On May 14, 2018, the US Embassy, Kabul, provided notice stating that the Afghan Ministry of Finance has vocally approved a new tax exemption procedure which removes the requirement for Bi-Lateral Security Agreement (BSA) and NATO Status of Forces Agreement (SOFA) contractors to provide a complete or redacted copies of their contracts or subcontracts.
Defense contractors supporting US and NATO forces in Afghanistan under classified contracts have been practically barred from receiving tax exemption rulings agreed under BSA and SOFA 2015. This is due to differences between policies of the Afghan Government and US/NATO national security obligations.
BSA/SOFA defense contractors are entitled to obtain tax exemption ruling from applicable taxes under the laws of Afghanistan that would otherwise have been due on revenue generated within the country. Nevertheless, the procedures for obtaining the tax exemption ruling have placed companies with classified contracts in a difficult position. To obtain a tax exemption ruling, the Afghan Ministry of Finance historically required companies to disclose their full contracts without redaction, thereby potentially placing these same contractors in violation of relevant laws and contracts.
Licenses issued for a three year period pursuant to BSA/SOFA have either expired or are about to expire. The inability to comply with Afghanistan’s tax exemption process has not only caused trouble related to finances of contractors, but has also limited their operational flexibility. Like all other businesses seeking to do business in Afghanistan, BSA/SOFA contractors are also required to apply for and renew a business license with the Afghanistan Central Business Registry & Intellectual Property (ACBR-IP), if these business license are not renewed in a timely manner, it hampers companies from obtaining visas for their employees.
Although, the newly announced tax exemption procedure provides greater relief, companies should still adopt a cautious approach until we all have an opportunity to observe the practical application of the new process.
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