Iraq Corporate Tax Guide

Iraq

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Baghdad Iraq Street address: Al-Mansoor/Al-Ameerat Street Block 609 Street 3 House 23 Baghdad Iraq

Principal Tax Contacts

Mustafa Abbas +964 (1) 543-0357 Mobile: +964 7700-824-139 Email: mustafa.abbas@iq.ey.com

Abdulkarim Maraqa +964 750-798-4444 Email: abdulkarim.maraqa@iq.ey.com

Business Tax Services

Ali Samara +962 (6) 580-0777 Mobile: +962 777-282-283 Email: ali.samara@iq.ey.com

Business Tax Advisory

Jacob Rabie +962 (6) 580-0777 Email: jacob.rabie@jo.ey.com

Tax Policy and Controversy

Ali Samara

+962 (6) 580-0777 Mobile: +962 777-282-283 Email: ali.samara@iq.ey.com

Jacob Rabie +962 (6) 580-0777 Email: jacob.rabie@jo.ey.com

A. At a glance

(a)

income tax rate. The 35% rate applies to oil and gas

rate

and extraction activities and related industries, including service

The Kurdistan Region of Iraq has not yet adopted the 35% rate.

(b) This withholding tax is imposed on payments to nonresidents. (c) See Section C.

B. Taxes on corporate income and gains

Corporate income tax. In general, corporate income tax is imposed on profits arising in Iraq from commercial activities (or activities of a commercial nature), vocations and professions, including profits arising from contracts and undertakings. In assessing the taxability of nonresidents in Iraq, the tax authority generally relies on certain factors that distinguish between “doing business in Iraq” and “doing business with Iraq.” If any one of the follow ing factors is satisfied, a company is deemed to be “doing business in Iraq” and accordingly taxable in Iraq:

• The place of signing the contract by the party performing work under the contract (vendor or service provider) is in Iraq.

• The place of performance of work is in Iraq.

• The place of delivery of goods or services is in Iraq.

• The place of payment for the work is in Iraq.

The Iraqi Ministry of Finance’s Instructions No. (1) of 2014 amended the above four factors. Under the amended instructions, the taxability of the following items is addressed separately:

• Supply contracts

• Supplementary or complementary services performed in relation to a supply contract

• Professional services

Income arising from a supply contract is taxable in Iraq if any one of the following factors applies:

• The vendor or service provider has a branch or an office in Iraq, and the contract is signed by the branch or office representative, any of the branch or office’s employees or any other person who is resident in Iraq and authorized to sign the contract.

• The vendor or service provider has a branch or an office in Iraq, and the contract is performed or executed by the branch or office representative, any of the branch or office’s employees or any other person who is resident in Iraq and is authorized to perform or execute the contract.

• The contract’s legal formalities and requirements are completed in Iraq in the name of the vendor or service provider (for exam ple, customs clearance, payment of customs duties, opening of letter of credit or any related procedures, regardless of whether the vendor or service provider has a branch, office or agent in Iraq).

• Payments under the contract to the vendor or service provider are received fully or partially in Iraq, regardless of the currency used to make the payments.

• The vendor or service provider receives payment in barter.

Tax is imposed on income arising from supplementary or comple mentary services performed in Iraq with respect to a supply con tract (such as erection, supervision, maintenance or engineering services), regardless of whether the services are included in the supply contract or in an independent contract. In addition, the tax ability of the service component is determined separately from the taxability of the supply contract.

Tax is imposed on professional services performed in Iraq by a legal or natural person, regardless of whether the services are included in the supply contract or in an independent contract and regardless of the place of payment. The taxability of the service

component is determined separately from the taxability of the supply contract.

Tax rates. The general corporate income tax rate applicable to all companies (except oil and gas production and extraction activities and related industries, including service contracts) is a unified flat rate of 15% of taxable income. Activities relating to oil and gas production and extraction and related industries, including service contracts, are subject to income tax at a rate of 35% of taxable income. The Kurdistan Region of Iraq has not yet adopted the 35% rate.

Withholding tax. Companies doing business in Iraq are required to withhold taxes from payments made to their local subcontractors and service providers and remit the withheld taxes to the Iraqi tax authority on a monthly basis. The withholding rates vary, depend ing on the nature of activities carried out under each contract. The Kurdistan Region of Iraq does not currently observe this tax with holding, retention and remittance process with respect to local payments made to subcontractors and service providers.

Capital gains. Capital gains derived from the sale of fixed assets are taxable at the normal corporate income tax rate of 15% (35% for oil and gas production and extraction activities and related industries, including service contracts, except in the Kurdistan Region of Iraq where the 35% tax rate has not yet been adopted). Capital gains derived from the sale of shares and bonds not in the course of a trading activity are exempt from tax; otherwise, they are taxed at the normal corporate income tax rates.

Administration

Tax filing due dates and penalties. In Iraq, the tax filing package (whether for Iraqi companies or foreign branches operating in Iraq) consists of audited financial statements prepared under the Iraqi Unified Accounting System, together with an income tax return. The tax filing package must be filed in Arabic within five months after the end of the fiscal year. In the Kurdistan Region of Iraq, the filings must be made within six months after the end of the fiscal year, consisting of the audited financial statements prepared under the Iraqi Unified Accounting System (along with an income tax return only for those taxpayers classified as large taxpayers by the tax authority of the Kurdistan Region of Iraq).

For all taxpayers in Iraq and the Kurdistan Region of Iraq, except companies classified as large taxpayers in the Kurdistan Region of Iraq, a delay fine equal to 10% of the tax due is imposed (up to a maximum of IQD500,000 and IQD75,000 in Iraq and the Kurdistan Region of Iraq, respectively) on a taxpayer that does not submit an income tax filing within the tax filing deadline.

Foreign branches that fail to submit the tax filing package by the due date in Iraq are subject to a penalty of IQD10,000. A similar penalty is not currently being imposed in the Kurdistan Region of Iraq.

For taxpayers not classified as large taxpayers in the Kurdistan Region of Iraq, the tax authority in the region has been sending the files of taxpayers that fail to submit their tax filing in a timely manner to a tax tribunal. The tax tribunal assesses late filing penalties, ranging from 10% to 25% of taxable income.

For taxpayers classified as large taxpayers in the Kurdistan Region of Iraq, failing to submit the tax filing package by the due date results in a penalty equal to 5% of the tax due for each late month, up to a maximum of 100% of the tax due and no less than IQD100,000 for branches and IQD500,000 for Iraqi limited lia bility companies.

Tax assessment and payment. For all taxpayers in Iraq and the Kurdistan Region of Iraq, except companies classified as large taxpayers in the Kurdistan Region of Iraq, after an income tax filing is made, the tax authority audits the filing and may request additional information. It eventually issues a tax assessment in an estimation memorandum. In general, payment of the total amount of tax is due after the tax authority and the taxpayer sign the estimation memorandum indicating their agreement with the tax assessment. For companies classified as large taxpayers in the Kurdistan Region of Iraq, the tax filing is initially accepted on the self-assessment basis.

In Iraq, if the tax due is not paid within three days from the date of assessment notification, late payment interest equal to the cur rent overdraft banking interest applied by Al-Rafidain Bank (cur rently 11%) applies. Except for taxpayers classified as large taxpayers in the Kurdistan Region of Iraq, if the tax due is not paid within 21 days after the date of assessment notification, a late payment penalty equal to 5% of the amount of tax due is imposed. This amount is doubled if the tax is not paid within 21 days after the lapse of the first period.

For companies classified as large taxpayers in the Kurdistan Region of Iraq, the payment is due together with the tax filing package based on the self-assessed tax liability declared in the tax return. The tax authority should accept the tax filing as selfdeclared by the taxpayer. The penalties associated with late pay ment are equal to 10% of the tax due. Delay interest of 1% per month is also imposed, with partial months counting as a full month.

Dividends. In general, dividends paid from previously taxed in come are not taxable to the recipient.

Interest. Interest paid to nonresidents is subject to a withholding tax rate of 15%.

Foreign tax relief. A foreign tax credit is available to Iraqi compa nies on income taxes paid abroad. In general, the foreign tax credit is limited to the amount of an Iraqi company’s income tax on the foreign income. Excess foreign tax credits may be carried forward for five years.

C. Determination of trading income

General. In general, all income generated in Iraq is taxable in Iraq (see Corporate income tax in Section B), except for income ex empt under a valid tax law or resolution, the industrial investment law, or the investment promotion law in the Kurdistan Region of Iraq.

Business expenses incurred to generate income are allowable, with limitations on certain items, such as entertainment and donations. However, provisions and reserves are not deductible for tax purposes.

Tax depreciation. The Iraqi Depreciation Committee sets the maximum depreciation rates for various types of fixed assets. These rates are set out in several tables for various industries. In general, the following are the acceptable depreciation methods:

• Straight line

• Declining balance

• Other methods (with the approval of the tax authority)

If the rates used for accounting purposes are greater than the prescribed tax depreciation rates, the excess is disallowed for tax purposes.

Relief for losses. A tax loss from one source of income may offset profits from other sources of income in the same tax year. Unused tax losses may be carried forward and deducted from the taxable income of the taxpayer during the following five consecutive years, subject to the following conditions:

• Losses may not offset more than half of the taxable income of each of the five years.

• Losses may only offset income from the same source from which the losses arose.

To claim losses, a taxpayer must obtain appropriate documenta tion including financial statements that support the loss and suf ficient documentation to support the expenses that created such loss.

Groups of companies. Iraqi law does not contain any provisions for filing consolidated returns or for relieving losses within a group of companies.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Stamp duties; imposed on the total contract value Iraq 0.3 Kurdistan Region of Iraq 0.1 (The stamp duty rates provided are the most commonly applied rates in Iraq and the Kurdistan Region of Iraq. In practice, the application of the stamp duty may vary.) Property tax; imposed on the annual rent From buildings 10.8 From land 2

Social security contributions; imposed on salaries and benefits of local and expatriate employees; a portion of employee allowances up to an amount equal to 30% of the base salary is not subject to social security contributions Employer (general) 12 Employer (oil and gas sector, except in the Kurdistan Region of Iraq) 25 Employee 5

E. Miscellaneous matters

Foreign-exchange controls. The currency in Iraq is the Iraqi dinar (IQD). Iraq does not impose any foreign-exchange controls. However, according to the Central Bank of Iraq’s instructions and regulations, transfers of funds must be in accordance with the Anti-Terrorism Law and the Anti-Money Laundering Law.

Debt-to-equity rules. Iraq does not have any debt-to-equity rules. The only restrictions on debt-to-equity ratios are those stated in the articles and memoranda of association. However, the tax authority may disallow claims of interest expense if it deems the expense to be excessive or unreasonable.

F. Tax treaties

Iraq has entered into a bilateral double tax treaty with Egypt and a multilateral double tax treaty with the states of the Arab Economic Union Council.