Afghanistan Compliance Advisory
30 May 2014
For more information of any of the below updates, please contact the Afghanistan Financial Services division of Afghanistan Holding Group by emailing firstname.lastname@example.org. Afghan tax guides, forms and manuals are available here: https://www.ahg.af/offer/financial/taxation.htm.
Dividend Withholding Tax Ruling on Exempt Contracts. On 18 May 2014, the Ministry of Finance (MOF) Objections and Review Department issued a final ruling that dividend withholding tax does not apply to contracts holding tax exemption confirmations. However, other tax requirements may still apply, on a contract by contract basis:
Article 59: 0%, 10% or 15% Rental Tax Withholding
Article 58: 0%-20% Employee Tax Withholding (unless both Afghan and non-Afghan employees exempted)
Article 72: 2% or 7% Contractor Tax Withholding
Article 46: 20% Interest Tax Withholding
Article 64: 2%, 5% or 10% Business Receipts Tax (unless exempted)
Article 8: 20% Annual Income Tax (unless exempted)
Tax Audit Actions. Over the past 6 months, the MOF Medium Taxpayers Office (MTO) and Large Taxpayers Office (LTO) have levied an increasing number audit assessments on over 500 organizations. Typically, these assessments include the following items:
Article 100: 0.1% of the tax due per day for late tax deposits
Article 101: 20,000 Afs for poor records
Article 102: 100 Afs per day late filing annual returns (revised 1392)
Article 103: 10% of the tax due for not withholding tax
Article 104: 10% of the tax due without reasonable cause
Article 105: 20,000 Afs not obtaining TIN
Article 98: 2 times the tax due for tax evasion
Tax Enforcement Actions. On 1 March 2014, the MOF Large Taxpayers Office began enforcement action on 38 international companies and 12 Afghan companies. Enforcement action may include include:
Article 92: Collection of unpaid tax from third parties
Freezing and seizure of bank accounts in country
Garnishment of income from customers and debtors
Auction assets to cover tax liabilities
Article 93: Personal liability of key staff
Article 94: Persons not allowed to leave Afghanistan
Article 95: Business closure
Article 96: Restrictions on disposal of property
AISA Audit Actions. On 1 April 2014, the Afghanistan Investment Support Agency (AISA) blacklisted 11 international companies and 13 Afghan companies, in response to orders from the Attorney General’s Office. These companies will not be allowed to obtain work permits or visas and may not be able to renew their AISA license.
Financial Action Task Force (FATF) Blacklisting of Afghan banks. On 26 May 2014, FATF warned that Afghan banks could be blacklisted on 22 June 2014 if Afghanistan does not pass a stricter Anti-Money Laundering (AML) regulations. A blacklisting would cut Afghan banks off from making cross border transfers with most international financial institutions. The Afghan Cabinet has approved the draft AML law and sent it to Parliament for review next week. AHG is closely following this situation, which has serious implications for our clients’ ability to transfer routine operational funds, payroll and taxes to Afghanistan.
U.S. Department of Defense (DOD) Contract Afghan Tax Reporting Requirement. On 23 May 2014, U.S. House of Representatives Passed the FY2015 National Defense Authorization Act, which included the below:
SEC 1251215. Requirement to withhold Department of Defense assistance to Afghanistan in amount equivalent to 150 percent of all taxes assessed by
Afghanistan to extent such taxes are not reimbursed by Afghanistan.
(a) Requirement to withhold assistance to Afghanistan.—An amount equivalent to 150 percent of the total taxes assessed during fiscal year 2014 by the Government of Afghanistan on all Department of Defense assistance in violation of the status of forces agreement between the United States and Afghanistan (entered in force May 28, 2003) shall be withheld by the Secretary of Defense from obligation from funds appropriated for such assistance for fiscal year 2015 to the extent that the Secretary of Defense certifies and reports in writing to the appropriate congressional committees that such taxes have not been reimbursed by the Government of Afghanistan to the Department of Defense or the grantee, contractor, or subcontractor concerned.
(b) Waiver authority.—The Secretary of Defense may waive the requirement in subsection (a) if the Secretary determines that such a waiver is necessary to achieve United States goals in Afghanistan.
(c) Report.—Not later than March 1, 2015, the Secretary of Defense shall submit to the appropriate congressional committees a report on the total taxes assessed during fiscal year 2014 by the Government of Afghanistan on any Department of Defense assistance.
DOD prime contractors and subcontractors have a reporting obligation to the DOD regarding Afghan tax assessments. Neither Afghan tax withholding requirements (rental, employee, Afghan contractor) nor penalties are considered a violation of the SOFA. Commercial contracts also do not fall under the SOFA. The only dispute between the MOF and the DOD is regarding the 2% BRT and 20% corporate income tax on DOD subcontracts, which also triggers a 2% or 7% contractor withholding requirement by the prime from sub invoices. The MOF believe subcontractors are not tax exempt while the DOD considers taxing subcontractors is a violation of the SOFA.
Tax Implications Bi-lateral Security Agreement (BSA). There were two draft versions of the BSA circulated. Of importance to the DOD-MOF subcontractor withholding debate is that Article 2, paragraph 5, has been clarified from the following:
““5. ‘United States contractors’ means persons and legal entities who are supplying goods and services in Afghanistan to or on behalf of United States forces under a [AFG: prime] contract [US: or subcontract] with or in support of United States forces. [AFG: Subcontractors are not included under the definition of United States contractors.]”
. . . to the following Article 1, paragraph 5:
“5. “United States contractors” means persons and legal entities who are supplying goods and services in Afghanistan to or on behalf of United States forces under a contract or subcontract with or in support of United States forces.”
It appears that the final BSA draft was agreed to be changed from subcontractors not being exempt to them being exempt from taxation. However, this is understood to only have effect on future revenue from subcontracts. Both presidential candidates have stated they will sign the BSA if elected. The run-off election is scheduled 14 June 2014.
Future U.S. Presence in Afghanistan. On 28 May 2014, President Obama announced 9,800 U.S. troops would stay in Afghanistan after the end of 2014, 4,800 after the end of 2015, and only an Embassy presence after the end of 2016. Historically, U.S. development assistance levels have also dropped as compared to before and after troop reductions; -69% in Iraq, -52% in Kosovo, -43% in Haiti, -60% in Bosnia. However, this may be an opportunity for the Afghan economy to grow outside military spending and aid that has dominated over the past decade.