US and Afghanistan argue over tax exemptions for contractors

The Afghan Government has run into resistance from the International Security Assistance Force (ISAF) on its plans to tax foreign contractors. ISAF have issued a controversial view on the Military Technical Agreement, insisting that international subcontractors are entitled to tax exemptions in contrast to the Afghan government's view that tax exemptions are only available to prime contractors (even though they must withhold 2 or 7% from payments to all subcontractors in Afghanistan).

The tax would seek to raise millions of US$ for the cash strapped government, however transparency in the existing tax agreements between Afghanistan and the United States are proving problematic. The Afghan government's total revenue is currently only $1.8 billion annually, of which some $540 million is allocated towards security costs. Whilst the MTA and the Diplomatic Notes (Dip Notes) do exempt contractors from paying tax, the agreements contain language that does not define the term "contractor" and whether it includes "subcontractors".

The United States, who along with NATO, spend some $10 billion annually on private contractors in the country, has argued that it should be exempt from Afghan tax under bilateral agreements known as Status of Forces Agreements (SOFA's) and US contractors could face problems in recovering their tax payments under their US contracts. SOFA's establish the legal regulations concerned for military personnel operating in a foreign company, including the imposition of income taxes as well as for US Contractors.

"The fact that ISAF and the US Dept. of Defense are issuing interpretations that claim that subcontractors are tax exempt is all well and good. However these opinions are irrelevant to the Afghan tax authorities. Within the Afghan government there is no uncertainty. Subcontractors are not exempt. Companies that do not withhold from subcontractors, or take the position that subcontractors are exempt are violating the Afghan tax law, and assuming all of the risks associated with doing so.": says Tom Rosenstock of Rosenstock Legal Services in Afghanistan.

Subcontractors have already faced bills from the Afghan Ministry of Finance for income tax on profit earned and failure to comply could result in the loss of their business license or a restriction on their freedom of movement in terms of bringing goods or people into the country. It seems likely that if Afghanistan is going to be able to support their own reforms in the future, taxes on foreign contractors will be inevitable. Contractors and subcontractors in the country should prepare for an uphill battle should they wish to challenge the tax and similarly this could prove an interesting test case for the appeals process in the Ministry of Finance.

Just as this issue was going to press we learned of a new update of interest to companies doing business in Afghanistan. According to reliable sources, the US Government has begun sharing contractor data with the Afghan Ministry of Finance, listing contractors, in some cases subcontractors, and the total value of their projects over the past several years. This information would give the Afghans the ability to crack down on companies which are unregistered, or under-reporting.

Cyprus and UAE sign Double Taxation Agreement

On February 27^th 2011, Cyprus and the United Arab Emirates signed an Income tax treaty in Abu Dhabi aimed at improving trade and economic relations between the two states.

Articles of the treaty include provisions in respect to the Hydrocarbons, stating that the agreement shall not void any regulations or laws existing by either countries to impose taxation on income arising from the production of hydrocarbon or related activities.

In respect to the Exchange of Information, the treaty lays out that information requested by one state shall not be given unless the requesting state has provisions or applies appropriate administrative practices for the information requested. The requesting state must also demonstrate that it has exhausted all possibly means in its own territory for obtaining such information.

Articles 11, 12 and 13 lays out the regulations in terms of dividends, interests and royalties stating that any paid by a company, being resident of a contracting state to the resident in the other state, shall only be taxed in that other state. The proceeds will be considered as business profits and will be taxed accordingly. In the case of interest however, the treaty provides that where the interest is borne by the permanent establishment, such interest shall be deemed to arise in the state that the establishment is located.

The agreement is hoped to contribute greatly in boosting trade and economic relations between the two countries. The treaty will enter into force once both countries have ratified the treaty for its enforcement.

UAE End of Service Gratuity update

An amendment has been announced to the UAE Federal Labour Law in respect to the calculation of a workers gratuity following a case whereby an employee sought dues of up to Dh159,000 from his employer.

Initially rejected by the Court of first instance, it was later overturned by the court of appeal ordering the employer to pay a total amount of Dh 54,000.

The worker appealed to the court having only been paid gratuity based on his basic salary negating any leave allowance and flights home received throughout his employment, which the court ruled was against the law.

The Court of Cassation observed: "The pay in accordance with the provisions of Article I of the Labor Law includes all that a worker receives as emolument, whether in cash or in kind, hence the gratuity should be calculated according to the entire amount received by a worker, including his monthly commission."

Tax & Treaty updates:

UAE & Kenya

05/07/2011

Double Taxation Agreement signed between UAE and Kenya.

Notes from Washington: A New Washington Consensus on Trade? Not Yet.

For nearly sixty years following the end of the Second World War and the creation of the GATT and the Bretton Woods institutions, American leaders enjoyed an unwritten covenant regarding the establishment and preservation of a liberal world trading order. This so-called "Washington consensus" guided policymakers and legislators alike in promoting free trade and capital flows throughout the world, with the United States serving as both a global hub and the importer of last resort for struggling economies. That same consensus gradually imploded during the first decade of the 21^st century. By the 2008 presidential elections in the United States, political support for free trade had crumbled, replaced by a "fair trade" mantra of thinly-veiled protectionism spouted by the victorious Democrats.

Nearly three years have passed since the elections that swept President Obama to the White House, and so has the high tide of U.S. protectionism. Facing a stubborn recession and the political need to create jobs, President Obama's team reluctantly embraced exports as a source of growth. The results of the 2010 Congressional elections also generated renewed support for trade, as Republicans swept back into control of the House of Representatives with a strong pro-business agenda. Three free trade agreements concluded under the Bush Administration awaited Congressional ratification, and enjoyed the support of Republicans. The scene was seemingly set for the restoration of a Washington consensus on the value of trade.

More than halfway into the 2011 legislative calendar, however, and the trade agreements with Korea, Panama and Colombia still face an uncertain path in the legislature. This week in Washington, all three agreements were approved in "mock" mark up votes by their committees of jurisdiction in both the House and Senate. While such "mock" votes are intended to signal the all clear for the White House to formally submit the trade treaties to Congress for real votes, the committee processes this week revealed that substantial difficulties lay ahead. This is so because the trade debate has now become ensnarled in the bigger argument in Washington over the U.S. debt ceiling, deficit spending, and budget cuts.

Republicans support the president in his determination to pass all three trade deals, but have drawn the line on refinancing the U.S. Trade Adjustment Assistance program (TAA), a government unemployment scheme for workers dislocated by foreign competition. Democrats and major constituencies such as labor unions, argue that even "fair trade" will cause some job losses, and the TAA program provides both economic and political compensation necessary if trade liberalization is to advance. Thus President Obama's drive for freer trade has been waylaid by members of his own party. Seizing on Democratic weakness, Republicans seek to leverage their resistance to TAA to secure White House support for greater budget cuts in the parallel negotiations now occurring in Washington over raising the U.S. debt ceiling.

The mock mark up votes that took place this week indicate to the White House the impossibility of passing new funding for TAA as a package deal with the three free trade agreements. Complicating the matter further is the stance of House Speaker John Boehner (R-OH), who has threatened to use legislative procedures to remove fast track protections from the three trade bills. This would open the bills to endless amendments in Congress, and could derail the entire process. Boehner's threats are clearly designed to extract more budget concessions from the Obama Administration in the debt negotiations.

Meanwhile, the clock on the debt ceiling continues to quick, with the U.S. Treasury setting a July 22 deadline for reaching a deal on debt extension to avoid taking drastic measures in order to maintain cash flow to US creditors worldwide. The Republicans have chosen to play a high risk game over trade and the nation's finances. By the end of the month, we will know if the gambit has paid off, or been dashed by the reaction of global markets to the political brinkmanship which has replaced the once trusted consensus on trade.

This contribution was gratefully received from Eric Shimp - Special Advisor to UAE regarding the UAE-USA FTA Negotiations, and Policy Advisor, Alston & Bird, LLP. Washington DC.