9/1/20

CONTENETS
ØSCOPE OF INCOME TAX
ØTAXABLE PERSONS
ØSOURCES OF INCOME
ØINCOME TAX CALCULATION
ØFORMAT

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LEARNING OUTCOMES
OBJECTIVE
ØSources of income
• Identify the different sources of income: Afghan and Non-
Afghan(2)
• Tax on natural persons
ØScope of income tax
• Outline the objectives of the Income Tax Law
• Differentiate between legal and natural persons
• Explain how the residence of an individual is determined
• Apply the Principal Home test for a natural person
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LEARNING OUTCOMES...
ØTax calculation and exemptions
•Prepare a basic income tax computation for natural persons
•Compute the income tax payable

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1. INTRODUCTION TO INCOME TAX

§ Natural and Legal persons are required by law to pay
tax on their income earned from local sources,
whether situated within or outside Afghanistan.
§ If the persons
fulfill the criteria of Afghanistan
residency, then the taxpayer is required to pay tax on
income earned from Non-Afghan sources as well.
These sources can be set-up in Afghanistan or in
some other country.

2. TAXABLE PERSON
A natural person is considered a resident of
Afghanistan if:
üThey have their principal home in Afghanistan at any
time during the tax year
üThey are physically presentin Afghanistan for a
period or periods aggregating to one hundred eighty-
three days in the tax year
üThe natural person is
an employee or official of the
Government of Afghanistan and has been assigned to
perform services abroad at any time during the tax
year
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2. TAXABLE PERSON…
Principal Home:
Whether a natural person’s “principal home” is Afghanistan or not,
is determined using a facts and circumstances test, in which the
following factors are taken into account:
ü Whether the natural person owns or rents the home in
Afghanistan
ü Whether the natural person owns or rents a home in a
different country
ü The amount of time the natural person spends in Afghanistan
compared to the amount of time the natural person spends in
other countries
ü The location of the natural person’s family
The length of time the natural person has owned his or her home in
Afghanistan and the length of time that the natural person has 7
owned a home in one or more other countries.
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2. TAXABLE PERSON…
Example:
Correctly identify whether Khadim’s principal home is in
Afghanistan or not, based on the following scenarios:
i. (i) Khadim owns a home in Bamiyan province but also rents an
apartment in Uzbekistan. During the recent tax year, Khadim
spent half of his time in Bamiyan and the remainder in
Uzbekistan.
ii. (ii) Khadim owns a home in Kabul City but he also owns a
home in Tajikistan
iii. (iii) Khadim owns a home in Bamiyan province which he has
owned for the past three years. Khadim recently purchased a
home in Uzbekistan and ended up spending an equal amount
of time at both of the residences

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2. TAXABLE PERSON…
Example…
Correctly identify whether Khadim’s principal home is in
Afghanistan or not, based on the following scenarios:
iv. Khadim rents an apartment in Kabul City as well as an
apartment in Tajikistan and Pakistan. In the recent tax year,
Khadim stayed at his Kabul City apartment for 150 days; 107
days in his apartment in Tajikistan and 108 days in his
apartment in Pakistan.
v. Khadim rents an apartment in Kabul City where he lives with his
wife and three children. Khadim also owns an apartment in
Karachi, Pakistan. Due to the nature of his work, Khadim spent
most of his time during the year working in Pakistan while his
wife and children remained in Kabul City

3. SOURCES OF INCOME
§ Non Resident: Any natural person who does not meet the
criteria of being an Afghan resident, will be deemed a Non
Resident.
Non-residents are only required to pay tax to the Ministry of
Finance (Afghanistan) on their income from local sources.

§ Afghan residents are required to pay tax on their world-wide

income i.e. Total Taxable Income is the sum of local and foreign
income.

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3. SOURCES OF INCOME…
Local Sourced Income
The following income will be treated as Income from local
sources based on the situations specified:

1) Interest from loans, profit on deposits and income from

investments
a) Interest earned on deposits by natural or legal persons in banks in
Afghanistan
b) Interest earned on loans or/ and finance leases to individuals,
companies, permanent establishments and subsidiaries in
Afghanistan

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3. SOURCES OF INCOME…
Local Sourced Income…
2) Dividends paid by an Afghan corporation or a Limited
Liability Company, operating in Afghanistan, will be
considered to be local sources and therefore the payer will
be required to withhold tax on these amounts.
Where a branch set-up in Afghanistan but belonging to a
non-resident person remits an amount to the non-resident
person or a connected party; the remittance is treated as
dividend from local source to the extent of the branch’s
earnings.
If the amount remitted is in excess of the branch’s earnings,
the excess is considered a return of the capital investment
made by the foreign person and is therefore treated as
foreign sourced income.
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3. SOURCES OF INCOME…
Example:
Rebecca, a UK resident, owns all of the issued stock of an
Afghan corporation. The company had accumulated earnings
of Afs.240,000 in a tax year but decided to remit Afs.300,000 to
Rebecca during the year.

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3. SOURCES OF INCOME…
Local Sourced Income…
3) Salaries, wages, self-employment income etc., for services
performed in Afghanistan.
Example:
Correctly identify which of the following income will be
considered to be local sourced income:
§ Javed, an Afghan resident, works for a local company and
earns wages of Afs.20,000 per month.
§ Daniel is employed by a Swiss company and works in a
branch of the company in Kabul. He spends nearly 90% of his
time in Kabul and earns a salary of Afs.1,500,000 per annum.

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3. SOURCES OF INCOME…
Local Sourced Income…
4) Rentals and royalties from any property (moveable and
immovable) used within Afghanistan.
Example:
Arshad runs a small business in Kabul, leasing trucks to
companies.
In a tax year, one of Arshad’s customers leased a truck for a
total rent of Afs.15,000 but then used the truck to make
deliveries of material all over Afghanistan as well as Pakistan.
The ratio of the use in Afghanistan was approximately
estimated as 80%.

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3. SOURCES OF INCOME…
Local Sourced Income…
5) Gains from sale of immovable and movable property,
physically situated in Afghanistan.
This includes gain from:
§ Transfer of ownership or interest in any immovable property,
mineral deposit or natural resources in Afghanistan
§ Transfer of ownership or interest in any franchise operating
in Afghanistan.
§ Sale of an interest in a foreign or domestic partnership, to
the extent that the partnership owns assets in Afghanistan.

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3. SOURCES OF INCOME…
Local Sourced Income…
Example:
Correctly identify which of the following income will be
considered to be income from Afghan/ local source:
§ Khalil owns a 15% interest in the capital and profits of an
Afghanistan partnership that owns immovable property in
Afghanistan. Khalil is now considering selling his investment.
§ William owns 25% interest in the capital and profits of a UK
based company, which he plans to sell. The UK Company owns
agricultural property in Afghanistan.
§ Harryownsa10%interestinthecapitalandprofitsofanAfghancorpo
ration, which owns immovable property in Pakistan but does
not own any assets in Afghanistan. Harry is thinking of selling
5% of his total share in the company. 17

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3. SOURCES OF INCOME…
Local Sourced Income…
6) Commissions on sales activities taking place in Afghanistan.
These include insurance sales of any type and are assessed on
the relevant facts and circumstance associated with the sale.
The physical location of where the contract is issued is a strong
factor in deciding the location of the transaction but not the
definite evidence of where the sales activities will be deemed
to have taken place.
Example: Munir, an insurance salesman from Lahore visited Kabul
for a month to sell insurance to foreign nationals residing in
Afghanistan. He managed to get some contracts signed on the spot
but some contracts were actually finalized in Lahore. Munir earned
commissions worth Afs.17,200 from the sales of the insurance.

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3. SOURCES OF INCOME…
Local Sourced Income…
7) Income from commercial activities within Afghanistan.
This includes gain from the sale of transfer of any movable property used
in the commercial activities in Afghanistan.
‘Use’ of the property is determined based on the facts and circumstances
test. The amount of time, the property was actually used in Afghanistan as
compared to its use in another country, during the total ownership period
is also given due consideration.
Example: A Pakistani citizen has been running a business of leasing
trucks for delivery for many years. Four years ago, the company bought a
truck that was sold at the end of the fourth year.
Identify whether the gain will be treated as income from local source or
foreign income, if:
§ The truck is used to make deliveries in Afghanistan for 3 years out of the 4.
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§ The truck is used to make deliveries in Pakistan for 2.5 years.
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3. SOURCES OF INCOME…
Local Sourced Income…
8) Royalties, fees, commission etc. paid by an Afghan resident

Example: A lawyer, an Indian National, provides legal counsel

to a business in Afghanistan and receives a per annum retainer
amount of Afs.50,000 for the legal services provided.

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4. TAX CALCULATION ASPECTS

An Afghan resident is subject to taxation under the Income Tax
Law, even on income earned in exchange for services performed
outside of Afghanistan.
§ The tax of a natural person is calculated as follows:
1) The taxable income from all sources earned in a tax year, is
added together to deduce the total taxable income.
Taxable Income = Gross Income – Tax Allowable Deductions

The rate of conversion is the average of open (current) rates used

by Da Afghanistan Bank (DAB) to purchase such foreign money at
the end of each month.

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4. TAX CALCULATION ASPECTS…

§ The tax of a natural person is calculated as follows:
2) The Income tax rates are applied to the total taxable income,
according to the tax slabs, to determine the tax liability of the
tax year.
If the person has not paid any previous tax on the income of
the current tax year, then the amount calculated in this step is
the final tax liability of the Natural person.
3) If however, a prior tax payment has already been made on
any of the income earned during the tax year, then the
amount previously paid is treated as a tax credit amount.
The tax credit is adjusted against the liability calculated, to
arrive at the tax payable/ refundable amount.

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4. TAX CALCULATION ASPECTS…

§ The tax of a natural person is calculated as follows:
If any income tax was paid to the government of a foreign
country, it is treated as a credit amount and net off against only
that part of the income tax liability which is attributable to the
foreign income of the taxpayer.
Tax Payable is the excess of Tax Liability after adjusting for any
tax credit. The amount has to be deposited by the tax payer.
Tax Refundable is the excess of the tax credit over the tax
liability. The amount has to be returned to the taxpayer by the
Ministry.
Tax Year
Natural and legal persons are required to carry out their tax
calculation according to the tax year.
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4. TAX CALCULATION ASPECTS…

Example:
§ Abdul Wahab started his business in the last 3 months of 1396
and completed the rest of his year by working for additional
months of 1397.
§ Abdul Wahab decided to close his business after the first year
and to simplify his tax calculation he wants to treat his taxable
income of the entire 12 months in one tax year.

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4. TAX CALCULATION ASPECTS…

Tax Payable Calculation EXAMPLEs:

o Ahmad earning a total taxable income of Afs 170,000

Monthly.
o Durr-e-Aden earned a total taxable income of Afs.1, 800,000
for the tax year 1397.

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4. FORMAT

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