The Agreement between NATO and the Islamic Republic of Afghanistan on the Status of NATO Forces and NATO Personnel (“SOFA’) and the Security and Defense Cooperation Agreement between the United States of America and the Islamic Republic of Afghanistan (“Bilateral Security Agreement” or “BSA”), both of which became effective on January 1, 2015, clarified the tax status of defense contractors and their employees. Legacy Tax issues refer to disputes that arose between the United States and NATO defense contractors prior to January 1, 2015.
This Diplomatic Note emphasizes in accordance with Article 15 of the SOFA and Article 17 of the BSA, defense contractors who are non-Afghan entities and their employees do not reside in Afghanistan and are not subject to taxation in Afghanistan. Previously, disagreements had arisen as to whether the tax exemptions applied only to prime contractors and their employees, or whether the exemptions extended to subcontractors as well.
The Diplomatic Note outlines the following points of agreement:
- The United States and NATO prime and subcontractors, as well as their employees, are exempt from all types of taxation under the Afghan law on the activities from January 2002 through January 2015. However, it does not exempt the penalties for late filing of any forms of tax clearance.
- Afghanistan Revenue Department shall discontinue any efforts to collect Legacy Taxes from contractors or their employees.
- The exemptions are not applicable to prime contractors, subcontractors, and their employees who already paid their taxes prior to the approval of the Diplomatic Note.
- All the restrictions imposed by the government agencies of Afghanistan, including placement of contractors on the “no-fly” list and restrictions on their assets, are suspended.