Afghanistan's push to tax U.S. contractors could renew tensions

Continued photo coverage from the front lines of the U.S., Afghan and NATO military effort in Afghanistan.
Washington Post Staff Writers
Monday, January 17, 2011; 12:48 AM

The Afghan government is ramping up efforts to tax U.S. contractors operating there - an effort that could raise millions for the cash-strapped government but could also provoke fresh confrontation with the United States, according to U.S. and Afghan officials.

Taxation of U.S. government assistance is barred by U.S. law, as well as by a number of bilateral accords between Afghanistan and the United States. But the wording in the documents is vague, and the two governments disagree on what "tax-exempt" means.

Non-Afghan contractors who have recently received tax bills for work done under U.S. government programs say they have appealed to the Defense and State departments to clarify the matter with the Afghans. But they have been told simply to ignore the bills and "stand up for our rights," said one official of an American company that has multiple U.S defense contracts in Afghanistan.

The Afghan government says no clarification is needed. It has started to send out what it says are overdue tax bills and has threatened some U.S. companies with arrests, loss of licenses and confiscation of aid goods.

"I don't need any new plan [to require a] foreign company to pay tax," Afghan Finance Minister Omar Zakhilwal said in a text message in response to questions. "Whatever is not exempted by law and treaties will not be exempted." Afghanistan, he said, is "serious against tax evasion."

The simmering controversy is the latest in a series of run-ins between the Afghan government and the U.S.-led coalition that spends up to $10 billion a year on private contractors in Afghanistan, more than five times the $1.8 billion in total revenue the Afghan government expects to take in by the end of the fiscal year in March.

The most recent public disagreement, over the fate of private security companies, remains unresolved.

Earlier this month, President Hamid Karzai approved a plan to require all new foreign development projects to employ government security guards rather than those from private Afghan and foreign companies. But the government guards - known as the Afghan Public Protection Force - still don't exist except on paper. NATO's new development projects would require an estimated 25,000 guards.

'Issue for quite a while'

The Afghan government has long urged foreign donors to funnel their billions through government ministries, rather than paying for projects directly to contractors. Karzai has regularly complained about what he calls "parallel structures," such as the coalition-run provincial reconstruction teams, which dole out vast sums to build roads, dams or other projects that are not always aligned with Afghan priorities.

The effort to collect more taxes appears in line with other attempts by the government to assert more control as well as feed its feeble coffers.

As part of its anti-corruption efforts, the Obama administration certifies Afghan ministries as eligible to receive direct funding. Only a handful of about two dozen ministries have received certification.

The tax question "has been an issue for quite a while," a senior Afghan official said, but only in the past several months has the government become aggressive. One prominent Afghan businessman, familiar with the government's intentions, saw it as yet another intentional confrontation with the West and said it could become a "bombshell" in relations with the United States.

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