Taxes

In 2009 the Government of the Islamic Republic of Afghanistan has finalized and introduced the modernised tax regime, which is based on international standards.
http://mom.gov.af/en/page/3994

Essential information for investor’s on taxes in the mining sector, are as follows:

 

General Information for taxpayers


Corporate Tax Law

Art. 4 of the Income Tax Law obliges every legal entity in Afghanistan, such as corporations, limited liability companies and certain types of partnerships, to pay a flat tax of 20% of net taxable income.
Net taxable income is computed by deducting all ordinary and necessary business expenses from the gross income.

 

Wage withholding

According to Art. 58 (1) of the Income Tax Law, employers with two or more employees are required to withhold tax from the salaries/wages of their employees, based on the rates in Art. 4 (3) of the Income Tax Law.
These rates are pro-rated based on the frequency of payment (monthly, weekly, etc.). Wage/salary earners with only one employer and no other sources of income are not required to file an annual tax declaration. A wage earner who has more than one employer or additional sources of income must file an annual income tax declaration.

 

Income Tax for Sole Proprietors

Sole Proprietors or Self-employed individuals must file a tax declaration, and are allowed to deduct all ordinary and necessary business expenses to compute net taxable income. Tax at the 10% and 20% rates is then computed on net taxable income above 150,000 and 1,200,000 Afghanis per year, respectively. This is the same tax-free threshold given to wage earners as in Art. 4 (3) of the Income Tax Law.

 

Withholding Tax on Rental Services

In case of requiring rental facilities to fulfill mining activities, legal entity tenants and natural person tenants conducting business at the rented property, and paying rent between 10,000 and 100,000 Afghanis per month are required to withhold the tax of 10% at the time the rent is paid.  Where a rent is more than 100,000 Afghanis, the tax will be 15%. This is a pre-payment of landlords' income tax. The landlord is responsible for reporting rental income on his annual income tax declaration. Ordinary and necessary expenses of maintaining rental property are allowable as deductions against rental income.


QEIT (Qualifying Extractive Industry Taxpayers)

The mining sector is a very special and important sector to the Government of Afghanistan. Due to this importance the law has been adapted in many areas with regard to this sector.

The Income Tax Law has a complete chapter referred to the extractive industry. It describes the taxation rules for QEIT. Art. 77 (1) of chapter 12 of the Income Tax Law defines the addressees of these rules:

  1. a “hydrocarbons Contract” means an Exploration Contract or Service Contract described in any applicable law affecting hydrocarbons in Afghanistan. Hydrocarbons are petroleum, gas, and other derivatives therefrom
  2. a “Mining Authorization” is a permission letter that is issued by Ministry of Mines in accordance with the Mineral Law, for exploration of quarries, constant utilization of quarries, utilization of previously explored idle materials, professional utilization, business, process, transfer, and processing of minerals
  3. A “Mining License” is a document issued in accordance with the Mines Law for exploration or utilization of mines.

 

Business Receipts Tax

The business receipts tax imposed under Art. 64 of the Income Tax Law shall not apply to:

Receipts of a QEIT from the sale of mineral substances (as defined in Minerals Law) that are subject to a mining license or mining authorization;

  • Receipts of a QEIT from the sale of hydrocarbons that are subject to a hydrocarbons contract or;
  • Receipts of a QEIT from the sale or transfer of a mining license or mining authorization or a hydrocarbons contract.

 

Deduction

The Income Tax Law provides investors, who are identified as QEIT’s, to deduct following incurred expenses:

  • Expenses to acquire a QEIT asset (other than a building or rights to occupy a building); Lesser than 5 years and effective life of the asset
  • Expenses to construct or acquire a QEIT asset that is a building or a right to occupy a building; 15 years
  • Expenses to acquire a mining authorization, mining license or hydrocarbon contract; Over the period which the authorization, license or contract applies
  • Expenses for road construction to carry on the business that is subject to a mining license, mining authorization or hydrocarbon contract; 15 years

 

Pre-Production Costs

Deduction of expenses, which are incurred by a QEIT prior to commencing commercial production of minerals over the pre-production cost recovery period:

  • For mining licenses and mining authorization, lesser than 15 years and the remaining years of the license or authorization
  • For hydrocarbon contracts, the number of the years remaining in the contract

Expenses in respect of environmental and social obligations under Art. 82 of the Minerals Law may be deducted from the taxable income in the amount that is required to be paid for the obligations.

 

Loss carry-forward and stability agreements

Loss-carry-forward

Where the deduction of a net operating loss by corporations or limited liability companies is limited to three years, the taxation rules for extractive industry taxpayers allows the holder of mining rights to deduct the loss of the taxable income each year, until the loss is fully set off.

 

Stability

The Income Tax Law provides a fiscal stability, where the QEIT has agreed in writing that taxable income of QEIT shall be 30% instead of 20%. The provision of this stability agreement applies for a period of:

  1. 5 years, in the case of a QEIT holding a mining Authorization, commencing with the year in which the QEIT begins to hold the Authorization;
  2. 8 years, in the case of a QEIT holding a mining License, commencing with the year in which the QEIT begins to hold the License; or
  3. The period of the hydrocarbons Contract, in the case of a QEIT that is party to a hydrocarbons Contract.