In previous article, 4 steps which should be taken to prevent Canadians to lose their potential market share in Iran to other international corporations were reviewed. This article studies 4 more elements which affect Canadian businesses to experience the same level of competition with other international and European companies in their business with Iran.
5- Negotiating a preferential trade agreement (PTA)
Iran is not a member of the World Trade Organization (WTO), and therefore preferential trade agreements (PTA) are one of the main vehicles helping Iran emerge from its isolated position, and enter into reasonable and productive relationships with its trading partners. PTAs are viewed as instruments paving the path towards accession to the WTO by lowering custom taxes imposed on imported products.
Iran is not a member of the WTO and therefore imposes high tariffs and quotas on imported products. Any cuts on tariff and quotas will drastically improve market access for the products listed in the agreement, pushing other competitors out of market.
Iran has signed 9 PTAs with different countries providing better market access for goods produced in the jurisdictions of parties to the agreements. The most recent case is the Iran-Turkey Preferential Trade Agreement which entered into force on January 1, 2015. Through this agreement, 125 items of Iranian goods and 140 items of Turkish goods are traded based on preferential tariffs.
The Canadian government should start negotiating for a PTA with Iran. This would provide a good competing power for Canadian goods in Iran. Iran is not a member of the WTO and therefore imposes high tariffs and quotas on imported products. Any cuts on tariff and quotas will drastically improve market access for the products listed in the agreement, pushing other competitors out of market.
6- Negotiating a double tax avoidance agreement
One international legal instrument available, which would affect the volume and value of bilateral businesses, is an agreement dealing with the problem of double taxation. The levying of taxes by two jurisdictions on the same declared income (income and corporate taxes), assets (capital taxes), or financial transactions (sales taxes) might discourage businesses to seek opportunities in the other jurisdiction.
Though Iran has neither a capital gain tax nor a tax on dividends, the absence of a treaty will not significantly affect Canadian businesses doing business in Iran. Rather, it will affect Iranian businesses investing in Canada, as well as the personal income tax of Canadians working in Iran. This negative impact can be controlled and reduced by negotiating a double tax avoidance agreement between the countries. 25 countries have already signed such an agreement with Iran, providing a preferential treatment for their businesses. German, Swiss, Austrian, Spanish and French companies enjoy the privileges of double tax avoidance agreements giving them an edge in their global competition.
The Canadian government needs to address this obstacle and take steps to reduce one of the significant barriers to cross-border trade and investment. The agreement will also improve tax administration between the two countries by reconciling differences in the definitions of different types of income, and will establish a common method on classifying and taxing different incomes. This will become all the more important given the high number of Iranians living in Canada.
7- Giving the mandate to Export Canada Agency to insure and finance the export of goods and services to Iran
The big market opportunity of a post-sanction Iran is luring international corporations and enabling the Iranian government to select its business partners from the long list of international companies. Years of sanctions and the drop of oil prices have reduced Iran’s revenue significantly, making the Iranian government unable to finance or pay for its purchases. As such the Iranian government is using its leverage to pick companies who include financing in their business package.
While the restrictive measures against Iran have been eased and amended by the Canadian government, EDC is still continuing its previous complete shut-down approach with regards to Iran.
Therefore, among the first necessary steps taken was the signing of agreements between export credit and insurance agencies with Iranian financial institutions, establishing their financing mechanisms in Iran. France’s Coface, Italy’s SACE, Germany’s Hermes, Denmark’s EKF, Switzerland’s SERV and Spain’s CESCE started supporting bilateral trade and investment, creating competition for their clients in the Iranian marketplace.
Export Development Canada (EDC) is the Canadian institution vested with the mandate to support and develop Canada’s export trade, Canadian foreign direct investment and investment into Canada. EDC, partnering with other financial institutions and in collaboration with the Government of Canada, provides financing and insurance services such as political risk insurance policies for Canadian companies, enabling them to respond to international business opportunities.
While the restrictive measures against Iran have been eased and amended by the Canadian government, EDC is still continuing its previous complete shut-down approach with regards to Iran. Currently, EDC’s position is to not pursue business, and they have closed their programs related to business with Iran.
FATF members should apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) in Iran. This requires enhanced due diligence in considering requests by Iranian financial institutions to open corresponding accounts, branches and subsidiaries in their jurisdiction.
8- Establishment of a financial channel and banking relations
Banking payment plays a critical role in any transaction. Without a banking channel through which the purchaser pays the seller, trade and investment will never happen. It is hence not surprising that the crippling sanctions against Iran mainly targeted its financial and banking sectors. Yet the implementation of JCPOA and the lifting of economic sanctions has not yet solved Iran’s banking problem.
The Financial Action Task Force (FATF) considers Iran as a jurisdiction with strategic deficiencies posing a risk to the integrity of the international financial system. The FATF, since 2009, has called on its members to advise their financial institutions and give special attention to business relationships and transactions with Iran. FATF members should apply effective counter-measures to protect their financial sectors from money laundering and financing of terrorism (ML/FT) in Iran. This requires enhanced due diligence in considering requests by Iranian financial institutions to open corresponding accounts, branches and subsidiaries in their jurisdiction.
Following the FATF’s finding, the Office of the Superintendent of Financial Institutions (OSFI), which regulates Canadian Federally Regulated Financial Institutions (FRFIs), issued a guideline requesting FRFIs to classify clients, banks and other financial institutions based in or connected to Iran as high risk (including branches and subsidiaries of such entities outside Iran), apply enhanced customer due diligence measures, and take the FATF’s concerns into account when monitoring financial transactions emanating from, or destined to Iran. The OSFI’s notice has been reiterated on its notice dated from December 7, 2015.
Given the fact that many non-US and European banks have been sentenced and fined billions of dollars by the US over their past business with Iran, Canadian banks will be concerned about engaging with Iranian banks. To address this unwillingness, a government intervention and a state guarantee could play a key and vital role.
In addition to Canadian restrictions on Iran’s financial sector, US AML measures on Iran play a critical role. On November 21st, 2011, the US identified Iran as a jurisdiction of “primary money laundering concern” under section 311 of the USA Patriot Act presenting, for the first time, the entire Iranian financial sector as posing illicit financial risks for the global financial system. This included Iran’s Central Bank, private Iranian banks and branches and subsidiaries of Iranian banks operating outside of Iran.
This identification by the US treasury caused US OFAC to alarm non-US banks and financial institutions who wished to open corresponding accounts for Iranian banks, even after the JCPOA Implementation Day and the lifting of US secondary sanctions. US-based financial institutions should apply strict scrutiny at the corresponding USD accounts of foreign banks having opened corresponding accounts with Iranian banks, to ensure that no Iran-related payment is involved in the processing of dollar payments. This means a delay in processing the USD payments of banks and making these banks subject to more scrutiny and enhanced due diligence.
Given the fact that many non-US and European banks have been sentenced and fined billions of dollars by the US over their past business with Iran, Canadian banks will be concerned about engaging with Iranian banks. To address this unwillingness, a government intervention and a state guarantee could play a key and vital role.
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– Written by Hassan Razavi
