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Inspector General's Report on Taxation of U.S. Contractors in Afghanistan

Inspector General's Report on Taxation of U.S. Contractors in Afghanistan

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Published by MarkMemmott
May 2013 report titled "Taxes: Afghan Government Has Levied Nearly a
Billion Dollars in Business Taxes on Contractors
Supporting U.S. Government Efforts in Afghanistan."
May 2013 report titled "Taxes: Afghan Government Has Levied Nearly a
Billion Dollars in Business Taxes on Contractors
Supporting U.S. Government Efforts in Afghanistan."

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Published by: MarkMemmott on May 14, 2013
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11/12/2013

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Special Inspector General forAfghanistan Reconstruction
d
SIGAR Audit 13-8
Taxes: Afghan Government Has Levied Nearly aBillion Dollars in Business Taxes on ContractorsSupporting U.S. Government Efforts in Afghanistan
SIGAR Audit 13-8/Afghan Business Taxes on U.S. Contracts
 
SIGAR
MA
2013
 
 
For more information, contact SIGAR Public Affairs at (703) 545-5974 or sigar.pentagon.ccr.mbx.public-affairs@mail.mil.
WHAT SIGAR REVIEWED
U.S. agencies, including theDepartment of Defense (DOD),Department of State (State) Bureauof International Narcotics and LawEnforcement Affairs (INL), and U.S.Agency for International Development(USAID), have negotiated agreementswith the Afghan government thatexempt their contracts from certainAfghan business taxes. However,since 2008, the Afghan governmenthas levied taxes and tax-relatedpenalties on contractors supporting U.S. government contracts inAfghanistan that should be exemptfrom such taxes under the negotiatedagreements.The U.S. government has an interestin addressing the business taxationchallenges that contractors are facing to reduce the cost of projects to theAmerican taxpayer. This audit focuseson business taxes and associatedpenalties levied on contractorssupporting the U.S. government’sefforts. Specifically, our objectiveswere to determine (1) the amountand types of inappropriate businesstaxes and associated penalties theAfghan government assessed and theamount paid and reported bycontractors supporting U.S.government contracts in Afghanistan,and (2) the extent to which U.S.government agencies have takensteps to minimize the tax burdenimposed by the Afghan governmenton these contractors.
WHAT SIGAR FOUND
Since 2008, the Afghan Ministry of Finance (MOF) has levied over $921million in business taxes, and associated penalties, on 43 contractorsthat support U.S. government efforts in Afghanistan. DOD, INL, andUSAID have agreements with the Afghan government that provideexemption from certain Afghan taxes. SIGAR identified instances wherecontractors were taxed despite these agreements. For example, $93million of the $921 million represented taxes levied on business receiptsand annual corporate income—a tax category that both the U.S. andAfghan governments have agreed should be exempt for contractorsoperating under covered agreements. SIGAR also identified instances inwhich the MOF assessed tax liabilities on contractors even though thecontractors held MOF-issued tax exemption certificates. For example, theMOF issued Business Receipts Tax and annual corporate income taxassessments on some DOD contractors, even though the contractorsshould have been exempt from both tax categories. Three DODcontractors in SIGAR’s sample that held MOF-issued tax exemptioncertificates were improperly assessed nearly $59 million in businessreceipts and annual corporate income taxes. U.S. and MOF officialsdisagree about the tax-exempt status of subcontractors. MOF officialsassert that the DOD and State INL agreements provide tax-exempt statusonly to prime contractors, and not subcontractors, whereas U.S.government officials contend that the agreements provide tax exemptionfor all non-Afghan companies (both prime and subcontractors)supporting U.S. government efforts. Given these ongoing disputes andthe ambiguous nature of the MOF-issued assessments, the 43contractors in SIGAR’s sample have paid approximately $67 million of the $921 million in total tax assessments, and most still face unresolvedassessments. As a result of the outstanding assessments, the MOF hasrestricted contractors’ freedom of movement and refused to renewbusiness licenses, and the Afghan government has even arrested somecontractor personnel. The combined effect is the potential interruption of support to U.S. military operations.SIGAR also found that INL and DOD contracting officers do not fullyunderstand Afghanistan’s tax laws and, as a result, they have improperlyreimbursed contractors for taxes paid to the Afghan government.Additionally, while DOD, INL, and USAID have taken some steps to helptheir prime contractors gain tax exemption, DOD and INL have not takensufficient steps to ensure that their subcontractors obtain required taxexemption certificates.
SIGAR
Special Inspector General for Afghanistan Reconstruction
May 2013
 Taxes: Afghan Government Has Levied Nearly a Billion Dollars in Business Taxes on Contractors Supporting U.S. Government Efforts in Afghanistan
 
 
For more information, contact SIGAR Public Affairs at (703) 545-5974 or sigar.pentagon.ccr.mbx.public-affairs@mail.mil.
WHAT SIGAR RECOMMENDS
SIGAR recommends that the Secretary of State, among other things, develop a consistent, unified position on what theU.S. government deems appropriate taxation of contractors supporting U.S. government efforts in Afghanistan. SIGARalso recommends that State and USAID determine if taxes reimbursed by INL and USAID were legitimate and recover anyinappropriately reimbursed taxes. SIGAR is also making three recommendations to State, USAID, U.S. Army Corps of Engineers (USACE), and the U.S. Central Command’s Joint Theater Support Contracting Command (CJTSCC) to developprocedures for contractors to obtain appropriate documentation of tax-exempt status with the Afghan government, issueguidance to properly identify taxes in contracts and invoices, and take steps to prevent the improper reimbursement of taxes to contractors. In addition, SIGAR identifies two matters for Congressional consideration to ensure that Congresshas complete information on taxes levied by the Afghan government and to address any improper taxation by the Afghangovernment.In commenting on a draft of this report, CJTSCC and USACE concurred with SIGAR’s recommendations. State did notexplicitly agree or disagree with SIGAR’s recommendation to develop a consistent, unified position on what the U.S.government deems appropriate taxation of contractors; it argued that such a unified position already exists and that it isinappropriate to suggest that there are inter-agency differences. SIGAR disagrees. SIGAR’s finding that contractors havefailed to receive guidance on differing tax treatment by different federal agencies shows that inter-agency differences do,in fact, exist. Regarding SIGAR’s recommendation to determine if reimbursed taxes were legitimate and to recover anyinappropriately reimbursed taxes, State neither agreed nor disagreed but requested further details on SIGAR’s analysis.SIGAR provided State with specific information on the types of taxes it identified during an exit conference in January2013. This information should be sufficient for State to implement SIGAR’s recommendation. Although SIGAR is willing to provide additional information on our analysis, SIGAR notes that it is State’s responsibility to ensure that the taxes itreimburses are legitimate and to recover any inappropriately reimbursed taxes. USAID neither agreed nor disagreed withSIGAR’s recommendations, but instead stated that the recommendations made had already been implemented, werenot applicable, or lacked detailed analysis for the agency to implement. SIGAR disagrees and believes itsrecommendations are well supported and valid.
 Afghan Government Tax Assessment on Contractors Supporting U.S. Government Contracts
Agency Total Tax WithholdingsBusiness Receipts &Annual CorporateIncome TaxesUndeterminable
c
 Number ofContractors
USAID
$5,458,7138 $5,223,048 $235,665 $0 7
DOD
$92,875,298 $8,671,298 $62,704,000 $21,500,000 17
State
$19,095,672 $5,238,000 $1,200,000 $12,657,672 8
Multiple Agencies
a
 
$803,967,530 $25,677,833 $29,300,000 $748,989,697 11
Total
b
$921,397,213 $44,810,180 $93,439,665 $783,147,368 43
Source: SIGAR analysis of contractor data.Notes:
a
Multiple agency contractors are contractors that work under contracts for a combination of DOD, State, and USAID. Nocontractor in our sample indicated that it had contracts with agencies other than DOD, State, and USAID.
b
For figures presentedto SIGAR in Afghanis, we converted to U.S. dollars using the Afghani to U.S. dollar exchange rate published by Da AfghanistanBank on October 18, 2012. This table reflects paid and assessed amounts.
c
Some taxes were undeterminable because the taxassessment issued by the Afghan government did not indicate the specific category of tax that was being assessed. However,based on our analysis, much of this total amount is likely illegitimate.
 

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