Iran: Tax Cut for Stock Trading, Exemption for Capital Increase

EghtesadOnline: Tehran stock market's turbocharged rally in recent weeks had many up on their feet and cheering for what seemed like a healthy growth compared to other parallel inflated markets.

News ID: ۷۴۵۵۹۶

10 July 2018

Government officials were especially enthusiastic and now seem to be taking their support beyond mere rhetoric, by offering tax breaks on equity trade and exemption on raising capital.

The decisions were made during the recent meeting of the Supreme Council of Economic Coordination, attended by the heads of the three branches of power and headed by President Hassan Rouhani on Saturday.

Supporting capital market growth was one of the session's main themes, among other grand goals such as focusing on job creation, revitalizing domestic production and financing key economy sectors, Financial Tribune reported.

Officials at the meeting decided to cut financial transaction tax (FTT) paid by the selling side on each equity trade from 0.5% to 0.1% for the next 12 months. Originally a suggestion by Economy Minister Masoud Karbasian, the move is meant to "foster and support capital market development and channel money supply to investment in equities", Iran Chamber of Commerce, Industries, Mines and Agriculture reported.

To ease companies’ financing, it was decided that if companies funnel their retained earnings toward raising capital and use it for expansion, the capital raise will be exempt from income tax.

With no taxes in the way, the move is expected to ease capital increase for firms, as bureaucratic hassles have been causing the process to take at least nine months.

SCEC was formed on the order of the Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei to address public concerns over the reimposition of sanctions after US President Donald Trump pulled out of the Iran nuclear deal in May.

> FTT's Fading Global Existence

FTT has proved to be a controversial issue globally and SCEC's recent decision to cut it puts Iran on the same path as many of the world's large markets.

The United States, for instance, had an FTT in place during 1914-66, which was originally 0.2% and then doubled during the Great Depression. However, it was scrapped and shaped into a $0.0042 round-trip transaction tax on security futures transactions and $23.1 per million dollars of security transactions, known as Section 31 fee collected by Securities and Exchange Commission.

Sweden had an FTT from 1984 to 1991, but it was repealed because so much trading moved offshore. Germany abolished FTT in 1991 for a similar reason. Italy still has its 0.1% FTT on since 2012.

Among all FTT schemes, whether still in place or killed, the only one that surpassed Iran's was the Swedish FTT, amounting to 0.5% on purchase or sale of an equity, with a round trip resulting in a 1% tax.

Global markets' argument against FTT is simple: It reduces trading and liquidity, and does not raise as much money as everyone thinks.

> How Big Is FTT in Iran?

In Iran's case, it's basically impossible to tell how much FTT has been raised over the years, as the Iranian National Tax Administration does not disclose the relevant data in its reports. Consequently, its effectiveness is unknown.

As for trade volume and liquidity, FTT does not seem to be a primary cause of investors' mood swings in Iran.

Of course, traders have always argued that the tax is higher than in most countries and has to become proportional to the gained profits. And INTA won't be happy about giving up a ready and transparent source of revenue.

Yet in a market mostly affected by external developments such as political risks and sudden upheavals in parallel markets (foreign exchange, gold, housing, etc.), ensuring equities' growth requires looking beyond the market itself to the state of the economy, doubling down on stability and making share prices' rise over increased profitability in the long run.

As it stands, a wandering money supply ballooned over years of high banking deposit rates is the market's prime trade booster. Stocks were already in a good place, as the fiscal year started on March 21 with a devalued currency and bright prospects for exporting firm. However, without fresh money, no index would have jumped.

Will the tax cut bring any new money into the market? Unlikely. The recent surge of money into equities was caused by a slowdown in FX and gold trading, and in the short run, stocks appeared as a sure bet for profiting. This is underlined by the dwindling trade volume after the last few market corrections. In other words, a tax cut is no match for attractive speculation options.

Nevertheless, this will prove to be a positive development for those already established and trading in the market and might even boost companies' investment and expansion.