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11 November 2011
With the current high number of foreign investment and foreign workers operating in Iraq, it is becoming increasingly important to determine whether foreign, non-Iraqi employees are subject to Iraqi tax and social security provisions. While this area of Iraqi law is still developing, it is clear that all foreign employees operating in Iraq, regardless of duration or type of employment, are subject to Iraqi personal income tax. Likewise, the companies which hire these workers are, in turn, subject to the strict and very clear withholding provisions. However, the issue of social security contributions is not as clear.
The payment of social security contributions on behalf of foreign workers is not currently accepted by the Iraqi government, but nevertheless is often required for compliance reasons by other agencies. This creates an uncertain situation for foreign companies and subjects any company to a litany of non-compliance fines and penalties for factors that may be outside their immediate control.
Labour and employment issues in Iraq are governed by the Labour Law (71/1987, as amended by Law 15/1991 and Coalition Provisional Authority (CPA) Order 89). In addition to the Labour Law, dozens of orders, directives and resolutions deal with a host of employment-related issues, such as trade unions, hygiene, health and safety rules and occupational safety.
Iraqi employees are subject to tax on income arising inside or outside Iraq, regardless of where payment of salary is made. The payment of the salary is subject to a 15% withholding amount, which must be retained by the employer and paid directly to the General Commission of Taxation. This requirement is set forth by the Income Tax Law (113/1982, as amended) and the Direct Deduction of Tax (DDT) Instruction (1/2007). The Income Tax Law has been substantially amended by Order 49/2004 and 84/2004, issued by the CPA.
Independent contractors are liable to pay their own personal income tax. However, the mere contractual arrangement in which an individual is considered a 'contractor' does not constitute conclusive proof that the tax authorities will not deem that person to be an employee of the beneficiary. Under Article 9 of the DDT Instruction, an employer is responsible for collecting income tax from employees on a monthly basis and for remitting it directly to the tax authority. Therefore, it is highly advisable for companies operating in Iraq state in any independent contractor agreement that it is the clear responsibility of the independent contractor (or the agency employing the independent contractor) to withholding their own taxes and also pay any relevant contributions.
Double taxation treaties
Iraq has entered into double taxation agreements with only certain countries, including Egypt, Jordan, Libya, Somalia, Sudan, Syria, Tunisia and Yemen. However, CPA Order 49 includes a tax credit provision by which, subject to certain provisos, "income tax paid to a foreign country on income earned in that country may be credited against tax paid to Iraq". This double taxation provision has not yet been successfully invoked - it may be that it is simply not followed by the General Commission of Taxation. However, it shows that Iraqi law does, at least in theory, cater for the double taxation concerns of a non-Iraqi investor. It is the application of the law that is often not reliable.
Divergent treatment in Kurdistan
As with many issues in the federal Iraqi system, taxation issues are dealt with slightly divergently in the Kurdistan region. Specifically, expatriate employees in Kurdistan must first qualify as tax residents in Iraq in order to be taxed in Iraq.
According to Article 1(10) of the Kurdish Income Tax Law, a resident is "any person residing in Iraq during the year in which the income arose, for a total period of not less than six months, or he/she resides in Iraq for a period of not less than four consecutive months". Article 1(11) defines a 'non-resident' as "a person who does not meet the residence qualifications stated in paragraph (10) [of Article 1] above, even if income has arisen for him [or her] in Iraq from any source".
Thus, once a person is deemed to be a tax resident, expatriates working in Kurdistan are subjected to the following rules:
However, the tax authorities in Kurdistan currently consider income paid outside Iraq as income derived outside Iraq, for which no tax will apply. This practice, although established among the Kurdistan authorities, is not based on any publicly available written statutes or regulations and could therefore change at any time and without notice.
Social security and pension contributions are governed by the Pension and Social Security Law (39/1971), as amended and applied in all regions of Iraq. As a general rule, employers operating in Iraq are required to remit these contributions for their Iraqi employees working in Iraq to the Ministry of Labour and Social Affairs. The contributions are paid as follows:
All contributions are made monthly by certified cheque from an Iraqi bank.
Before making a payment, an employer must register its employees at the Labour and Social Security Department of the ministry. All employers and employees, including employees of foreign nationality, must be registered.(1) Failure to register exposes the employer to civil and criminal penalties.
Divergent practice in Kurdistan
There is no specific exemption under Iraqi legislation permitting non-Iraqis to be excluded from paying the contributions. Indeed, Article 3 of the Pension and Social Security Law states that "[t]he provisions of this law shall apply to all workers covered by the Labour [Law] 71/1987".
Furthermore, the Labour Law covers both Iraqi and non-Iraqi employees and applies to all workers in Iraq, including Arab and non-Arab foreigners, provided that they are working in Iraq. However, under current practice, Kurdish employers ignore the registration requirement for expatriate employees. The ministry branches in Kurdistan have, until now, turned a blind eye to this practice. This is arguably because some or most expatriate employees pay some type of equivalent social security or pension contributions in their home countries, and that payment of similar amounts in Kurdistan is therefore not justified. Although it is questionable whether a significant amount of expatriate employees actually make equivalent payments in their home countries, it seems that the authorities in Kurdistan require no proof that these payments are indeed being made. Accordingly, a presumption of payment by the employee is applied unless the expatriate individual notifies the ministry that he or she is not making such payments abroad and wishes to pay his or her contributions in Kurdistan.
Not surprisingly, very few employers (if any) register their expatriate employees for the purposes of making the contributions, although there appears to be no legislative justification for this. Companies employing expatriate employees are advised to anticipate any change in this practice, which is not subject to any published regulation or statute and which may take place at any time and without notice.
(1) The Pension and Social Security Law is applicable to all Iraqi employees, except employees that are covered by laws and regulations of their own pensions (eg, lawyers and engineers), and to which the government or professional syndicate contributes funding.
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Thomas W Donovan