Key CPA orders |
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With the agreement between the Coalition Provisional Authority (CPA) and the Governing Council of Iraq to restore Iraqi sovereignty by the end of June 2004, the spotlight has been firmly trained on the administrative and legislative regime in Iraq and the impact of a new Iraqi government on present and future legislation. The imposition of personal and corporate income taxes, suspended up to December 31 2003, repeatedly delayed since then, has just recently come into effect.
The CPA issued various orders in 2003 and in the earlier part of this year in respect of taxes and foreign investment.
Taxes after Saddam
On September 19 2003, the CPA issued Order 37 in respect of taxes in Iraq. This order entitled Tax Strategy for 2003, suspended all income tax for assessed income sources as detailed in the Iraq Tax Law, real property rent tax as levied under Law no 162 of 1959, as amended, and all other taxes apart from hotel and restaurant tax, tax on the transfer of real property, car sale fees and petrol excise. This order also stated that the highest individual and corporate income tax rates for 2004 and subsequent years would not exceed 15%. This suspension was effective from April 16 2003 to the end of the calendar year.
Subsequently, the provisions of the 2004 budget, passed in October 2003, reinforced Order 37, stating that both corporate and personal income taxes would be reintroduced on January 1 2004, at a rate no higher than 15% in each case.
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Formalization of tax regime
The enforcement of both corporate and personal income tax did not become effective on January 1 2004. In fact, a measure of certainty was brought to the budget provisions only with the subsequent introduction of Order 49, Tax Strategy of 2004, on February 20 2004. This order reiterated the maximum tax rate for personal and corporate income tax as 15%. It also delayed the imposition of these taxes to April 1 2004.
However, CPA Order 84, issued on April 30 2004, made a few amendments to Orders 37 and 49 and further delayed the enforcement of income tax on individuals until May 1 2004.
Personal Taxation
Order 49 provides an increasing scale of taxation for Iraqi tax residents and non-residents on income from Iraqi sources with a maximum tax rate of 15%, after personal allowances.
Tax-free income:
Iraqi Dinar (ID)2.5 million ($1,733) for taxpayer plus ID2 million for wife/wives if the wife has no income and her income is added to the husband's.
ID200,000 for each child
ID3.2 million for a widow or divorcee plus ID200,000 for every child she maintains
Personal income tax rates after allowances:
At 3% on amounts up to ID250,000
At 5% on amounts between ID250,000 and ID500,000
At 10% on amounts between ID500,000 to ID1 million
At 15% on amounts over ID1 million
CPA Order 84 reduces these personal allowances and the amounts delineating the tax brackets, by one third for 2004.
Advisers to the CPA have said that wage withholding tax for individuals will be collected quarterly, with the first payment due for the quarter ended June 30, 2004.
Corporate taxation
Foreign companies registered in Iraq or considered to have a permanent establishment in Iraq, will be taxed at a flat rate of 15% on their income in Iraq from April 1 2004. However any corporate income tax due for 2004 may not be collected until June 2005. We have been advised that the forms and procedures regarding the collection mechanism are currently being reviewed.
Under the old tax legislation, tax losses could be carried forward and set against profits of the future five years. Order 49 amends this legislation and states that income from financial year 2003 and the first three months of financial year 2004 shall not be taken into consideration when determining the amount of loss to be carried forward. In the same manner, losses incurred in this period may not be carried forward. Additionally, 2003 shall not be taken into account in determining the five consecutive years to which losses may be carried.
The Order also states that foreign tax credits on a foreign source of income may be credited against tax paid to Iraq, the relief being limited to Iraqi tax assessed on that income. Any resultant excess foreign tax credits can be carried forward five years for set off in a later year. However, taxes paid in the carried-forward year must be credited before brought forward tax credits.
Government and state-owned enterprise employees
Under the previous tax regime, employees of government and what were termed "socialist and mixed sector companies" were not subject to taxation on their salaries, wages and allowances. To spread the burden of taxation across all sectors of Iraqi society, Order 49 supersedes this provision. However, government employees will still receive generous tax-free allowances throughout financial year 2004 and will then be brought into line with all other employees and receive the allowances described above with effect from January 1 2005.
Coalition contractors and sub-contractors
Due to the massive reconstruction underway in Iraq, much of the work is being carried out under CPA contracts, and for a time, a question in many people's minds was the status of coalition contractors, their sub-contractors and employees under Iraq law. CPA Order 17, issued on June 27 2003, stated that coalition contractors, sub-contractors and their employees not normally resident in Iraq would not be subject to Iraqi laws or regulations in matters relating to the terms and conditions of their contracts in relation to coalition forces or the CPA. It also stated that coalition contractors and sub-contractors, other than those normally resident in Iraq, would not be subject to Iraqi laws or regulations with respect to licensing and registration of employees, businesses and corporations in relation to such contracts.
Order 49 also provided clarification on the taxable status of CPA contractors and sub-contractors, stating that they and their employees would not be liable to tax on income from foreign sources or on income paid from or on behalf of the CPA.
In addition to the above, members of foreign diplomatic missions to Iraq, as well as members of their households, if they are not citizens of Iraq; members of consular offices, as well as members of their household, if they are not citizens of Iraq, and honorary consuls of foreign countries - but only for income received from the country that has appointed them honorary consul - are exempt from payment of income tax under Order 49.
Reconstruction levy
The 2004 budget also stated that a new Customs duty (to be known as a "reconstruction levy") of 5% on the taxable value of most imports would become effective on January 1 2004. CPA Order 38, issued on September 19 2003 stated that the reconstruction levy will be imposed for a period of two years from January 1 2004. It also provided a list of goods that would be exempt from this reconstruction levy, such goods to include, among other things, food, medicine and medical equipment, clothing, books and goods relating to humanitarian assistance, in an attempt to maintain the tax-free status of most basic amenities used in the reconstruction process. For the purposes of calculating the reconstruction levy, the taxable value of goods will consist of their total customs value assessed in accordance with international practice.
On April 4 2004, CPA Order 70 was issued which delayed the imposition of the reconstruction levy until April 15 2004. We are aware that this reconstruction levy is now being collected.
Taxes in application
Senior advisers to the Ministry of Finance advise that, other than those laws that have been suspended or replaced (as stated above), all existing laws and regulations will remain in force until they are repealed or superseded. This is also reinforced by interpretation of the legal situation by reliable judges at the Ministry of Justice and high-ranking legal experts, recently expressed in daily papers and television interviews regarding existing rules and regulations on other matters.
Foreign investment
The CPA has also attempted to open Iraq to foreign investors with the obvious aim of regenerating the country's economy and creating much needed job opportunities and income for the local Iraqi population. CPA Order 39 entitled Foreign Investment (as amended by CPA Order 46) now allows foreign investors to register a 100% foreign-owned company in all sectors apart from natural resources, banking and insurance. Order 40 entitled Banking Law, specifies the rules in respect of banks in Iraq.
Future uncertainty
When the new Iraqi government is elected at the end of June 2004, there can be no guarantee that these tax and investment breaks will remain unchanged.
While Iraq is no doubt an attractive proposition for certain types of foreign business, the uncertainty of a new Iraqi government means that the foreign investor should keep fully up-to-date on administrative and legislative developments over the coming year.
Mahyra Roy
(mahyraroy@kpmg.com)
United Arab Emirates
Michel Picard
(mpicard@kpmg.com)
Iraq
