Do Foreign Contractors Pay Tax in Iraq? Withholding, Rates and Tax Clearance

Short answer: yes, in most cases. A foreign company performing a contract in Iraq is treated as trading in Iraq and pays Iraqi income tax on that income, normally 15%, or 35% in the oil and gas sector. The tax is collected along the way: the Iraqi contracting entity withholds a percentage from each payment and sends it to the General Commission of Taxes, and the final payment, retentions and guarantees are held until the Commission confirms the contractor is clear. The rules are in Instructions No. 2 of 2008 on the tax treatment of contracts between Iraqi and foreign contracting parties, issued under Income Tax Law No. 113 of 1982 and published in Al-Waqa’i al-Iraqiyya issue 4084 on 25 August 2008.

Trading in Iraq or trading with Iraq

The 2008 instructions draw the line that decides whether Iraqi tax applies at all. Trading in Iraq is taxable. Trading with Iraq is not.

Under Article 1, a contract with an Iraqi contracting party counts as trading in Iraq, wherever the goods are delivered, in any of these cases:

• The foreign company has a branch or representative office in Iraq that signed or performed the contract.
• The contract was signed abroad but its formalities, such as the letter of credit, shipping documents and customs clearance, were completed in the foreign company’s name.
• Any part of the price is paid inside Iraq, in any currency.
• The price is paid by barter.
• A resident of Iraq is authorised to sign and perform the contract for the foreign company.
• The contract includes work inside Iraq such as installation, supervision, maintenance or engineering, whether in the same contract or a separate one.
• The contract covers expertise or services delivered inside Iraq, including the pay of experts and workers, even if they are paid abroad.

Under Article 2, a supply contract signed and concluded abroad, with the formalities completed in the Iraqi party’s name, is trading with Iraq and is not taxed, and so are services such as inspection or consultancy performed outside Iraq. If a branch exists but took no part in the contract, tax is limited to the commission or fees earned by the branch or agent. Under Article 12 the Commission decides which side of the line a contract falls on, and its decision can be challenged before the tax courts.

The rates

• General rate: companies pay 15% under the Income Tax Law. In practice the Commission often assesses on a deemed profit, a set percentage of contract revenue fixed in its annual controls, and applies whichever result is higher.
• Oil and gas: Law No. 19 of 2010, published in Al-Waqa’i al-Iraqiyya issue 4148 on 15 March 2010, imposes 35% on income earned in Iraq from contracts with foreign oil companies, their branches and offices, and their subcontractors in oil and gas production and related industries. Foreign oil companies withhold from their own contractors at rates set in the implementing instructions, commonly reported as 7% on oil contracts and 3.3% on other contracts.

How withholding works

1. Register first. For contracts of IQD 5 million or more, the Iraqi contracting entity must ask the contractor for proof of registration with the Commission, and this is a condition of the contract. The entity then sends the Commission a copy of the award (Article 3).
2. Withholding from every payment. The entity deducts the percentage the Commission sets each year from every advance and payment to Iraqi and foreign contractors under taxable contracts, and transfers it to the Commission (Article 4).
3. Main contractors withhold too. A main contractor must withhold from its subcontractors and suppliers, and those amounts are treated as a government debt owed by the main contractor whether or not it actually deducted them. A contractor leaving Iraq must pay over everything it withheld before it goes (Article 4).
4. The final payment waits for clearance. The last payment and final account are not released without written approval from the Commission within 180 days of completion. If the contractor does not obtain clearance in time, the entity transfers all remaining amounts due to it straight to the Commission (Article 4).

Tax clearance controls your money

Article 6 is the provision foreign contractors feel most. No Iraqi contracting entity may issue a clearance certificate, return retentions, release a performance guarantee or settle the final account without the Commission’s approval, even where the contractor is exempt from tax. The Commission in turn will not clear a main contractor until it has paid all amounts withheld or due from its subcontractors and the tax on its employees’ salaries. In practice the clearance certificate (براءة ذمة) is what stands between a finished project and the last of your money.

Mistakes we see most often

• Pricing a contract on the assumption that withholding is the whole tax, when it is a payment on account against the final assessment.
• Doing installation or commissioning work in Iraq under a supply contract that was meant to stay offshore.
• Not withholding from Iraqi subcontractors, then finding the debt sits with the main contractor anyway.
• Leaving tax clearance until after demobilisation, when the retentions and the performance guarantee are already locked.
• Relying on the Commission’s older estimation controls without checking which set is current.

This article covers federal Iraq. The Kurdistan Region has its own withholding rules, and the planned national tax reform may change rates, so check the current position before you price.

How Iraq Gate helps

Iraq Gate Legal Consulting is a Baghdad law firm whose lawyers are admitted to the Iraqi Bar Association. We review whether a contract is trading in or with Iraq before you sign, structure supply and service scopes, handle registration with the General Commission of Taxes, and follow tax clearance through to the release of retentions and guarantees. If you are setting up in Iraq, see our guide on how to register a foreign company branch in Iraq and our Iraq legal FAQ. This guide is also available in Arabic.

Sources: Instructions No. 2 of 2008 on the Tax Treatment of Contracts between Iraqi and Foreign Contracting Parties, Al-Waqa’i al-Iraqiyya issue 4084 (25 August 2008); Law No. 19 of 2010 Imposing Income Tax on Foreign Oil Companies Contracted to Work in Iraq, Al-Waqa’i al-Iraqiyya issue 4148 (15 March 2010); Income Tax Law No. 113 of 1982 as amended; General Commission of Taxes. This article is general information, not legal or tax advice.

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