TAX EXEMPTION FOR DOD CONTRACTORS

UNCLAS STATE 058461 SIPDIS SENSITIVE C O R R E C T E D C O P Y (SENSITIVE CAPTION ADDED) E.O. 12958: N/A TAGS: AF OFDP SUBJECT: TAX EXEMPTION FOR DOD CONTRACTORS REF: KABUL 4447 ¶1. (SBU) SUMMARY: The purpose of this cable is to provide clear guidance to Post to address issues outlined in reftel that have arisen surrounding the interpretation and implementation of the Status of United States Military and Civilian Personnel of the U.S. Department of Defense Present in Afghanistan in connection with the Cooperative Efforts in Response to Terrorism, Humanitarian and Civic Assistance, Military Training and Exercises, and Other Activities, which was concluded by an exchange of notes and entered into force on May 28, 2003. ¶2. (SBU) Responses to the questions posed in reftel are as indicated below: - Question: Would Afghan legal entities that are USG contractors or sub-contractors be subject to Afghan corporate, personal income, Value Added Tax (VAT),rental, excise taxes, and/or import duties? Are Afghan employees of USG contractors and sub-contractors liable for personal income, VAT, and excise taxes? - Answer: Afghan legal entities that are USG contractors or sub-contractors and Afghan employees of USG contractors and sub-contractors are not subject to the payment of such taxes under the terms of the Agreement regarding the Status of United States Military and Civilian Personnel of the U.S. Department of Defense Present in Afghanistan in connection with the Cooperative Efforts in Response to Terrorism, Humanitarian and Civic Assistance, Military Training and Exercises, and Other Activities (the &Agreement8 or &Note No. 2028). The fourth paragraph of the Agreement provides that such persons are included within the category of personnel and entities that are exempt from taxation. The purpose of the restrictions on taxation in paragraphs four and five is to exempt payment of taxes or duties that are in effect levied against or passed through to the USG, such as import duties or VAT on items obtained by USG contractors or subcontractors for the official use of the USG for the campaign against terrorism, regardless of the nationality of the payor. - Question: Are Afghan landlords who rent living quarters and office space to USG contractors and sub-contractors or their employees liable for rental tax? - Answer: Yes. We find no exemption for such a tax under the Agreement as the tax is assessed against the landlord, not the tenant, and there is nothing in the Agreement that would prohibit the landlord from including the tax in the rental amount. - Question: Are the non-Afghan, non-U.S. national employees of USG contractors and sub-contractors, whether U.S. legal persons or not, subject to personal income, VAT, and excise taxes? - Answer: No. The USG would object to Afghanistan authorities taxing non-Afghan employees of USG contractors and sub-contractors who are in Afghanistan pursuant to the USG contract. - Question: Is the Agreement meant to apply only to DoD or is it to be read to apply to other USG agencies? - Answer: The Agreement applies only to DoD and its contractors. The scope of the Agreement is contained in the first paragraph of Embassy Kabul,s Note No. 202. It clearly states that it applies to "United States military and civilian personnel of the United States Department of Defense who may be present in Afghanistan in connection with cooperative efforts in response to terrorism, humanitarian and civic assistance, military training and exercises, and other activities." - Although the fourth paragraph of Note No. 202 states that the tax exemption applies to &(t)he Government of the United States of America, its military and civilian personnel, contractor and contractor personnel,8 it was not intended that this agreement apply to employees and contractors of non-DoD USG entities. The scope of the provisions contained in the opening paragraph govern all elements of the respective agreement between the USG and GoA. - Although the Agreement only applies to DOD and not to other USG agencies, there are, however, other existing agreements or arrangements with the GoA that may address these issues with respect to USG employees or other non-DoD contractors. For example, the 1951 General Agreement on Technical Cooperation provides at Article 3.2, &Any funds, materials and equipment introduced into Afghanistan by the Government of the United States of America pursuant to such program and project agreements shall be exempt from taxes, service charges, investment or deposit requirements, and currency controls.8 Article 4 provides, &All employees of the Government of the United States of America assigned to duties in Afghanistan in connection with cooperative technical assistance programs and projects and accompanying members of their families shall be exempt from all Afghan income taxes and social security taxes with respect to income upon which they are obligated to pay income or social security taxes to the Government of the United States of America, and from property taxes on personal property intended for their own use(.8 In addition, the GoA entered into a series of agreements in 2005 with USAID under which USAID contractors and subcontractors are exempted from certain taxes. Additionally, the March 2006 Letter of Agreement on Police, Criminal Justice, and Counter-narcotics Support Programs makes it clear that foreign contractors and subcontractors for these programs are also exempt from some taxes. Of course, future agreements with the GOA could be negotiated on this taxation issue. ¶3. (SBU) We recognize and sympathize with the GoA Ministry of Finance,s concerns about raising revenue necessary to meet the International Monetary Fund targets and achieve GoA budget sustainability. USG agencies are working diligently with the Afghan Ministries and the international community to improve the Afghan economy and ensure continued growth of the GoA revenues. ¶4. (SBU) For Post,s information only, the questions raised by the GoA have initiated a review of State Department foreign assistance contractors/grantees within Afghanistan. We are reviewing whether agreements and arrangements in place cover appropriate taxation exemptions. Depending on the results of this review, we may need to approach the GoA for further discussions on this issue. RICE