On September 20, 2019, the Department of Defense (“DoD”), General Services Administration (“GSA”), and National Aeronautics and Space Administration (“NASA”), published a document proposing to amend the Federal Acquisition Regulation (“FAR”) to add two new clauses that notify contractors about the exemptions from liability for Afghanistan taxes, customs, duties, fees or similar charges. Comments for the proposed rule will continue to be accepted on or before November 19, 2019. Small and large government contractors performing in Afghanistan need to ensure they are registered to do business in Afghanistan and have the proper tax-exemption certificates in place prior to performance to avoid incurring Afghan tax liabilities that are otherwise exempt.
This proposed rule change was likely prompted by audit reports out of the Special Inspector General for Afghanistan Construction (“SIGAR”), which have identified significant Afghan business taxes being imposed on contractors that should have otherwise been exempt or reimbursed by the Afghan Ministry of Finance (“MoF”). With some contractors facing seizure of passports and threat of, or actual detention in some cases due to outdated or improper documentation.
Under the commercial laws of Afghanistan, contractors who want to do business in Afghanistan need to register with the Afghanistan Central Business Registry (“ACBR”) within the Ministry of Commerce & Industry (“MoCI”). Once registered, the ACBR will assign the entity a tax identification number (“TIN”), which is required for all contractors working with the U.S. government in Afghanistan to sufficiently obtain tax exemption for work performed in Afghanistan. More recently, the ACBR has implemented an electronic business registry verification system, see http://www.acbr.gov.af/, which allows registered entities to search and confirm their registration and TIN online. This has made it much easier for federal contractors to ensure active compliance with ACBR’s business registration requirements.
When obtaining the proper tax-exemption certificates, it is important to recognize that there are various agreements that have been entered between specific agencies and the Afghan government that provide tax-exempt status to non-Afghan contractors performing on federal contracts in Afghanistan. For example, back in 2003 and more recently in 2015, the DoD entered into Status of Forces Agreements (“SOFA”), which exempt DoD personnel and contractors from paying taxes on goods and services provided in Afghanistan. However, contractors still have to file annual Afghan tax returns and are responsible for withholding and paying certain taxes for employees working in Afghanistan, as well as for host-nation contractors. Tax exemption certificates are received through the MoF tax exemption office, where procedures to receive tax exemption certificates is ever-changing and often refused mid-performance. As such, it is imperative for contractors to initiate the tax-exemption authorization process with their appointed contracting officer as soon as possible to ensure sufficient authorization from MoF.