have settled at + 4.5 / 5. % per year. Washington’s withdrawal from the JCPoA and the reintroduction of US sanctions changed the picture. The related adjustments led to a negative sign in 2018 and 2019, and a timid recovery in 2020 and 2021. The exports of hydrocarbons, the trend of foreign investments, as well as the trend of the main macroeconomic indicators were heavily affected.
The depreciation of the national currency (Rial) is exerting strong pressure on the inflation rate which, according to estimates, is around 40% on an annual basis. Following the devaluation of the Rial against the dollar and the euro, in April 2018 the Iranian authorities approved the introduction of a fixed official exchange rate (42,000 Rials for 1 USD which correspond to approximately 52,000 Rials for 1 Euro), penalizing the sale of foreign currency at a price higher than that established. Subsequently, an exchange system was reintroduced on a so-called secondary market which entailed the presence of some elements of flexibility. In addition to the fixed one established by the Central Bank and applied for the importation of “essential” goods (food and pharmaceutical products), the Iranian currency is currently exchanged at around 300,000 Rials for one Euro on the informal market.
Main sectors of industry
Iran, in the 1960s and 1970s, was the protagonist of an industrialization process financed by oil revenues. At the same time, however, the infrastructures have not been strengthened and the country does not have the conditions to be able to refine the product.
Agriculture, practicable only on 10% of Iranian territory, supports 30% of the population. The most popular crops are those of pistachio, barley, cereals, tobacco, cotton, cane and sugar beet. The climatic and territorial differences mean that breeding is differentiated according to the areas of the country: sheep and goats are raised in the driest areas, while cattle are raised in the other parts.
In addition to oil, the Iranian territory is rich in natural gas, copper, iron and coal.
The sector is highly developed in crafts, especially for the production of carpets, in petrochemicals, in the steel industry and in the food industry. Rafsanjani, President of Iran from 89 to 1997, during his mandate undertook an economic policy aimed at peace and aimed at modernizing production structures and opening up to markets. The country was not ready for such a modernization and the policy undertaken led, in the early 90s, to a serious crisis. In addition, Islamic religious ideology has prevented the privatization of some sectors of the Iranian economy.
In February 2008, the Iranian Oil Bourse was inaugurated to trade oil and petroleum products. Among the EU countries, Italy is one of the leading partners of the Iranian state in terms of volume of trade.
Taxation for businesses in Iran
The Iranian tax system has historically been characterized by the fundamental role played by the oil sector in the state budget and by the presence of a large sector of the underground or informal economy. In order to increase tax revenue, in recent years some tax reforms have been put in place that have attempted to bring greater order to a generally inefficient taxation system and to attract capital from abroad again after the end of international sanctions. This strategy allowed in 2015 (for the first time in fifty years) tax revenues to exceed those deriving from oil. In particular, it is worth noting the approval in 2015 of an amendment to the law on direct taxes aimed at making it more effective and strengthening the control and assessment activity.
All income produced by companies and other non-commercial entities (in this case only for those of a commercial nature) resident in Iran are subject to taxation, while for similar non-resident taxpayers only income from Iranian sources is considered. The tax base is calculated considering the overall profit or loss and making the changes for non-exempt costs and the deductions provided for by law. Specifically, certain depreciation rates are envisaged for fixed assets. Dividends from Iranian companies are exempt while those from foreign companies are taxed at the standard corporate tax rate. Capital gains and losses are part of income and are treated in the ordinary way.
For non-resident companies that receive royalties, dividends or rents, a flat-rate level of profits between 20% and 40% of revenues is provided, while a profit of 12% is expected for non-resident companies carrying out construction contracts.
Losses incurred during the year can be carried forward without time limits in order to offset any profits.
This income is then subject to a fixed rate of 25%.
For foreign companies carrying out sea or air transport activities, a substitute tax equal to 5% of the revenues relating to goods and people transported from Iran is envisaged. For foreign insurance companies that reinsure Iranian insurance companies, the rate is equal to 2% of the premiums received. These rates are increased if the conditions of reciprocity for Iranian companies are not respected.
For manufacturing and mining companies located outside the vicinity of major cities, exemptions from income tax of 80% are guaranteed for a period of 4 years, which becomes total and for 10 years for those located in disadvantaged areas. The profits of businesses reinvested in renovation and development are also exempt provided they have been previously approved by the administration. The proceeds from the export of finished industrial products falling into specific categories are also exempt, while the exemption is 50% for other goods, always if included in the categories provided for by law.
Investing in Iran
In recent years there has been a real building boom that has mainly affected the residential sector and shopping centers. After a period of slowdown recorded since 2013, the opening of the market and the suspension of sanctions since January 2016 have provided a new stimulus now tempered by the recent restoration of the American sanction system and by obstacles in the economic field. This area includes healthcare and hospitality construction (which often has insufficient structures with respect to the growing demand), as well as infrastructural works in the transport sector (roads, railways, airports and ports) which may include renovation and / or modernization of structures existing, as well as greenfield projects.
The Iranian executive has announced plans for the creation of new plants, in response to the growing energy demand. The country also aims at the modernization and redevelopment of existing plants. The Authorities have drawn up a development plan for alternative sources, announcing investments also in the field of renewable sources, a sector in which they aim to generate 5000 MW per year, hoping for foreign participation with financing and transfer of technologies and know-how. Investments in the oil and petrochemical sector are expected. Between 2017 and 2018, Iran returned to export crude oil at pre-sanctions levels, but the restoration of US sanctions (effective, in the energy sector, from November 5, 2018), negatively affected this figure.
Iranian cities, on average, need massive investments in wastewater treatment and municipal waste management. Water is becoming an increasingly scarce resource in Iran and modern irrigation systems and desalination plants are needed.
The tourism and hotel sector has experienced a strong expansion in recent years. The flows of tourists coming in particular from Europe or from countries of Shiite religion (religious tourism) have registered significant increases. The expansion of the number of accommodation facilities and the modernization of existing ones, together with the upgrading of infrastructures – especially connections and transport – are a priority. Based on the latest data released, in the first seven months of the Persian year (corresponding to the period 20/03/19 – 20/10/2019), there was an increase in attendance of 24% compared to the previous year, with almost 6 million entries, mainly from neighboring countries.