Case: Afghan government is planning to raise revenue to fund the 

national budget by imposing

a tax on digital giants such as Twitter and Facebook (which are not registered/don't have center
of their business administration in Afghanistan). It has reached out to us to ask whether it can
impose any tax on them based on the provisions of the Income Tax Law in force?
Answer:

Issue: Can the Afghan Government can impose any tax on digital giants such as twitter and
Facebook for raising revenue to fund the national budget?
Source test
Rule:
According to Article 2(1) of the Income Tax Law, “Tax shall be imposed on all income of
natural and legal persons derived from Afghan sources in and out of the country”. Moreover,
according to Article 8(1), “Non-resident natural and legal persons engaged in economic, service
or business activities in Afghanistan shall be subject to tax on their income from sources within
Afghanistan”. Furthermore, Article 7(1) states that non-resident legal persons not engaged in
trade or business are subject to income tax from sources within Afghanistan from interest,
dividends, rents, royalties, etc.
Analysis:
According to Article 2(1), tax will be imposed on a legal person if income is derived from an
Afghan source in and out of the country. This is regarding active income. In this case, Twitter
and Facebook do not derive their income from Afghan sources, whether in or out, since they do
not have a branch in Afghanistan and thus tax cannot be imposed on them. Rather, these digital
giants derive their income from the USA and other countries that they have a registered branch
in. Moreover, according to Article 8(1), since these non-resident digital giants are not engaged in
economic, service or business activities in Afghanistan, they are not subject to tax on their
income. Finally, Article 7(1) states that non-resident legal persons who are not engaged in trade
or business in Afghanistan are still subject to income tax IF they derive income from sources
within Afghanistan from interest, dividends, rents, and royalties. This means if these digital
giants received passive income from Afghan sources, they could’ve been taxed. However,
Facebook and Twitter do not receive passive income from the aforementioned passive sources.
Thus, they cannot be taxed.

Residency test
Rule:
Article 2(2[4]) states that “a natural or legal person shall be considered a resident of Afghanistan
if an entity has been established during the tax year or has the center of its administrative
management in Afghanistan”. According to Article 8(5) of the Afghan Income Tax Law, “Where
a non-resident person carries on business through a branch in Afghanistan, the taxable income of
the branch shall be determined as if the branch was a separate legal person”. Furthermore,
Article 8.8 of the Income Tax Manual states that a foreign corporation or limited liability
company is considered to be doing business in Afghanistan if it has a place of business or
permanent establishment in Afghanistan and so income from such business is taxable.
Consequently, if a foreign company is not doing business in Afghanistan or if it has no
permanent establishment in Afghanistan, its income is not taxable.
Moreover, Article 8.8 (c) states that “A person acting in Afghanistan on behalf of a foreign
company shall be deemed to constitute a permanent establishment of that company in
Afghanistan…” by meeting certain conditions and thus will be taxable.
Analysis:
In accordance with Article 2(2[4]), since digital giants like Twitter and Facebook do not have an
established entity or do not have a center of its administration in Afghanistan, they are not
considered to be residents of Afghanistan and thus are not subject to tax. And this goes hand-in-
hand with the fact that they do not derive income from Afghan sources either.
To elaborate on Article 8(5) of the Income Tax Manual, a non-resident legal or natural person
who does business activities through a registered branch in Afghanistan is subject to Afghan
Income Tax Law and the branch will be considered a separate legal person and thus will be taxed
separately. However, digital giants such as Twitter and Facebook do not have a registered branch
in Afghanistan and thus cannot be taxed by the Afghan government. If they did have a branch in
the country, then they would have been subject to tax. Rather, Facebook's headquarters is in the
US and Twitter's headquarters is also in the US. 
Moreover, according to Article 8.8 of the Income Tax Manual, since these digital giant
companies such as Twitter and Facebook have no permanent established in Afghanistan, they are
not considered to be doing business in Afghanistan and thus are not subject to tax. Neither
Twitter nor Facebook has an office or warehouse in Afghanistan. Thus, these digital entities are
not subject to Afghan tax.
Finally, 8.8 (c) of the Income Tax Manual, a person acting on behalf of the foreign companies
can also be considered as a permanent established. However, these digital giants do not have a
person acting in Afghanistan on behalf of them (no person has been appointed or sent by Twitter
or Facebook in Afghanistan on behalf of them) nor do they have an independent agent working
in Afghanistan on behalf of them. Therefore, the foreign entities are not subject to tax.
Conclusion:
In conclusion, the Afghan Government cannot impose tax on digital giants such as Twitter and
Facebook because these non-resident communication companies are not registered in
Afghanistan and do not have center of their business administration in Afghanistan nor do they
have a person acting in Afghanistan on behalf of them. Finally, these digital giants do not derive
active or passive income from Afghan sources and so they cannot be taxed.
References:
Income Tax Law of Afghanistan: Official gazette number 976, 18th March 2009.
Income Tax Manual, May 2010.