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Iraq – Top tax issues facing
foreign investors
For foreign investors, Iraq offers tremendous opportunities. As
the country emerges from years of conflict and economic sanctions,
its government is undertaking massive reconstruction projects to
restore its infrastructure and develop its economy. As its security
improves and its stability rises, Iraq is on track to return to its
pre-war prosperity.
But, like other parts of its infrastructure, Iraq’s tax system has
suffered from neglect over the past decades and is in need of
modernization. Iraq’s international tax rules remain underdeveloped
and its tax authorities lack experience in dealing with
non-residents. As the Iraqi government works to make its tax system
more attractive to foreign investment, the biggest tax challenges
that investors currently face are set out below, along with our
recommended approach to navigating these challenges.
Top 7 tax issues for foreign investors in Iraq
1. Unclear meaning of oil and gas related activities
2. Uncertain tax treatment of assets under offtake agreements
3. Difficulties in obtaining tax refunds
4. Difficulties in obtaining credit for amounts withheld
5. Unclear accounting treatment of DBO assets
6. Taxation of sales of Iraqi company shares
7. Over-application of retention tax
1. Unclear meaning of oil and gas related activities
Iraq’s general corporate tax rate is 15 percent, but a higher 35
percent applies to oil and gas related activities. Uncertainty over
what activities constitute oil and gas related activities could make
it difficult to determine the corporate income tax and retention
rates that apply to a company’s activities in Iraq. The Iraqi tax
authority’s instructions and interpretation regarding what
constitutes such related activities (e.g., ancillary activities,
upstream services, subcontractors) are unclear.
Companies should seek written confirmation from the tax authority
about the tax status of their activities where those activities are
not related to upstream activities and not included in the
predefined oil and gas related services.
2. Uncertain tax treatment of assets under offtake agreements
When an oil and gas producer transfers completed assets under an
offtake agreement, the appropriate tax treatment can be difficult to
determine. For example, the tax authorities may treat similar
companies differently, and the tax authorities’ position could cause
a deemed sale to arise on the transfer.
To avoid uncertainty, contracts should pre-define the ownership of
assets and payments, and the parties should confirm the ultimate tax
treatment by obtaining an advance tax ruling.
3. Difficulties in obtaining tax refunds
Companies that are entitled to tax refunds under the law often
struggle to obtain them from the tax authorities due to interpretive
differences and bureaucratic hurdles.
To ease the process for obtaining refunds, companies should be
prepared to satisfy all local compliance requirements (e.g.,
filings, local financial statements) and be ready to present the
data necessary for tax clearance.
4. Difficulties in obtaining credit for amounts withheld
Like tax refunds, companies can have a hard time getting tax credit
for tax amounts withheld from other taxpayers. Iraq’s tax system is
not equipped to follow up on tax withheld from payment made by
others, and so companies need to supply proof of the tax amounts
withheld.
To ease the process and speed up the release of final payments,
companies should always request payment receipts from the other
party, as well as copies of the information schedule submitted to
the tax authority.
5. Unclear accounting treatment of DBO assets
The lack of sophistication of Iraq’s accounting regime can create
uncertainty over the accounting (and tax) treatment of the assets to
be used by the project company in a design-build-operate (DBO)
project. For example, whether such assets are subject to a finance
lease for accounting purposes is unclear.
Again, to avoid uncertainty, contracts should pre-define the
ownership of assets and payments, and the company should seek
written confirmation of the acceptable accounting treatment from the
tax authority.
6. Taxation of sales of Iraqi company shares
When shares of an Iraqi resident company are sold, whether capital
gains tax applies is uncertain. If the sale is in the ordinary
course of business, capital gains tax does not apply as long as
trading in shares is not the core business of the seller. However,
Iraqi tax legislation lacks clear definitions, allowing for
different interpretations of terms like “ordinary course of
business” and “trading in shares”.
Investors are advised to obtain advance written confirmation from
the tax authority related to the tax treatment of the sale.
7. Over-application of retention tax
Foreign companies doing business with Iraq (as opposed to in Iraq)
are not subject to Iraqi retention tax (i.e., withholding tax). Due
to uncertainties over the difference between doing business with and
in Iraq and lack of experience among Iraqi tax officials and
taxpayers alike, retentions are applied on all payments without
regard to the nature of the foreign payee’s activities in Iraq.
Foreign companies should investigate the conditions for doing
business with Iraq and negotiate these conditions with client
companies and the tax authorities. Foreign companies can also obtain
an advance tax ruling to avoid the complicated and lengthy process
of obtaining the refund.
In the future, Iraq’s tax and regulatory regimes are expected to
undergo reforms designed to internationalize the country’s economy.
As revenues from oil and other sectors continue to fuel the
country’s growth, there is little doubt that Iraq will continue to
rise as a destination of choice for international investors.
Therefore, it is critical that foreign investors not let current tax
uncertainties and issues deter them. In the meantime, navigating the
tax issues through active engagement with the tax authorities is
important in gaining greater certainty on tax matters.
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