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Summary:

Any country which wishes to accede to the General Agreement on Tariffs and Trade (GATT) should make its own domestic rules and regulations compatible with GATT directives and stipulations. In case Iran wishes to join GATT, this act might be in contradiction with the country's Islamic principles and civil codes. This report zooms in on some of these legal differences.

Article 4 of the Constitution of the Islamic Republic of Iran stipulates that all civil, penal, financial, economic, and administrative rules and regulations should be in accordance with Islamic principles. On the other hand, Article 16, Paragraph 4 of the Agreement to set Up the World Trade Organization (WTO) specifies that every member will guarantee the compatibility of its own rules, directives, and administrative trends with commitments based on the GATT's regulations.

This demand for compatibility might be in conflict with Islamic principles. For instance, in Article 23 of the Agreement, special protective measures have been considered for alcoholic beverages. Undoubtedly, such commitment is contradictory to Islamic principles. And when the GATT agreements are to be considered in the Majlis (Islamic Consultative Assembly), they will become problematic, since they clash with the country's Constitution and religious codes.

Of course, given Article 20 of the GATT Agreement (1947) and Article 72 of the same Agreement, the government of Iran can set conditions on this article in case other GATT members agree.

Also, based on Article 44 of the Constitution, the state sector is to include all large-scale and mother industries, foreign trade, major minerals, banking, insurance, power generation, dams and large-scale irrigation networks, radio and television, post, telegraph, and telephone services, aviation, shipping lines, roads and railroads, and the like. All these will be publicly owned and administered by the State. This is not in tune with the rules and regulations of the World Trade Organization (WTO).

In relation to foreign trade, Article 17 of the GATT Agreement specifies that every member undertakes that whenever it establishes or retains a government corporation or officially or practically grants a corporation exclusive advantages, this corporation should, in relation to exports or imports, act in conformity with the general principles of non-discriminatory behavior in regard to private merchants. In addition, this Article makes the governments bound to undertake such purchases and sales exclusively based on trade considerations such as price, quality, usability, maeketability, transportation and other relevant conditions. They should allow other party corporations enough chance to compete in these sales and purchases based on trade norms and regulations.

This Article intends to minimize the government share in trade activities and to make it mainly serve as a guide to the enterprises. Whenever the government engages in trade activities, it should fully account for trade considerations. On this basis, foreign trade cannot be in the hands of the government based on Article 44.

In regard to financial services, the GATT regulations embrace all insurance and insurance-related services, as well as banking services and other financial services. These regulations include deposits, loans, payment of rents for facilities, payment and transfer of money, letters of guarantee, letters of commitment, trade in the stock exchange market, finance management, financial counselling services, etc. (Refer to Paragraphs 1 to 5 of the Annex on Financial Services of the General Agreement on Trade Services).

Considering the extensive zone of activities articulated in the Commercial Agreement on Services for the insurance institutions and banks in the member states, without specifying that these should be provided by the government, after accepting the Agreement and lapse of the time limits, the principal conflicts between this Article and Article 4 of the Constitution can be observed.

In regard to telecommunications, the Annex to the General Agreement on Trade Services applies to all activities undertaken by a member to gain access to public telecommunication services and networks (Paragraph 2-A). No part of this appendix makes any member duty-bound to create, build, obtain, rent, put to use or present telecommunication services or networks outside the framework of the chart drawn up for the members (Paragraph 2-C).

Moreover, this annex stipulates that every member guarantees that rendering services will be based on rational and non-discriminatory conditions to grant permits to other members to gain access to and to utilize the telecommunication services and networks in tandem with the services set forth in the relevant chart. The members also undertake to use the telecommunication networks to transfer information along the borders and in the realms of other member states (Paragraph 5-A and C). Despite this regulation, every member can undertake measures which are exigent for insuring the confidentiality of the messages (Paragraph 5-D).

These points indicate that in principle foreign providers of telecommunications services are permitted to carry out activities in this field. But a government can set certain exceptions in its chart of commitments. But if ultimately this part of the services is fully liberalized, it will clash with Article 44 of the Constitution according to which the post, telegraph, and telephone are publicly owned and administered by the State.

Article 81 of the Constitution stipulates that the grant of concessions to foreigners for the formation of companies or institutions dealing with commerce, industry, agriculture, services, or mineral extraction is absolutely forbidden. But the Council of Guardians has stated that foreign firms which draw up legal contracts with Iran's state bodies can register their branches in Iran for legal activities and affairs within the framework of Article 3 of the Law on the Registration of Firms. This does not clash with Article 81 of the Constitution. Also based on the General Agreement on Services Trade, the foreign trade institutions of member states can have offices in other member countries. These are within the framework of establishment, utilization, or maintenance of a branch or a representation office with state or private ownership. ( Article 28). In addition to the items cited, the Agreement's Preface dealing with investment activities related to trade encourages capital investments in GATT member countries and to have the GATT body's supervision over investment for production of goods.

Of course, liberalization in the services sector will take place gradually and in tandem with the specific rules and regulations of every government as crystallized in its national plans. Liberalization will take place with regard to the national policies and level of development of each and every member in general and in particular. The developing countries will enjoy the needed flexibility in this process. They will have to liberalize fewer sectors and exchanges and to increase gradually access to the market in tune with their status of development (Article 19-Paragraph 4).

In addition, Article 4 of the Agreement, in regard to investments related to commerce, has allowed the developing countries to transgress the infrastructural principles of this agreement, i.e. Articles 3 and 11 of the 1947 GATT Agreement. Despite these facilities for the developing countries, Article 81 of the Constitution has forbidden the set-up of any foreign firm in Iran. The decision of the Council of Guardians only applies to foreign firms which have drawn up contracts with state organizations and does not serve as a general license for the set-up of foreign firms in Iran by the GATT members. The need, therefore, exists to revise this article of the Constitution, unless the word "concession" is taken as an exclusive concession.

Based on Article 139 of the Constitution, the settlement of claims relating to public and state property or the referral thereof to arbitration is in every case dependent on the approval of the Council of Ministers, and the Majlis must be informed of these matters. In cases where one party to the dispute is a foreigner, as well as in important cases that are purely domestic, the approval of the Majlis must also be obtained. Law will specify the important cases intended here.

The GATT rules and trends on settlement of claims and differences specify that if the GATT members fall into disputes in relation to their rights and commitments, the case will be considered within the framework of the undertakings of this Agreement. Based on this consideration, at first the parties to the dispute are called on to take consult with each other (Article 4 of the Agreement). But if the said counsultations are not successful, the plaintiff can demand arbitration. The parties to the dispute can voluntarily demand other ways of settlement and arbitration (Article 5). In view of Article 139 of the Constitution, recourse to these methods to solve disputes and to engage in arbitration will become problematic. In other words, a permit should be obtained to consider the cases involving disputes unless the Majlis, while ratifying Iran's accession to the GATT, would once and for all grant such a permit to the government.

-Banking and Insurance Laws

Based on the 1358 bill for the nationalization of insurance and credit institutions (Articles 1 and 2) "in order to safeguard the rights of the insurers, promote the insurance industry throughout the country, and place insurance at the service of the people, from the day of ratification of this law, all insurance institutions of the country are declared nationalized, while accepting the principle of legitimate ownership" and "the work permit of foreign insurance agents in Iran will be declared void and void".

In addition, based on the 1358 Law for the Nationalization of the Banks, "all banks are declared nationalized and the government is bound immediately to appoint the managers of the banks". The 1358 Legal Bill for Running the Banks also specifies the mode of nationalization of the banks and the continued activities of the formerly state-owned banks which have become nationalized.

Moreover, based on the 1350 Law for the Establishment of Iran's Central Insurance, the transfer of up to 20 percent of the shares of non-governmental Iranian insurance firms to foreigners is permissible with the agreement of Iran's Central Insurance Company. Any shares exceeding this figure will have to be proposed by Iran's Central Insurance Company and approved by the High Council of Insurance and the Council of Ministers (Article 35). The Note to this Article includes some regulations to the effect that the transfer of shares of Iran's insurance companies to foreign governments or the transfer of more than 49 percent of their shares to foreign residents is absolutely forbidden. Transfer of shares to foreign shareholders should take place with the prior agreement of Iran's Central Insurance Company. The 1351 Monetary and Banking Law has stipulated that Iranian banks cannot transfer more than 40 percent of their shares to foreign nationals. The transfer of the shares of Iranian banks and foreign governments is totally forbidden (Article 31).

In addition to these cases, the 1362 Law on Usury-Free Banking Operations has determined the aim of the Islamic banking system as establishing a monetary and credit system based on truth and justice (in accordance with Islamic norms) to insure the sound flow of money and credits in order to guarantee the country's economic health and development. In addition, based on Article 21 of this Law, the Central Bank or any other banks in isolation or in unison are not allowed to engage in banking operations based on usury.

Yet based on the General Agreement on Services Trade, institutions such as banks and insurance companies which render services can be established and can undertake activities in the GATT member countries. No member can set any limitation for foreign providers of services in terms of quotas and monopolies or total value of the services rendered. No such limitation also applies to the total number of people working in the relevant sector. In addition, no limitation applies to the maximum percentage of foreign shares or total foreign capital in foreign investments (Article 16 of the Agreement). Of course, based on the Annex, the members can take measures to monitor the entrance or stay of foreign nationals in their respective countries or to guard their borders.

The said Agreement allows the set-up of foreign monetary, banking, and insurance firms within other GATT member countries. While Article 44 of the Constitution prohibits foreign participation in the domestic financial services industry on the ground of the latter being publicly owned. In addition, within the framework of the said rules and regulations, even if the legal ban on the set-up of foreign banks and insurance companies is removed, there is a limitation on the amount of foreign shares, and this limitation is in flagrant conflict with the said Agreement. Ultimately, even if these problems are removed, are foreign banking institutions ready to carry out their activities under the usury-free banking system? According to the GATT's perspective, doesn't this limitation serve as a hurdle in the way of liberalizing services trade? At any rate, as already mentioned, despite the anticipation of the chances and facilities for the developing countries, the General Agreement on Services Trade ultimately makes liberalization of all sectors inevitable. These rules and regulations should undergo changes.

In addition to Article 81 of the Constitution which forbids the establishment of foreign firms in Iran, there are other laws which create limitations on absorption and protection of foreign capitals. According to Article 3, Note 2 of the 1334 Law on Absorption and Protection of Foreign Capitals, the individuals, as well as private firms and institutions named in Article 1, do not have the right to transfer their shares, interests, and rights to their own governments or to other governments. In addition, Article 1, Note 1 of the Executive Directive of this Law sets the conditions for implementation of this Article: if during operations, a foreign government in one way or another holds a share of the capital invested, the said capital should, in the time period specified, be withdrawn from Iran. In addition to the ban on ownership of shares by foreign governments, a Circular which was issued on the Principles of Surveying Foreign Investment Projects (approved in 1343) has opposed a hundred percent foreign investment without Iranian participation. It has stated that Iranian shares should be at least 51 percent or more (Paragraphs 1 and 6).

Also the 1343 Law for the Protection of Domestic Industries stipulates that ministries and all state organizations and firms, as well as all government-affiliated organizations, are duty-bound to purchase their requirements from domestic factories in cases where the domestic goods are similar to imported items in terms of specifications, price, and quality. In addition, based on the 1343 Law for Industrial Protection and Prevention of the Closure of the Factories, in specific cases where the factories are closed down, an organ by the name of the Delegation for the Protection of Industries can appoint a person or several persons as the manager or managers of the factory (Article 2). The said law does not differentiate between domestic and foreign firms. Apparently, such a decision can also apply to foreign firms which are active in Iran.

A comparison of these views and the articles of the General Agreement on Services Trade in regard to the activities of foreign firms and the agreement on investment measures related to trade sheds light on some discrepancies. According to Article 28 of the General Agreement on Services Trade, a legal entity refers to any type of public or state-owned firm, trust, participation, joint investment, exclusive ownership, or an institution which has been established or formed in accordance with current laws for the sake of earning interests or for any other purpose. This is diametrically opposed to the Law on the Absorption and Protection of Foreign Capitals and its Executive Directive, according to which the capital of a foreign firm which is active in Iran cannot be absolutely owned by the foreign governments. In accordance with Article 16 of the said Agreement, no limitations can be set on the maximum percentage of the share of foreign capital either on the basis of the value of each investment or the value of the total foreign investments.

The ban on the transfer of shares to foreign governments and the appointment of an Iranian management with at least 51 percent of the shares in the foreign investment serve as other advantages involved here.

Though the developing countries have the necessary flexibility in regard to accepting the commitments, though special commitments can be included in the national chart, and though the needed opportunity can be gained to liberalize different sectors including services investment, the said laws can ultimately be in contravention to the GATT rules and regulations.

In Iran's foreign trade laws, reference can be made to rules banning trade with some countries, the monopoly of foreign trade, encouragement of exports, and limitation of imports. According to Article 9 of the Executive Directive for the 1373 Law on Imports and Exports, any trade transaction with the Qods-occupying regime is forbidden. This is while immediately after accession to the GATT, the acceding party is bound to abide by the Agreement of the WTO, as well as all agreements and legal documents which are annexed to it and all the commitments which are accepted based on the special accession protocols. The government will have to undertake these commitments in relation to other GATT members. Of course, in one case, these documents and commitments will no longer be enforced between two members and that is when one of the members, at the time of membership, does not agree to enforce these documents and commitments, provided that, at first, reference is made to Article 35 of 1947 GATT Agreement (Article 13 of the Agreement for the Establishment of the World Trade Organization).

In this way, by recourse to Article 13 of the Agreement for the Establishment of the World Trade Organization and Article 35 of the 1947 GATT Agreement, the government of Iran is entitled to abstain from implementing the GATT rules in relation to the Qods-occupying regime. This ban applies to the said regime and to Israeli firms. It does not apply to the firms which are affiliated to the regime or to Zionism or, for instance, to a foreign firm in which a Zionist holds a percentage of the shares or which engages in trade deals with the Zionists. In this way, if the word "affiliated" is taken in its broad sense, the item might be in contradiction with Article 8 of the 1369 Law on the Support for the Islamic Revolution of the People of Palestine. This Law bans transactions with institutions and firms which are affiliated to the Zionists. Apparently, cooperation with such firms cannot be considered as part of Article 13 of the Agreement of the World Trade Organization or Article 35 of the 1947 GATT Agreement.

Also based on Article 1 of the 1311 Law on Monopoly of Foreign Trade and its Amendment in 1320, Iran's foreign trade is exclusively in the hands of the government. The government has the right to import and export all natural and industrial goods and to determine the amount and conditions for their imports and exports within the framework of this Law. Of course, in practice, the government has given over its monopoly mainly to private bodies and firms, but legally it is not bound to do so.The government monopoly on tobacco products is among examples of such monopoly.

With the Amendment to the 1310 Law on the Monopoly of Tobacco Products, the government holds the monopolized right to import and export tobacco products within the framework of the Law on the Monopoly of Foreign Trade (Article 1). As mentioned in the discussion on foreign trade being state-governed in accordance with Article 44 of the Constitution, this absolute monopoly is incompatible with GATT rules and regulations.

In regard to the laws on encouragement of exports, there are items which clash with the GATT rules and regulations. In the Agreement on Subsidies and Compensatory Measures, reference has been made to the role of the government in promotion of exports.

According to this Agreement, the government's financial aid applies to cases where the State directly transfers the sums or undertakes commitments. These are known as subsidies. In addition, subsidies refer to when the government provides or purchases goods or services other than those related to the country's general infrastructure or protects incomes or prices (Article 1 of the Agreement). The said subsidies are banned in case according to the law or even based on practical reality they require the exports operations of the unit receiving subsidies. Note: The said subsidies, to the amount specified, are not banned in the agreement on agriculture.

Article 5, Note 1 of the Executive Directive of the Customs Affairs Law of 1351 also stipulates that exportable goods are exempt from paying 75 percent of the expenses of loads handling and transport services. Yet in accordance with Annex 1 Paragraph C of the Agreement on Subsidies and Compensatory Measures, exports subsidies are banned on the expenses of transporting exports goods which the government provides with more favorable conditions as compared with domestic ones. Note 12 of the Executive Directive of the Imports and Export Law of 1372 encourages the transport of exportable goods using Iranian means of transportation.

In addition, Article 3 of the 1333 Law on the Encouragement of Exports and Production stipulates that firms which, based on the determination of the Ministry of National Economy and Ministry of Finance, engage in the exports of one or several exportable and industrial goods, exploit mines, engage in refining, or produce industrial goods enjoy a five-year tax exemption from the day when they start their operations. This item clashes with Paragraph E of the said Annex, according to which the grant of full or partial exemption or the suspended payment of taxes especially in relation to exports are viewed as exports subsidies, which are banned according to Article 3 of the Agreement.

According to Article 6 of the 1345 Law on the Establishment of Iran's Export Promotion Center, the permissible amount of exports of industrial items will be annually issued by the Ministry of Economy for the benefit of the people following the proposal of the Ministry of Economy and approval of the Council of Ministers. This has been mentioned in the Note to Article 3 of the 1346 Articles of Association of the Export Promotion Center. Likewise, in accordance with the Law on assisting the development of exports of some exportable goods passed in 1343, in order to encourage exports, from Shahrivar 23, 1343, the exports of iron ore, lead ore, chromite and oysters will be entitled to the payment of an amount of at most 20 percent and zinc will be entitled to at most 10 percent of their FOB (Article 1). Additionally, Article 19 of the 1372 Imports and Exports Law stipulates that the government can annually allocate to the exporters a sum to boost exports and to present them as facility donations based on the proposal of the Ministry of Commerce and the approval of the Council of Ministers. The measures set in these laws are in contradicts with Paragraph B of the said Annex, according to which plans related to securing exports currency or similar methods which demand exports premiums are banned.

Article 1 of the Law Encouraging Exports and Productions stipulates that the country's exports are exempt from any kind of domestic taxes. This Article is in contradiction to Paragraph G of the said Annex in which exemptions on indirect taxes on production and distribution of exportable goods--more than that which has been stipulated for production and distribution of similar items at home--are banned.

Ultimately, in the final Paragraph of Annex 1 of the Agreement on Subsidies and Compensatory Measures, the moves of the governments or special institutions under their care for provision of insurance or guarantee programs vis-a-vis increased expenses of exportable goods or plans related to reducing the dangers ensuing from currency fluctuations or small insurance fees which apply to long-term operational expenses and their losses are deemed a type of subsidy and are, therefore, banned.

On the other hand, based on Article 1 of the 1352 Law for the Fund to Guarantee Exports, such a fund will be established to maintain the rights of the exporters vis-a-vis financial losses which are normally not undertaken by trade insurance firms. Without doubt, this refers to the grant of facilities in relation to the exports insurance fees. As a result, in case the Fund to Guarantee Exports specifies an insurance rate which is scant according to GATT, the rate can be considered contradictory to the stipulations of this paragraph.

In the country's foreign trade regulations, there are instances which according to the GATT limit imports. According to Article 11 of the GATT Agreement, a member should set or retain no limitation--apart from the rights, taxes, and other expenses through quotas, permits for imports and exports, and other measures--on the imports of goods from another member state.

Article 2 of the 1372 Law of Imports and Exports defines some commodities as "conditional." In other words, their imports or exports require permits. If setting a condition such as issuance of a permit for the imports of a commodity is considered to limit imports, this clashes with Article 11 of the GATT Agreement. Article 8 of this Law makes it incumbent upon the importers to receive permits for imports. Receiving an imports license does not immediately clash with the GATT rules and regulations, but based on the agreement on methods to issue imports permits, the objective is to expose the GATT member states to fewer non-automatic trends for issuing imports permits and to ultimately make license issuance for omports automatic (Preface to the Agreement).

According to this Agreement, the non-automatic issuance of license for imports of goods is permissible only when it does not bring about deviation of trade. In addition, the economic development, as well as the financial and trade requirements of the developing countries should be accounted for. ( Article 1-Paragraph 2, and Article 3- Paragraph 2). Likewise, based on Article 6 of the 1372 Law on Imports and Exports, the priority for transportation of all imports is with Iranian vehicles and means of transportation. If this item is viewed as a restriction on imports according to Article 11 of the GATT Agreement, it will clash with the GATT stipulation. Ultimately, Article 20 of the 1372 Law on Imports and Exports and the Single Article related to the 1373 Law on Determination of Customs Duties and Commercial Interests of Imported Goods include rules and regulations which openly limit imports and are in contravention to Article 11 of the GATT Agreement in regard to elimination of quantitative limitations. Article 20 makes the government duty-bound to receive as special taxes and tolls 1 percent of the total sums earned for customs duties and commercial interests on all imported goods from non-governmental importers who commercially import goods.

The Single Article allows the government to revise and attach priority to the commercial interests of the imported goods in order to such a way to effectively protect domestic productions, limit the imports of luxury goods, and earn tax revenues. In addition to the Law on Imports and Exports, the 1373 Executive Directive of the said Law sets certain quantitative limitations which clash with Article 11 of the GATT Agreement. Since order registration is exigent based on Article 8 of the Law on Imports and Exports and Article 5 of its Executive Directive and since a deposit is needed for this registration, the move might be perceived to limit imports according to Article 11 of the GATT Agreement. Based on Article 41 of the Executive Directive, deposits for credit facilities on imports can also limit imports. Pricing the used commodities on the basis of the prices of similar goods in accordance with Article 42 of the Executive Directive of the Law on Imports and Exports also contradicts with the GATT rules and regulations.

This is because according to Article 1 of the Agreement to implement Article 7 of the GATT Agreement (1994),customs pricing for omported goods should be based on determining the transaction value of the said commodities. Obviously, the transaction value or price of worn-out commodities is not the same as that of a brand new one of its kind to be subject to equal amounts of customs duties.

In short, in order to crystallize the GATT, all taxes on imported goods should be turned into tariffs and declared homogeneously. In the 1372 Law on Imports and Exports and in its Executive Directive, many indirect taxes on imports have been all-in-one turned into commercial interests. But as yet there are instances such as in balance of an amount or special taxes and tolls which have not been turned into tariffs.

It is of course necessary to mention that the limitation of imports or exports is not feasible for sundry reasons such as difficulty in the balance of payments, maintenance of public ethics, and insurance of security interests.

At the close of this discussion, several points are worthy of mention: Many of the GATT stipulations--especially those pertinent to the developing countries--should be enforced gradually and item by item. But this enforcement period should not exceed ten years. As a result, as stressed in the text of the report, some legal contradictions and problems might not be set forth immediately after accession to the GATT but might appear after a span of time.

In addition, some of Iran's rules and regulations are practically annulled, but this annulment has not been legally set forth. In other words, such laws are mainly problematic and do not serve to solve the existing tangles. Another point worthy of consideration is the vast array of laws on similar issues and their inherent contradictions.

On the other hand, though legal, many judicial and administrative practices of Iran are not used as documents by the courts in the country. This can also be problematic. Also, the possible differences between the devised rules and the religious precepts should be considered. Finally, as with any other multilateral agreement, accession to the GATT as a multilateral agreement entails limitation of the national sovereignty in return for gaining access to a collective and more sublime aspiration and advantage.