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Numerous companies located outside Iraq, but providing goods and services into the country (either on a single project basis or through a consistent stream of business), are grappling with the idea that Iraq may tax at least some of their business profits. This is true even where such companies are not registered in Iraq or do not maintain a local office or local employees. The Iraqi authorities are managing this by applying a tax to the value of the supply contract upon entry of goods into the country, as a kind of guarantee deposit. This is released only once the foreign supplier has submitted a tax clearance letter, issued by the General Commission for Taxes, confirming settlement of its tax liability on the supply contract in question.
The fact that Iraq permits the taxation of business profits of foreign-registered entities should be of no surprise. This practice is employed by many countries, provided that a sufficiently close nexus exists between the taxing jurisdiction and the foreign entity. In developed countries, especially, this ‘nexus’ is crystallised under the ‘permanent establishment’ analysis, subject to numerous tax treaties and the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention. However, the Iraqi authorities have adopted a much simpler formula for determining which foreign suppliers should be taxed, by considering whether suppliers are doing business in Iraq or doing business with Iraq. Given the significant distinctions between the approach under the OECD model and that adopted by Iraq, companies supplying goods and services into the country should familiarise themselves with the Iraqi approach in order to limit their tax exposure while doing business.
Permanent establishment under the OECD Convention