Tax insights from and Legal Services Middle East

Iraq: Taxation of contracts, sales tax, and other developments.

August 2015

In brief Income taxation of contracts – recent changes by authorities

Following the issue of a new instruction by the Iraqi Ministry of Finance (MoF) concerning economic activities that are deemed as ‘trading in Iraq’ (subject to Iraqi taxation) and ‘trading with Iraq’ (exempt from Iraqi taxation), the General Commission of Tax (GCT) has changed its analysis of contracts. This could well result in a changed classification for certain contract types. There has also been amendments to the requirements surrounding withholdings on final contract payments.

Indirect tax changes Effective from 1 August 2015 changes have been made to a number of sales tax rates in Iraq. This has resulted in some increases in tax rates and potentially additional compliance burden for companies operating in Iraq. Also effective from 1 August are a number of amendments to customs tariffs and there has also been a change to withholdings on final contract payments.

Amendments to brackets Another significant change for operators in Iraq in 2015 has involved the payroll tax brackets and allowances that need to be applied. The impact of these changes is to increase payroll .

In detail supplementary activities and other service Taxation of contracts activities, then each activity will be treated One of the key issues in determining when a separately for tax purposes. Accordingly, one company becomes taxable in Iraq is whether contract may include activities that are subject the foreign company is considered to be to tax and other activities that are exempted. trading ‘in Iraq’ (subject to Iraqi taxation) or ‘with Iraq’ (exempt from Iraqi taxation). Another development is related to the final Following Instruction No. 2 for the year 2008, payment due to the contractors or the which provided a clear distinction between subcontractors. Under the previous trading ‘in Iraq’ and trading ‘with Iraq’, the Instruction there was only one option, which is MoF has issued an amended Instruction to obtain an official written approval from the (Instruction no.1 for the year 2014) taking GCT to release the final due payment. In the effect from 1th January 2015. current Instruction, the taxpayer can either obtain an official approval from the GCT or Although no major changes were made to the withhold 10% from the final payment, and classification of the trading activities remit it to the GCT before releasing the final considered as trading ‘with Iraq’ or ‘in Iraq’, payment. the General Commission of Tax (GCT) has changed the analysis of the taxation of Instruction no.1 also touches on the contracts that include more than one economic application of the retention rates due on activity. As per the new Instruction, where a contractors and subcontractors payments main contract includes various business whereby these should be remitted to the GCT activities, for instance the supply of equipment within 30 days from the completion of the and the supply of complementary and work, previously 90 -180 days.

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responsible for collecting a 20% sales tax on such Sales tax and customs duties sales. The taxpayers will remit the sales tax using The Iraqi Custom Duty Law No. 22 of 2010 a specific tax return form to the GCT. The tax entered into force on 1 August 2015. As a result, returns are due within the first half of the month the 5% “Iraq reconstruction levy” applied to most following the end of a three-month tax period. of the goods imported into Iraq will be replaced by the customs duty rates as specified in the Locally produced alcoholic beverages and customs and the agriculture agenda that are cigarettes: annexed to the Customs Duty Law. Producers in Iraq of cigarettes and alcoholic Additionally, Sales Tax Instruction No. 5 for the beverages will be responsible for collecting a year 2015 issued by the Minister of Finance 300% sales tax on such sales using a specific tax became effective on 1 August 2015. Accordingly, return form. The tax returns are due within the the following goods and services are subject to first half of the month following the end of a new sales tax rates as well as new filing three-month tax period. requirements and due dates: Imported alcoholic beverages and cigarettes: Airline tickets: The GCT will collect sales tax at the border Taxpayers such as travel agencies and airline crossing point at a rate of 300% from the total companies will be responsible for collecting a value of the imported cigarettes and alcoholic 15% sales tax on airline tickets sales. The beverages as stated on the customs declaration taxpayers will remit the sales tax using a specific form. The filing date should coincide with the tax return form to the GCT. The tax returns are clearance date. due within the first half of the month following Importation of cars: the end of a three-month tax period. The GCT will collect sales tax at the border Pre-paid and post-paid mobile plans and crossing point at a rate of 15% from the total internet plans: value of the imported cars as stated on the Taxpayers who sell pre-paid and post-paid customs declaration form. The filing date should mobile plans and internet plans will be coincide with the import clearance date.

The below table summarises the new sales tax rates:

Goods and services Rates Airline tickets 15%

Pre-paid and post-paid mobile plans and internet plans 20%

Locally produced alcoholic beverages and cigarettes 300%

Imported alcoholic beverages and cigarettes 300%

Imported cars 15%

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Payroll tax brackets and allowances

On 15th February the Ministry of Finance amended the payroll tax brackets and allowances as set out below. By reducing substantially the tax brackets at which higher payroll tax rates apply and also reducing the allowances applicable, the payroll tax burden has been significantly increased.

The new applicable tax brackets The previous tax brackets Rate On IQD 0 – 250,000 of the annual taxable On IQD 0 – 500,000 of the annual taxable 3% income income On IQD 250,001 – 500,000 of the annual On IQD 500,001 – 1,000,000 of the annual 5% taxable income On IQD 500,001 – 1,000,000 of the On IQD 1,000,001 – 2,000,000 of the 10% annual taxable income annual taxable income On IQD over 1,000,001 of the annual On IQD over 2,000,001 of the annual 15% taxable income taxable income

Marital status The applicable allowances The previous allowances (Annual IQD) (Annual IQD) Single 2,500,000 5,000,000

Married 4,500,000 9,000,000

Children -18 200,000 400,000

Let’s talk For a deeper discussion of how this update might affect your business, please contact:

Stephan Stephan, Iraq Haythem Zayed, Iraq +962 (6) 500 1300 (ext.3103) +962 (6) 500 1300 (ext.3110) [email protected] [email protected]

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