New Local Content Legislation
Date: 25 June 2019
"An amendment, extending the scope of the law, has recently been made to the Law on "Maximum Utilization of Production and Services Potency in Providing Country’s Needs and Promotion of Exports” superseding all previous legislations in this respect." ...
"An amendment, extending the scope of the law, has recently been made to the Law on "Maximum Utilization of Production and Services Potency in Providing Country’s Needs and Promotion of Exports” superseding all previous legislations in this respect." The amendment has added substantial detail to the ambiguously drafted previous local content law, extended the scope of the law, created a Supervisory Board to monitor its application and imposes new criminal punishments as well as heavy fines on its violations. As far as the requirement of local content is concerned, the 51% percentage remains the same as the past but there are plenty of significant changes.
Of course, while ratification of this Law should be viewed in the context of existing currency problems in Iran and the need to encourage domestic production, it is particularly important as it applies to all oil and gas projects in Iran and it could be applied retroactively to contracts signed in the past. The Law has not materially altered the minimum local content requirement (51 per cent) but has added elaborations on its method of calculation as well as applicable penalties.
According to the Law, within two years from its ratification, all products need to have local content labels showing the percentage of local content used in the product value chain of the product.
To facilitate application and supervision of the Law, it mandates establishment of an Integrated System for:
The Law prohibits any assignment of projects even if carried out in accordance with tender laws if such assignments does not comply with this Law.
As with previous legislation, it is obligatory for all entities subject to the Law to assign their projects to Iranian entities listed on the Integrated System. However, where it is necessary to employ an Iranian-foreign partnership it is imperative that the Iranian side must hold at least 51% of the shares in the partnership and this assignment must be approved by the Supervisory Board.
Moreover, all entities subject to this Law are prohibited from purchasing any foreign products or services that have similar Iranian equivalent as listed on the Integrated System. Exceptionally, the highest relevant authority of the entity in question may request the Ministry of Industry Mine and Trade (MIMT) to authorize purchase of products or services from foreign suppliers even where there are similar Iranian equivalents.
The law also prohibits commercial advertisements of foreign products if they are not produced inside Iran. Any commercial advertisement of such products will subject the advertising media to financial penalties.
Financial penalties have been set for violations of the Law, which apply not only to directors and employees of entities subject to this Law but also to contractors and their employees. In case projects are assigned in violation of this Law, penalties proportionate to the project size ranging from 10 to 20 per cent of the project value will apply to perpetrators. The perpetrator will also be delisted from the Integrated System for a period of one to two years.