Comments on draft new Income Tax Law
15 April 2016
Regarding the draft new Income Tax Law (version Hut 1394), here are our suggestions:
Overall. The language used is extremely general and can be interpreted subjectively to result in widely differing opinions. In contrast, the November 2015 Tax Administration Law is much more specific.
Article 2. Afghan Revenue Source should be defined as “any revenue generated by a person providing goods or services physically within the borders of Afghanistan, regardless of which country the payment was made from or to. Afghanistan does not have jurisdiction over activities in other countries.
Article 2. Dividend is defined far too generally – for example “utilization of any asset” can mean riding in an office vehicle. Suggestion: strike 1-5 under the definition of a dividend.
Article 3.2.4. It does not make sense that any “office established during a fiscal year, or their main office is inside Afghanistan”. If they mean their permanent office (which the draft law defines as an office for more than 6 months) is now considered a resident, and residents are required to pay take on both Afghan and non-Afghan revenue sources; then this would mean any foreign company in Afghanistan longer than 6 months would be required to pay income tax on both Afghan and non-Afghan revenue sources – their worldwide income. Suggestion: strike this clause.
Article 8.2.1. There are many technical services that are performed physically outside Afghanistan, which cannot possibly be subject to Afghan withholding tax. Suggestion: strike “technical services”.
Article 8.2.5. Non-residents often have worldwide insurance policies which include Afghanistan. It is not possible to withholding tax from foreign insurance premiums, especially DBA insurance. Suggestion: strike this clause.
Article 10.1.4. Since Article 10.2. already states that only revenue supporting charitable activity shall be exempt from tax, then Article 10.1.4. is not needed. Suggestion: strike this clause.
Article 16.1.2. Costs for local housing for the taxpayer, especially when Afghanistan is not their primary home, is a reasonable business deductible expense. Suggestion: strike this clause.
Article 16.1.4. Costs for commuting to and from the workplace is provided by many employers for their employees, as a reasonable business deductible expense. Suggestion: strike this clause.
Article 16.1.5. Costs for insuring life, accident, health, indemnity of the taxpayer in a very dangerous country like Afghanistan is a reasonable business deductible expense. Suggestion: strike this clause.
Article 16.2.1. Costs for “durable objects” on a office property that are not left to the landlord are a reasonable business deductible expense. Suggestion: strike “durable objects”.
Article 16.2.3. Costs for payment of taxes to foreign governments by non-resident persons is a reasonable business deductible expense. There do not exist any such treaties with Afghanistan and other countries – the taxpayer cannot be penalized for this. Suggestion: strike this clause.
Article 24. If partnerships are only to report their financials while the individual members of the partnership are to report separately, then the process to renew a joint venture or partnership business licenses also needs to be amended accordingly.
Article 31. It doesn’t make sense for the Ministry of Finance to arbitrarily “divide and distribute the amounts earned, deductions, credits, and reimbursements” across commonly owned companies. Suggestion: allow companies to optionally file a joint consolidate return including all their subsidiaries. This would eliminate any intra-company and transfer pricing issues.
Article 44.1.5. Many businesses will not know if their payments to a single vendor will exceed 500,000 Afghani threshold. Guide 21 of the MOF explains that payments until 500,000 Afghani are not subject to 2% withholding, but any single transaction that caused the aggregate to exceed 500,000 Afghani in a fiscal year was subject to 2%, as well as all following transactions in that fiscal year. Suggestion: include this clarification in this article.
Article 44.1.5. Explain whether 2% or 7% applies to a company that has a business license but is expired.
Article 44.1.2, 3, 4 and Article 45.1.1, 2, 3. Without a minimum threshold, even a payment of 1 Afghani would be subject to withholding and filing paperwork. Suggestion: add a minimum threshold of 500,000 Afghani to all withholding categories.
Article 44.3. We do not believe stamp duty applies in Afghanistan. Suggestion: strike this clause and any other references to stamp duty.
Article 46. Clarify by the fifteenth day of the succeeding “Afghan calendar” month “in which payment was made”
Article 47. This clause adds additional filing burdens with a deadline 1 month after end of fiscal year in addition to 3 months after end of fiscal year. Suggestion: change from “end of first month” to “within 3 months”, so that it coincides with the annual income tax return as currently required.
Article 50.1. Define what “superior services” mean.
Article 69.2. We believe “except non-profit organizations” that it was meant to say “including non-profit organizations” have to file annual income tax returns.
Article 75. Include NATO, ADB, World Bank, and other agencies which are not foreign countries or the United Nations.