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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.

Most government and contractor officials who agreed to discuss the taxation situation refused to speak on the record about what they described as a subject of growing tension.

"Many companies, especially if there are agreements with USAID or ISAF or donors, they are not paying taxes," said Ahmad Shah Zamanzai, director general of revenue for the Finance Ministry. "Companies profit, why don't they pay tax for the profit they make? We don't tax the donation," he said, "we tax the company that is gaining from this donation."

Zamanzai said the government has drafted a plan to regularize rules for all donor countries, based on an analysis by the British consulting firm Adam Smith International. He said he expects the ministry to approve the plan by the end of the month.

In the meantime, the government's current focus appears to be on subcontractors - those hired by the major or "prime" contractors who have signed agreements directly with the United States or other donor governments. The "primes" contract the "subs" for specific tasks and "there is no contract of any magnitude that doesn't have a bevy of subs," the company official said.

The government's position is that the various accords regulating the foreign presence in Afghanistan, including taxation, do not cover anyone without a direct government contract. According to a recent Finance Ministry letter to primes on the taxation issue, "a contractor can only be identified as a U.S. government contractor if there is a legally binding agreement between this person and the U.S. Government." Subs are not exempt, the government asserts, because their contracts are with the primes.

The accords themselves are overlapping and incomplete, reflecting the initial ad hoc nature of the U.S. presence in Afghanistan. They include a "military technical agreement" signed in January 2002 between the then-interim government of Afghanistan and the NATO International Security Assistance Force, or ISAF, authorized by the United Nations.

U.S. forces have also been governed by a series of U.S.-Afghan diplomatic notes signed in 2002, 2003 and 2006. USAID has also issued regular notices to U.S. contractors confirming their tax-exempt status.

All use different wording to outline the tax situation. Some refer to contractors, while others mention goods and services funded by the United States. None directly mention subcontractors.

The Defense Department, in response to questions, said that its interpretation of the 2002 and 2003 agreements is that they provide tax exemptions "to both prime and subcontractors, even though the word 'subcontractor' does not appear."

USAID issued a similar statement, saying that "typically, we interpret these provisions to apply to any entity funded by USAID, including non-local primes and non-local subs."

Concern about precedent

Taxation has rarely, if ever, been a problem with worldwide U.S. foreign assistance programs, and some officials expressed concern that any possible concessions made in Afghanistan would set a precedent for other recipient countries.

In its 2008 State Department appropriation, Congress mandated that no new aid agreement be signed with any country without unambiguous tax exemption language. The law called on the secretary of state to "expeditiously" renegotiate existing agreements to include such provisions.

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