Note: This information was developed in a certain time and regulations frequently change. For any updates and recent announcement, check the Afghan Ministry of Finance’s website.
PART ONE: INTRODUCTION
The Ministry of Finance (MOF), led by His Excellency Minister Eklil Ahmad Hakimi, has successfully been implementing a long list of reforms in many areas, but particularly relevant to the public are those in the Afghanistan Revenue Department (ARD). We take this opportunity to highlight some of these accomplishments below.
Personnel. Highly qualified professional officials have been recruited at all levels of the MOF who are dedicated to integrity and excellence. This means that taxpayers will interact with qualified officials who fully understand the complexities of tax accounting in Afghanistan.
Systems. Many manual paper based systems have been digitized by mandating the use of the Standard Integrated Government Tax Administration System (SIGTAS) across all MOF departments. SIGTAS automatically calculates tax penalties and liabilities thereby reducing assessment subjectivity.
Public Awareness. The MOF has launched a public awareness campaign, including an Annual Best Taxpayers Award and publishing tax information on their comprehensive new website (http://ard.gov.af/) with eFiling and eForm sections. Now all MOF forms, guides, laws, regulations are available online for reference as well as to submit electronically, reducing the time required to visit the MOF in person.
Accountancy Board. The MOF has established Certified Professional Accountants Afghanistan (CPA Afghanistan) which is the first time an independent accountancy board has been established in the country. By developing a specific ACCA exam for Afghan taxation and certifying qualified accountants, MOF can enforce international accounting standards and dispel charlatans.
One Stop Shop. The Ministry has embraced the one-stop shop model for taxpayer customer service by working with Asan Khedmat to move certain public services to a single location, including TIN and the 3 tax filings offices. Thus, taxpayers would only need to visit one location for government services instead of having to tour an array of offices for some tasks.
Regulatory Reform. The Ministry is working to revise laws and regulations to make taxation easier and more transparent for taxpayers, including clarifying the new Tax Administration Law, obtaining public feedback on the draft new Income Tax Law, as well as auditing and reforming the 10% telecom fee collection.
PART TWO: MONTHLY TAX WITHHOLDINGS
General Requirements. All figures must be reported and paid in Afghani currency, based on the official buying rate of that period as published by Da Afghanistan Bank (DAB). Unless MOF has provided written approval, all due dates must follow the Afghan fiscal calendar (not the Gregorian calendar). All monthly withholdings, BRT and AITR taxes and penalties must be deposited directly into the assigned Small, Medium or Large Taxpayers Office (STO, MTO or LTO) bank account at DAB. All tax areas require in-person filing, typically with four carbon copy forms, with one copy distributed each to Payer, Payee, MOF and DAB.
Rental Withholding Tax (RWT). All entities are required to withhold tax from any rent payments to Afghan landlords (0% for 0-10,000, 10% for 10,001-100,000, 15% for 100,001 + monthly rent amount). Due 15 days after end of the month in which payment was made to the landlord. [Income Tax Law, Article 59]
Wage Withholding Tax (WWT). Non-Afghan national employees may be exempt from wage withholding by a Tax Exemption Confirmation (TEC). All Afghan nationals are subject to wage withholding tax (0% of 0-5,000, 2% of 5,001-12,500, 10% of 12,501-100,000 and 20% of 100,001 + portion of monthly salary). In addition, the employer is required to obtain individual Afghan Taxpayer Identification Numbers for all employees subject to wage withholding tax. Due 10 days after end of the month in which wages were paid to the employee. [Income Tax Law, Article 58]
Contractor Withholding Tax (CWT). International companies are those that are owned over 50% by non-Afghan nationals (with AISA license numbers starting with an “I”) while domestic companies are those that are owned 50% or more by Afghan nationals (with AISA license numbers starting with a “D”). International vendors may be exempt from contractor withholding by a TEC while all domestic vendors are subject to contractor withholding tax (500,000 per year threshold, then 2% of invoice amount for registered companies, 7% for unregistered). Due 10 days after end of the month in which invoices were paid to the vendor. Vendor receives a tax credit for any withheld amounts to apply against annual income tax liabilities. [Income Tax Law, Article 72]
PART THREE: QUARTERLY BUSINESS RECEIPTS TAX
Business Receipts Tax (BRT). Often confused with CWT, BRT is a completely separate tax. Contracts with a TEC are usually exempt from paying BRT, while all other revenue is subject to tax on gross quarterly receipts depending on the sector (10% for telecom, airline or hospitality with over 750,000 Afghani revenue, 5% for hospitality under 750,000 revenue, 4% for all other sectors). Due 15 days after end of each Afghan fiscal quarter. [Income Tax Law, Article 64]
Additional Changes. BRT filings are now required quarterly regardless if a company is fully tax exempt or even if it has no activity at all. BRT (4%, 5% or 10%) is now required to be calculated on an accrual basis, totaling gross revenue invoiced during each quarter, even if not yet received.
Afghan Fiscal Quarters. For reference, here are approximate Afghan fiscal quarters with BRT due dates:
- Quarter 1 – 21 December to 20 March: due 5 April
- Quarter 2 – 21 March to 20 June: due 5 July
- Quarter 3 – 21 June to 20 September: due 5 October
- Quarter 4 – 21 September to 20 December: due 5 January
PART FOUR: ANNUAL INCOME TAX RETURN
Annual Income Tax Returns (AITRs). Taxpayer must file an Annual Income Tax Return within 3 months after the end of each fiscal year (21 March) or within 30 days of receiving notice. Taxpayer must make corrections or provide further information within 30 days of receiving notice from MOF. Taxpayer may petition for an extension of up to 3 months for filing a tax return, and the MOF shall reply within 10 days whether to allow or disallow extension. Tax still has to be paid by due dates regardless of extension for filing. [Tax Administration Law, Article 7]
The AITR requires full breakdown and reconciliation of Profit & Loss Statement and Balance Sheet Statement for activities within the borders of Afghanistan. Companies with both tax exempt and taxable revenue are required to file two returns – one informational return consolidating all their tax exempt work and one actual return consolidating all taxable work. [Income Tax Law, Article 8]
Tax Assessments. If a taxpayer fails to file by the deadline, MOF will estimate tax liability and issue an assessment notice. MOF can change its assessment within 5 years from the tax return due date, unless it believes taxpayer has intent to evade tax, in which case can change its assessment at any time. If MOF believes collection is in jeopardy, it can issue an assessment for any previous or current period (even if the tax is not yet due). The MOF can assess what it believes to be the correct tax amount, by estimating similar market conditions and disregarding transactions that had “intent to cause reduction of tax”. [Tax Administration Law, Article 8-10]
Tax Clearance Letter (TCL). The law requires the annual Tax Clearance Letter (TCL) be issued by the MOF within 21 days of submitting all required forms [Tax Administration Law, Article 59.
PART FIVE: TAX AUDIT
Tax Objections. Taxpayer can submit an objection with justifications within 45 days of receiving an MOF decision notice. Taxpayer may petition for an objection deadline extension of up to 15 days. MOF shall decide on the objection within 60 days of receiving objection and inform taxpayer within 30 days of the decision being made (total 90 days). [Tax Administration Law, Article 11]
Tax Appeals. If taxpayer does not receive a decision within 90 days or is dissatisfied with the decision, it can appeal to Tax Disputes Resolution Board (TDRB) within 30 days. If the taxpayer is still dissatisfied with the TDRB decision, it can refer to a court of competent jurisdiction within 30 days, otherwise the TDRB decision is final and enforceable. [Tax Administration Law, Article 12]
Tax Payments. Note that “the taxpayer shall prove the incorrectness of the taxation decision at any stage of dispute” and that “initiation of taxation dispute cannot prevent collection of tax.” Taxpayer may petition for an extension of tax payment due dates or an installment plan. If MOF believes collection is in jeopardy, it can order immediate collection of the balance. [Tax Administration Law, Article 14-15]
PART SIX: TAX ENFORCEMENT
Tax Collection. MOF can collect unpaid tax from third parties, such as the taxpayer’s bank or taxpayers’ employer. If the MOF is collecting unpaid tax by requesting the employer to deduct from taxpayer wages, the employer cannot deduct more than 20% of taxpayer’s monthly wages to pay to the MOF. Third party may petition the MOF for a change in the amount or due date for collection ordered by the MOF. If third party does not comply, they will be held personally liable for payment. [Tax Administration Law, Article 16-18]
Tax Enforcement. For failure to file a tax return or pay tax by the due date, MOF can suspend taxpayer’s financial accounts, suspend importation of goods, usurp the right of the landlord to receive rent (if rental withholding 15 days past due), usurp the right of the landlord to evict the tenant (if rental withholding 30 days past due), forcibly affix a sign stating “Closed Temporarily For Not Complying With Tax Obligations” at taxpayer’s business premises (after 10 days’ notice), issue a notice for a taxpayer’s departure prohibition from Afghanistan (if 30 days past due and the MOF has evidence the taxpayer will permanently depart), or they may request the court to order the seizure and sale of the person’s property. “If perishable, sell immediately, if not perishable first detain for 21 days and then sell”. [Tax Administration Law, Article 20-24]
PART SEVEN: TAX PENALTIES
Tax Penalties. There are four main penalties for tax non-compliance. Even if no tax is due, the penalty for individuals is 30 Afghani per day, while for businesses it is 100 Afghani per day for each day a form is filed late. This includes monthly rental, wage and contractor withholding tax forms, quarterly BRT forms and annual income tax forms. Second, if taxes that should have been withheld from payments to landlords, employees or vendors were not withheld, the penalty is 10% of the tax due, in addition to the tax. Third, if any of tax amounts were deposited late to the MOF, the penalty is 0.1% per date late. Finally, if certain revenue is not reported with intent to evade tax, the penalty is 2 times the tax assessed. [Tax Administration Law, Article 34-44]
PART EIGHT: TAX EXEMPTION CONFIRMATIONS
Tax Exemption Confirmation (TEC). TECs are not automatic, even for non-profits. All TECs are issued on a contract by contract basis, not on a blanket organization basis. TECs are retroactive to the start date of the contract, regardless of the date of TEC application or business license registration. All TECs are issued on a contract by contract basis, covering a specific period of performance, budget figure and scope – not on a blanket organization basis. Both prime and subcontractors to NATO, DOD and USAID are eligible, while separate agreements govern DOS/INL, UK DFID, ADB, WB and the United Nations.
Required Documents. There are three documents required to apply for a TEC: Original Cover Letter from the company to the MOF, listing the full legal name, Afghan TIN, point of contact, contract number(s) and other details. One full un-redacted copy of the contract signed by both parties, with all modifications, task orders and changes, with all page numbers and sections complete and in order. Original Request Letter from the Contracting Officer, verified through the corresponding agency; multiple contract numbers and modifications can be listed on the same letter.
Special Conditions. Contractors that have international licenses, but are not a branch office of a foreign entity, may no longer be eligible for tax exemption. Contractors not withholding taxes from subcontractors holding international licenses may start having to prove exempt status by providing their subcontractors' Tax Exemption Confirmation (TEC) issued by the MOF.
Change in Subcontract TEC Process. Previously, non-Afghan subcontractors were required to provide a copy of their prime contractor’s TEC as well as a Request Letter from their prime contractor. The process for non-Afghan subcontractors has now changed to match the process for primes: there is no need to wait for the prime’s TEC and the subcontractor is now able to obtain a Request Letter directly from the DOD or NATO Contracting Officer (KO), which is then authenticated through Resolute Support before submission to the MOF, along with a copy of the subcontract and a Cover Letter.
Legacy Military Subcontract Issues. One of the greatest accomplishments of the MOF was finalizing the agreement to resolve legacy tax issues for military contractors under subcontracts awarded prior to 1/1/2015; they are now eligible for TECs and reversal of all tax enforcement actions, if any. For contracts awarded prior to 1/1/2015, ARD no longer requires a copy of the contract with TEC application, however a cover letter (also called an application letter) and a signed Contracting Officer Request Letter is still required. ARD is to issue a TEC within 3 working days of receiving the required documents. ARD is to issue a TCL within 5 working days of receiving the completed income tax returns. As for military contracts awarded after 1/1/2015, the existing Tax Exemption Confirmation (TEC) procedures remain the same.
PART NINE: LICENSE RENEWAL
Many new companies incorrectly assume that they can wait until a business license is expired to renew it, without realizing there are monthly, quarterly and annual tax filing requirements along the way. These mandatory filings are required even if all of your contracts are tax exempt, or even if you have no activity in Afghanistan at all. A TCL from the MOF is required for business license renewal, changes or closure. This process can take some time to complete, so please plan well ahead of your license expiry date. Obtaining new visas or renewing visas requires an active business license, as does banking, commercial customs clearance, government contracting and even certain training programs. To check the status of your business license, you can visit https://www.acbrip.gov.af/companyverification/.
For those new to Afghan compliance, relevant documents are available at http://ahg.af/aca/.
For more information or questions about any of the above, please email [email protected].
PART TEN: FREQUENTLY ASKED QUESTIONS (FAQ)
- Which payments qualify as dividends and are subject to 20% dividend withholding? What if the contract is exempt from tax? Contracts that are exempt from tax are also exempt from dividend tax withholding in most circumstances.
- Is contractor withholding required on transfers between internal divisions having separate business licenses but are within a single company with common ownership? Yes, contractor withholding is required on payments between all legal entities.
- Is contractor withholding required from foreign contractors providing goods or services outside Afghanistan? No, only on goods or services provided or performed physically within the borders of Afghanistan.
- Should 2% or 7% be withheld from a contractor holding business license that has temporarily expired? 2% should be withheld.
- How should contractor confidentiality be protected when providing contractor withholding tax receipts that include multiple contractor names and invoice amounts? Separate sheets can be filled out for each contractor.
- Does 20% insurance withholding apply to foreign insurance expenses where the coverage area is outside Afghanistan? No, only for coverage area within Afghanistan. Also, insurance withholding not required for tax exempt contracts.
- Is 2% or 7% contractor withholding calculated on only transactions at or after the 500,000 Afghani threshold, or also on transactions before the threshold was reached? Any single transaction between a payer and a payee which puts the payee — the person paid — over the AFN 500,000 per year threshold — either based on one transaction or many in the aggregate — that transaction triggers withholding payments due for that amount, then monthly from that point on.
- Which 12 months are used when calculating the annual period for the 500,000 Afghani threshold? Afghan fiscal year – 21 December to 20 December.
- Are direct foreign expenses by an Afghan business deductible on its annual income tax return? Yes.
- What are the allocation and apportionment rules for indirect overhead expenses incurred outside Afghanistan? IFRS should be used to properly allocate expenses to protect a true and correct view of financial statements.
- May internal divisions having separate business licenses but are within a single company with common ownership file a single consolidated income tax return? No, each license must file a separate income tax return.
- If a company has been subject to 2% withholding, is BRT calculated on 98% (actual cash receipts) or 100% (billed accrual amount) of its invoices? 100%, the billed accrual amount.
- Are tax exemptions applicable on contracts that started before the business license was issued? Yes, tax exemption confirmations are retroactive to the start date of the contract.
- What are the circumstances that justify a tax audit by the MOF? The MOF has the right for any reason to trigger a tax audit.
- What are the circumstances that justify an advance tax payment request by the MOF? Advance tax payments are not detailed in the law and are at the discretion of the taxpayer.
- Does all supporting documentation (including for international companies) have to be an original hardcopy receipt that is signed and stamped? Yes, auditors can request hardcopy originals.