Taxation of Foreign Suppliers in Iraq

Taxation of foreign suppliers

The authority of the General Commission for Taxes to tax an entity located outside Iraq is set forth in Article 21(7) of Law 113/1982, which establishes the principle that non-residents may be taxed in cases where:

"the trade, commercial business, vocations or any other transaction of a commercial nature from which the gains and profits have arisen is carried on in Iraq. The financial authority shall differentiate between trading in and with Iraq." (emphasis added)

Accordingly, Iraq law distinguishes between 'doing business in Iraq' and 'doing business with Iraq', and the tax regulations set forth the principle that non-residents are not liable for tax unless trade, commercial business, the provision of services or any other transaction of a commercial nature are carried on in Iraq. Under Tax Instruction 2/2008, the Iraqi tax administration has attempted to delineate further the distinction between business in Iraq versus business with Iraq. For example, under Article 2, trading with Iraq will be assumed (and Iraq tax liability will not apply) where the supplier has its place of business outside Iraq, the contract was signed outside Iraq and all legal and handling activities (eg, issuing letters of credit or shipping, paper handling, customs and similar processes) are performed by Iraq-registered entities. Trading with Iraq will also be assumed where all of the services and expert activities are performed and paid for outside Iraq.

However, a foreign supplier will be deemed to be doing business in Iraq (and will be subject to tax, irrespective of whether such services were performed under the same or a separate contract) to the degree that it provides complementary services inside Iraq, including installation, supervision, maintenance and engineering works.

Under this analysis, significant tax savings under any particular supply arrangement may be made by relocating outside Iraq the most important actions to be taken by the foreign supplier or subcontracting those actions to an Iraqi party. Significantly, tax savings could ensue if such foreign suppliers were to use two separate contracts with the Iraqi beneficiary: one for services performed outside Iraq and the other for services performed within the country.
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