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