Thinking beyond borders
Business travelers are likely to be taxed on employment income relating to their period of stay in Afghanistan. Employees commonly exercising authority to conclude contracts in Afghanistan may potentially create a permanent establishment (PE). Companies should take care of work permit and work visa for their assignees in Afghanistan.
An individual is taxed in Afghanistan on the basis of his/her residential status under the current Income Tax Law. Residential status is determined on the basis of physical presence of the individual in Afghanistan during a particular tax year (22 December to 21 December of the following year). Additionally, individuals having principal home in Afghanistan or officials of the Afghan Government serving abroad are also considered Afghan tax residents.
Taxation varies based on the residency status of the individual in a financial year as given below:
Salary for employment exercised in Afghanistan is deemed to accrue in Afghanistan and hence, is taxable in Afghanistan irrespective of the place of receipt and residential status of the employee. However, salaries of expatriate employees working on projects funded or contracted by USAID, US Military/Department of Defense or NATO/ISAF are exempt from taxes in Afghanistan by virtue of certain bilateral agreements.
Salary for employment exercised in Afghanistan is deemed to accrue in Afghanistan and hence, is taxable in Afghanistan for all individuals, irrespective of the place of receipt and residential status; subject to the exemption allowed under any bilateral or multilateral agreement. Salary entitlements paid for leave periods during the assignment in Afghanistan, in line with an individual’s employment contract, are also taxable in Afghanistan.
As mentioned above, salary income arising from exercise of employment in Afghanistan is taxable in Afghanistan irrespective of the length of stay and place of payment; except where exemptions apply under a bilateral treaty.
The law does not provide for tax residency certificate and currently no such procedure is in place.
The following categories of individual’s income are taxable in Afghanistan:
Income from all categories is clubbed and taxed in aggregate as no classification of different heads of income has been provided for in the law.
Individual are taxed with graduated rates ranging from 2% to 20% based on the quantum of income as tabulated below:
Currently, there is no social security scheme in Afghanistan and hence no contributions are required on this account.
Assignees should apply for tax registration number (Tax Identification Number – ‘TIN’) on their arrival in Afghanistan. TIN can be obtained from Afghanistan Revenue Department by submitting all relevant information in the prescribed application form.
All individuals deriving salary income exceeding AFN 5,000 per month are liable to pay tax which is withheld at source by the employer and is required to be paid to the Government account within 10 days of such deduction after the end of month in which such salary is disbursed. Delay in tax payment attracts penalty at the rate of 0.1 per cent per day. Individuals having single source of income from salary on which tax is deducted and paid on prescribed rates are not required to file annual income tax return.
Individuals other than salaried persons whose income exceeds the maximum annual amount not chargeable to tax (AFN 60,000), are required to file annual return of income for the respective financial year within three months after the end of financial year (ending 21 December).
The tax administration has the authority to extend the time limitation for filing of tax return by three month on basis of reasonable grounds. Where a taxpayer files a return after the due date, additional tax is levied at AFN 100 per day for each day of delay in filing.
As per Afghanistan income tax law, any person responsible for payment of salary is required to withhold tax on prescribed rates on salary paid to the employees.
The tax deducted must be deposited with the government within ten days from the end of the month in which the payment is made.
A statement of salary and tax payment should be issued to the employee within one month after the end of financial year.
The employer must also submit a monthly statement (tax deposit form) in the prescribed form to the tax authorities.
Tourist visa for a period of three months with single entry can be obtained from Afghan embassy or consulate in any country. Tourists are however, not allowed to engage in any employment within Afghanistan.
According to the visa policy announced in 2014, NATO/ISAF and US Military contractors and their employees are issued one year visa allowing multiple entries. The extended one year visa is also issued to potential business persons and investors of large corporations.
A visa must be obtained before the individual enters Afghanistan. The type of visa required will depend on the purpose of the individual’s entry into Afghanistan. Tourist will obtain visit visa (single entry). Employee will initially obtain single entry visa and then can apply multiple entry visa on arrival. Businessmen can obtain multiple entry visa. Every foreign national arriving on a visa to Afghanistan must ensure that the individual is registered with Ministry of Interior.
Employees are essentially required to obtain work permit on a fee of AFN 10,000 (2015). The work permit is valid for one year and can be renewed every year.
Afghanistan has not signed any treaty for avoidance of double taxation and fiscal evasion with any country till this date (2015).
Employees vested with authority to conclude contracts, obtain purchase orders, or maintain stocks of goods and merchandise will expose the foreign company as permanent establishment in Afghanistan.
Other exposures are created through establishment of branch, office, factory, workshop, warehouse, installations, assembly, mines, query, permanent sales exhibition, subsidiary under the control or management of the foreign country directly or indirectly.
Currently, no GST/VAT is applicable. A similar tax (business receipt tax) on the gross revenue in direct form is in force. The rate ranges from 2% to 10%.
Afghanistan has a transfer pricing provision in the income tax law. A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction; in other words, a cross-border benefit is provided. This will also depend upon the nature and complexity of the services performed.
Currently, there are no data privacy laws in Afghanistan.
All local and expatriates working with any organization or doing his/her own business in Afghanistan may open, hold, and maintain a foreign currency account with any bank in Afghanistan or outside Afghanistan and receive the whole of his/her income from salary, business or other legal sources.
Foreign residents can remit the whole salary or other income received in Afghanistan to any overseas account without any restriction.
As businesses become increasingly global, we have witnessed a dramatic rise in the number of business travelers now working in foreign jurisdictions.