May 24, 2021

Afghanistan Agrees to Drop All Tax Claims Against U.S. and NATO Contractors

Holland & Knight Alert
Terry L. Elling | Jeremy D. Burkhart

Highlights

  • After years of negotiations with the Afghan Government, U.S. contractors appear to have achieved a major breakthrough regarding their future tax liabilities for operating in Afghanistan.
  • The Afghanistan-NATO Implementation Commission and the Joint Commission Executive Steering Committees agreed that the Government of the Islamic Republic of Afghanistan (GIRoA) would drop all tax claims against defense contracts performed in Afghanistan.
  • At issue was whether GIRoA could tax portions of the income of U.S. and NATO contractors and their employees.

After years of negotiations with the Afghan Government, U.S. contractors appear to have achieved a major breakthrough regarding their future tax liabilities for operating in Afghanistan. On May 5, 2021, the Afghanistan-NATO Implementation Commission (ANIC) and the Joint Commission Executive Steering Committee agreed that the Government of the Islamic Republic of Afghanistan (GIRoA) would drop all tax claims against defense contracts performed in Afghanistan.

At issue was whether GIRoA could tax portions of the income of U.S. and NATO contractors and their employees. Multiple agreements signed between GIRoA and U.S. and NATO forces over the years made it clear that U.S. and NATO contractors, as well as their employees, were exempt from Afghan taxation. Diplomatic Note 202, which dates back to the inception of the current Afghan state in 2002, provided that "the United States, its military and civilian personnel, contractors and contractor personnel shall not be liable for any tax or other similar fees assessed within Afghanistan."

Similarly, the NATO Status of Forces Agreement provided that contractors "shall not be liable to pay any tax or similar or related charges assessed by the Government of Afghanistan within the territory of Afghanistan on their activities, and associated income, relating to or on behalf of NATO Forces under a contract or subcontract with or in support of NATO Forces."

However, the Afghan Ministry of Finance had tried to tax contractors through various avenues during the past several years:

  • insisting that only prime contractors were tax-exempt and demanding that subcontractors pay GIRoA taxes
  • holding that dividends earned in Afghanistan were taxable
  • considering U.S. and NATO contractor employees to be Afghan residents (and thus not tax-exempt) if they had resided in the country for more than 183 days (even if solely for work-related purposes)
  • claiming that awards and bonuses of employees were not "wages" and thus were taxable
  • alleging a number of other views that conflicted with the plain text and understanding of prior agreements

With the recent diplomatic notes, new assessments of these taxes should cease. Additionally, contractors who were previously improperly taxed by GIRoA may be able to recover money. The notes in fact identify one contractor as being entitled to recover "taxes" it had previously paid to GIRoA.

  • Contractors and Subcontractors that were subject to similar inappropriately assessed taxes should explore recovery as well.
  • Contractors in the process of demobilizing from Afghanistan should include an assessment of potential recoveries and reconciliation of disputed tax liabilities in light of the guidance provided by the new agreement.

Holland & Knight's national government contracts practice has worked with many clients facing these and other challenges that arise in the course of performing services, logistics, construction and other work in support of contingency operations and in other austere environments.

The authors acknowledge the insight provided by Veritas Assurance Partners LLC (Veritas), in partnership with Moore Afghanistan (formerly Afghanistan Holding Group). For the past 11 years, Holland & Knight has advocated for the interests of its defense contractor clients in meetings with Afghan government ministries. This milestone was the result of yearslong collaboration between the Veritas/Moore team and the many women and men of NATO Resolute Support and personnel of the American Embassy in Kabul, especially the Political – Economic Section. Special thanks to Veritas Assurance Partners Founding Partner Manuel E. Fernández Supervielle (msupervielle@veritasap.com tel: +1.305.215.8002) and Moore Afghanistan Chairman Sanzar Kakar (sanzar.kakar@moore.af tel: +971.55.510.6622) for providing this information.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.


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