The Afghan Ministry of Finance (MoF) has for years sought to impose income taxes, customs duties, or similar charges on all U.S. Government (USG) contractors operating in Afghanistan. Many contractors have avoided paying their tax bills (or even dealing with the MoF) due to ambiguity about their legality and reimbursability under USG contracts, resulting in a build-up of assessed back taxes and penalties. Recently, the Afghan MoF has offered an amnesty program that substantially lessens penalties for contractors willing to pay their outstanding tax bills. Many contractors are now facing an immediate decision as to whether it is time to finally address these legal questions. For years, the USG and the Afghan government disagreed over the taxation of USG contractors. The Afghan government initially sought to impose taxes on all USG contractors, whether acting as primes or subs. Over time, USG agencies succeeded in entering into bilateral agreements with the Afghan government to provide tax exempt status for certain classes of contractors. This ad hoc approach added to the confusion over the applicability of MoF taxes. The Department of Defense (DoD) early on entered into a Military Technical Agreement (MTA) between the International Security Assistance Force and the Interim Administration of Afghanistan and the NATO-Afghanistan Status of Forces Agreement (SOFA). DoD took the position that the MTA granted tax exempt status for all contractors and subcontractors, but the Afghan government took a narrower reading. Then, in 2014, DoD and the Afghan government entered into a Bilateral Security Agreement (BSA) providing clear income tax exemptions for USG DoD contractors, subcontractors, and their employees that are not resident in Afghanistan. The Afghan government initially took—but then somewhat retreated from—the position that the BSA does not cover tax liability for years prior to 2015 or most subcontractors. The U.S. Agency for International Development (USAID) obtained a tax exemption from the MoF for its Strategic Objective Grants Agreements (SOAGs). The Department of State’s Bureau of International Narcotics and Law Enforcement (INL) had yet another agreement with limited effect. Other agencies lacked any agreement to exempt contractors from taxation at all.

Co-Authors: Robert Nichols, Andrew Victor, and Adrian Wigston

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