Expat Taxation in Afghanistan

June 26, 2024

Author: Matt Nissley, CPA

Expatriates who work in Afghanistan, as well as organizations in Afghanistan that employ expats, often struggle to understand and comply with the requirements of the Afghan Income Tax Law regarding the taxation of expat income. This is not surprising given that the law and related guidance on this matter can be confusing and inconsistently enforced. This article seeks to clarify the requirements regarding what income is subject to tax, how that income gets reported, and how the tax is paid. Key reference documents for expat taxation include the Afghanistan Income Tax Law, Taxpayer Guide 5 and 15, and Public Ruling 1384-6.

Residents vs. Non-Residents

Residency Defined

Article 2 of the Afghan Income Tax Law states that a natural person shall be considered a resident of Afghanistan if:

They have their principal home in Afghanistan; OR
The person is present in Afghanistan for 183 days or more in the tax year (the tax year being based on the Afghan calendar – approximately March 21 to March 20).

Counting the days that a person is physically present in Afghanistan is straightforward and in most cases is the defining test for whether an expat is considered a resident for tax purposes. It is theoretically possible for someone to be physically present in Afghanistan less than 183 days yet still be a resident if they have their “principal home” in Afghanistan. However, such a scenario would typically be seen with Afghans citizens who spend more than half their time out of Afghanistan, and would rarely apply to expat situations. Therefore, this article will not spend time reviewing all the criteria for what constitutes a “principal home” – though such criteria can be found in Article 2 of the Afghan Income Tax Manual.

Taxation of Residents and Non-Residents

Now that we know how to distinguish between a resident and non-resident, the next question is: what difference does it make? Here is a summary of what the law says:

Non-Residents
Non-residents of Afghanistan are subject to tax on income derived from:

Afghan sources in country; AND
Afghan sources out of country

Residents
Residents of Afghanistan are subject to tax on income derived from:

Afghan sources in and out of country; AND
Non-Afghan sources

This means that residents of Afghanistan are subject to tax in Afghanistan on their worldwide income. In practice, reporting non-Afghan source revenue to the ARD (Afghanistan Revenue Department) is not commonly seen. While the ARD may enforce this provision with legal entities, it historically has not enforced this provision with expat individuals. If individuals who were residents of Afghanistan reported their non-Afghan source revenue to the ARD, they would also be entitled (as per Article 5 of the Income Tax Law) to claim a credit for foreign income taxes paid to reduce their income tax liability in Afghanistan. The ARD has not provided a clear process by which individual residents of Afghanistan could claim such a credit. Therefore, due to lack of a clear process and historical non-enforcement of reporting worldwide income, the remainder of this article will focus on Afghan source income.

Defining “Afghan Source” Income

The Afghan Income Tax law and related guidance provide different definitions of “Afghan source” income. This has caused confusion for taxpayers and ARD officials alike. The following definitions and examples are taken from the English translation of the relevant documents.

Definition #1

“Afghan sources: The income which is derived by residents of Afghanistan from sources within Afghanistan and from State properties outside Afghanistan.” – Article 2 of the Income Tax Law

The above definition is problematic since it refers to income derived by residents. This confuses the matter, as it should be possible to define “Afghan source” income in a way that applies to non-residents. However, the reference to State properties outside Afghanistan, while somewhat obscure, does provide a plausible explanation for what might be considered an “Afghan source out of country.”

Definition #2

“Afghan source income is defined as any income directly produced in Afghanistan or paid for services provided in Afghanistan regardless of the period over which those services were provided.” – Taxpayer Guide 5

This definition is somewhat more helpful. When applied to expat individuals, this definition seems to indicate that the expat’s income is “Afghan source” for the period that the expat is physically present and working in Afghanistan.

Definition #3

“For salary or wages to be subject to income taxation in Afghanistan, the principal requirement is that its source is in Afghanistan. Salary or wages will have its source in Afghanistan if it is earned or derived in Afghanistan typically from the provision of personal services by an employee who is located in Afghanistan. In that case, it is of no relevance whether the employer or employee is a resident of Afghanistan or not. Similarly, it is of no relevance whether the payment of salary or wages is made from within Afghanistan or not. Further, it is of no relevance whether the receipts of salary or wages by the employee occurs within Afghanistan or not.” – Public Ruling 1384-6, paragraph 6

This definition is also helpful. While it is specific to “salaries and wages” and does not attempt to cover income other than salaries and wages, such income is “Afghan source” if the employee is physically located in Afghanistan. It is also clear that the geographic location of the bank accounts of both employer and employee are irrelevant to whether the income is “Afghan source.”

Example

Paragraph 20.3 of the Afghan Income Tax Manual states the following:

“Salaries, wages, self-employment income, etc. for services performed in Afghanistan are considered to have an Afghan source.

Example: A non-resident individual is employed by a UK company to perform services inside and outside of Afghanistan. The non-resident employee spends approximately 80% of his time during the year in Afghanistan. Thus, 80% of the individual’s salary during the year shall be considered to have an Afghan source. This income will be subject to Afghan income tax unless exempted by a treaty or an agreement with the State.”

This example is clear that the salary of a non-resident employee is “Afghan source” only for the period that the person is physically present in Afghanistan. This is consistent with the two previous definitions provided above. However, this example is also internally inconsistent, because it refers to a person who spends 80% of their time in Afghanistan as a non-resident, while we know from Article 2 that anyone who spends 183+ days in country in a year is considered a resident.

Determination of “Afghan Source” on Wage Income vs. Other Types of Income

Up to this point, the material covered seems to generally indicate that expat wage income is “Afghan source” only when an expat individual is physically working in Afghanistan. However, many ARD officials, tax auditors in particular, often take the stance that income is “Afghan source” if the employer that pays the salary is in Afghanistan or provides goods or services in Afghanistan.

Article 7 of the Income Tax Law says the following:

“Non-residents payment of tax and allowable deductions (1) Nonresident natural and legal persons not engaged in trade or business are subject to income tax on the amount received from sources within Afghanistan from interest, dividends, rents, royalties, and any other income according to the provisions of this Law.”

Interestingly, the text above does not specifically mention salaries and wages, though it could be interpreted that “any other income” would include salary and wages. It is clear, however, that income from interest, dividends, rents, and royalties is subject to Afghan income tax if the source of such income is within Afghanistan, even if the person receiving the income is a non-resident outside of Afghanistan. This is further supported by paragraphs 20.1, 20.2, and 20.4 of the Income Tax Manual, which say that if the banks that pay interest are in Afghanistan, the companies that pay dividends are in Afghanistan, and the properties which generate rent income are in Afghanistan, such income is Afghan source and therefore subject to tax regardless of the location of those who receive the income.

Paragraph 20.3 of the Income Tax Manual (previously quoted above) on salaries and wages seems at first glance to be an exceptional case when compared to interest, dividends, and rent, whereby the primary factor that determines whether the wage income is “Afghan source” is the physical location of the employee, rather than the physical location of the employer that pays the salary. A more careful reading, however, reveals that the determination of the “source” of wage income is in fact entirely consistent with that of interest, dividends, and rent, because it is the employee’s labor that is the source of the wage income, not the employer that pays the salary.

While a careful reading of the law and related guidance seems to indicate that non-resident employees are subject to Afghan income tax on their wage income only for the time they are physically present in Afghanistan, the above analysis shows why the matter can be confusing and may help the reader to understand the perspective of ARD officials who often have a different understanding.

Withholding Requirements for Employers of Expats

It is worth examining the wage withholding requirements for organizations that employ expats. It is theoretically possible that an employer could be required to withhold tax even if the relevant employee is not subject to income tax. Paragraph 7.1 of the Income Tax Manual states the following:

“Certain amounts received by a non-resident are subject to withholding under Article 46 of the Income Tax Law. This withholding does not establish the taxpayer’s liability under the Income Tax Law, however.

Example: Feroz is an individual that is resident in Canada. Feroz receives Afs. 50,000 interest income from an Afghan corporation. The interest income is subject to 20% withholding under Article 46 of the Income Tax Law. Because Feroz earned less than Afs. 60,000 during the year, Feroz is not subject to tax in Afghanistan under Article 4 (Afs. 5,000 per month x 12 months = Afs. 60,000). Feroz can file an income tax return and claim a refund for the Afs. 10,000 that was withheld.”

The above example illustrates a situation in which a non-resident of Afghanistan is subject to Afghanistan withholding tax despite not being liable for Afghan income tax. In practice, however, this example is a bit far-fetched because it is unrealistic to expect that this non-resident will file a personal income tax return in Afghanistan. It is even more unrealistic to expect that the non-resident would be able to claim a refund for taxes withheld (anecdotally, the ARD never issues cash refunds).

As covered in Quest’s guide to payroll tax in Afghanistan, employers that employ two or more employees in a month are required to withhold wage tax from the payment of salaries and remit the wage withholding tax to the ARD (Afghanistan Revenue Department) within 10 days after the end of the month in which the wages were paid. The Income Tax Manual provides no distinction between resident and non-resident employees for these wage withholding requirements. However, Tax Guide 5 says the following:

“All resident and non-resident employees working in Afghanistan whose salaries and wages exceed the tax threshold of 5000 afghanis (or equivalent in foreign currency) per month or equivalent prorated amounts for those paid on alternate payroll periods [are subject to wage withholding]. Non-resident employees are exempt from withholding if their home country provides the same exemption to residents of Afghanistan. Resident and non-resident employees of foreign governments and international organizations are subject to tax based on existing agreements, treaties, or protocols with the State.”

The text above seems to indicate that wage withholding is required only for those employees who are working in Afghanistan.

Let us now look at one more text from Tax Guide 5:

“Example 1: Joe Brown is a resident of the United Kingdom where he maintains his principal home.

Example 2: Abdul Nasri is an Afghan national who lives in Dubai. He spent three months in Kabul working for the same British firm as Mr. Brown. Since he does not maintain his principal home in Afghanistan, was not in the country for at least 183 days, and is not an employee of the Afghan government, he is considered a non-resident. However, his wages for work in Afghanistan are considered Afghan-source income and subject to tax. The British firm is required to withhold tax on his wages and pay the tax to the Afghan government.”

Example 2 above presumably means that the British firm is required to withhold tax only on the three months of wages for which the employee was working in Afghanistan.

Case Study #1

A local Afghan entity employs a remote worker who is based in Indonesia. The remote worker is a citizen of Indonesia and performs all work for the local Afghan entity from Indonesia. Is the remote employee subject to Afghan income tax, and should the Afghan entity withhold wage tax from the payment of salary?

Taking all previous analysis into account, it seems clear that the salary of the Indonesian employee is not “Afghan source” since the employee spends no time in Afghanistan. Therefore, the salary income is not subject to Afghan income tax. Further, while the Income Tax Manual itself does not make any exception to the requirement for employers to withhold wage tax for the payment of salary to employees, Tax Guide 5 does seem to indicate that wage withholding is not required for employees located outside of Afghanistan.

It should be noted, however, that the default expectation of some ARD officials is that all salary expense on the accounting records of the Afghan entity should be subject to wage withholding tax. Therefore, the Afghan entity should be prepared to rigorously defend its position based on the text of the law and related guidance.

Case Study #2

An NGO based in the UK is registered with the Ministry of Economy in Afghanistan as an international NGO. The HQ office in the UK employs a British citizen to provide full-time support to the project work in Afghanistan. The British employee travels to Afghanistan for three weeks every quarter but spends the rest of the time in the UK supporting the project work remotely. The HQ office pays the related salary from its UK bank account to the employee’s UK bank account, with the full amount of the salary being subject to UK withholding taxes. Is the British employee subject to Afghan income tax, and should the Afghan entity withhold Afghan wage tax from the payment of salary?

The British employee is not a resident of Afghanistan for tax purposes since the total time in Afghanistan is less than 183 days per year. However, even as a non-resident, the British employee is subject to Afghan income tax for the three weeks of every quarter spent in Afghanistan. The NGO’s office in Afghanistan should remit wage withholding tax to the ARD on the portion of the British employee’s salary that relates to time spent working in Afghanistan.

From an accounting perspective, IFRS (International Financial Reporting Standards) would require that 100% of the British employee’s salary be recorded on the books of the local NGO in Afghanistan, since all work performed is in support of the project in Afghanistan. If the NGO takes this approach to the accounting records, the fact that 100% of the salary is recorded on the local accounting records but Afghan tax is paid on only 25% (approximately) of that salary expense, the NGO will again need to be prepared to defend this approach to the ARD. If the NGO decides not to record any of the salary expense on the local NGO’s accounting records (or only the portion of salary expense upon which Afghan income tax was paid), this would likely make the case much easier to defend to the Afghan authorities, though the accounting records of the local NGO may not conform to the requirements of IFRS.

Case Study #3

A business based in the United States maintains a branch office registration in Afghanistan with CBR (the Central Business Registry) under the Ministry of Commerce and Industry. The HQ office in the United States employes an American citizen to work full-time on a project based in Afghanistan. The American employee spends approximately eight months per year in Afghanistan. The HQ office pays the related salary from its U.S. bank account to the employee’s U.S. bank account, with the full amount of the salary being subject to U.S. withholding taxes.

The American employee is subject to Afghan income tax on 100% of the wage income due to being classified as a resident of Afghanistan. The business’ branch office in Afghanistan should remit wage withholding tax to the ARD on the full amount of the salary, even when the expat employee is traveling out of Afghanistan.

Tax Rates & Filing Requirements

Expat Employees

The annual income tax rates in Afghanistan for natural persons are progressive in nature as per the following table:

Taxable Income	Rate	Tax
AFN 0 to 60,000	0%	0%
AFN 60,000 to 150,000	2%	2% of the amount over AFN 60,000
AFN 150,000 to 1,200,000	10%	AFN 1,800 + 10% of the amount over AFN 150,000
Over AFN 1,200,000	20%	AFN 106,800 + 20% of the amount over AFN 1,200,000

When determining the amount of taxable wage income for an expat, we have already carefully examined the requirements for non-residents vs. residents and what income is “Afghan source.” The requirements can be briefly summarized as follows:

For expat employees who are residents of Afghanistan, all wages are subject to Afghan income tax, even for the periods of time when the expats are out of country
For expat employees who are non-residents of Afghanistan, all wages earned while they are physically present in Afghanistan are subject to Afghan income tax.

It is also important to determine what exactly constitutes salary and wages to determine a taxable amount. Please refer to the “Taxation of Expat Employee Benefits” section below.

If an expat has only one employer and no other sources of taxable income during the tax year and the employer withholds and remits the required amount of salary tax, the expat is not required to file a personal income tax return in Afghanistan. But if the employer does not withhold the correct amount of tax, or if the expat is employed by two or more organizations during the year, the expat is technically required to file a personal income tax return for the year as per Articles 63 and 88 of the Income Tax Law. Article 88, paragraph 3, states “Resident and non-resident persons who intend to leave Afghanistan before the due date for payment of their tax shall be required to file their tax returns and pay the tax due two weeks before leaving Afghanistan.”

However, it should be noted that the ARD has never enforced the requirement for individuals (expat or Afghan) to file personal income tax returns in such situations, and there is not a well-established process in place to do so (though it may be possible for those who try very hard).

Expat Contractors

An “expat contractor” in the context of Afghanistan is an expat who works under a consultancy contract rather than an employment contract and does not have an official business license from an Afghan governmental institution.

From the perspective of the Afghan Tax Law, a contractor is a natural person engaging in business activities. One major implication of this is that consultants who work outside of Afghanistan for a project located inside Afghanistan are subject to Afghan income tax (or fixed tax – see below) because they are considered to be a business delivering services inside Afghanistan. This tax treatment is very different than an employee based outside of Afghanistan working for a project located in Afghanistan, because, as previously determined, such employee is only subject to Afghan income tax for the time they are physically present in Afghanistan. Organizations that hire remote consultants to do consulting work for projects in Afghanistan must withhold 7% contractor tax from payment to these consultants, even if the consultants do not spend a single day in Afghanistan. Please refer to Quest’s guide to contractor tax in Afghanistan for more information.

Now that we have established that expat contractors are subject to Afghan tax on all income earned related to activity in Afghanistan, regardless of their physical location, the next question is how does that income get taxed? There is one theoretical answer and a different practical answer to this question.

In theory, according to the technical specifications of the law, the income of an expat contractor should be taxed as follows:

If contractor tax is not withheld from payment to the expat contractor, the contractor is subject to tax as follows:
1. If the contractor’s annual income is between AFN 500,000-3,000,000, the contractor must pay “fixed tax” of 3% on gross income on a quarterly basis.¹
2. If the contractor’s annual income is greater than AFN 3,000,000, the contractor must pay:
  - 4% BRT (business receipts tax) on gross income via quarterly business receipt tax returns, plus;
  - Income tax on net income at the income tax rates for natural persons mentioned in Article 4 of the Income Tax Law (shown in the previous table), via an annual personal income tax return.
If 7% contractor tax is withheld from payment to the expat contractor as per Article 72 of the Income Tax Law, this tax withholding satisfies the contractor’s income tax liability, and the contractor has no further tax obligations.

In practice, as previously noted, the ARD has never enforced the requirement for individuals to file personal tax returns. Therefore, the only way expat contractors typically pay tax in Afghanistan is via the 7% contractor tax which is withheld and remitted by the entity that pays the contractors.

One final word of caution. Organizations may be tempted to classify full-time expat workers (or even Afghan nationals for that matter) as “contractors” rather than “employees” because the tax withholding rates are lower for contractors than employees. However, the law does not permit organizations to make this classification based on the most favorable tax rate. Rather, the Income Tax Law along with Public Ruling 1385-5 provide clear guidelines on how to make this determination. Please see Quest’s previous post “How to differentiate between employee and independent contractor” for more information.

Expat Business Owners

Businesses licensed by an Afghan government institution and owned by expats are subject to the full requirements of the Afghanistan Income Tax Law and Tax Administration Law related to business taxation. All business income is subject to Afghan income tax regardless of whether the expat is a resident or non-resident and regardless of where the expat is physically located during the year. This is because the business itself is in Afghanistan, and therefore all income from the business is “Afghan source.”

This article will not provide an in-depth guide to business taxation in Afghanistan, but a short summary is as follows:

A business receipts tax (BRT) return must be filed every quarter, even if there is no activity during the quarter. The BRT rate is 4% on gross income for most industries, though the BRT rate is higher for those businesses working in the airlines, telecommunications, and hospitality industries.
An annual income tax return must be filed every year, even if there is no activity during the year. The annual income tax rate is 20% of net income. Annual tax clearance letters must be obtained.
Businesses must adhere to all tax withholding requirements, including wage, contractor, rent, dividend, and interest withholding tax.

Taxation of Expat Employee Benefits

When determining the amount of an expat employee’s taxable wages, all salary and related benefits should be considered. For more information, please refer to the section titled “What Constitutes Salary and Wages” in Quest’s previous article on payroll tax in Afghanistan. The general rule is that benefits that are part of an overall compensation package are considered to be included in taxable wages, though there are some exceptions. In this section we will briefly examine various types of benefits that are often seen in expat compensation packages that were not explicitly covered in the previously linked article:

Health Insurance. Article 19(1)5 of the Income Tax Law says that the “cost of life, accident, health, and liability insurance for the protection of the taxpayer and their family” is a personal expense and shall not be deductible. This means that health insurance premiums paid by the employer on behalf of an expat employee are part of taxable wages to the employee from an Afghan tax perspective. Any insurance proceeds or benefits received from the insurance company, however, are not subject to Afghan income tax as per Paragraph 14.4 of the Income Tax Manual which states “Payment received from an insurance company as a result of loss, misfortune, sickness, etc. against which the recipient was insured is not taxable.”
Retirement contributions. Employer contributions to an expat employee’s retirement account are considered part of taxable wages from an Afghan tax perspective. While there may be certain tax benefits to retirement contributions in an expat’s home country, no such beneficial tax treatment exists in Afghanistan.
R&R (Rest & Recuperation). This one is tricky and ultimately boils down to whether the R&R is a reward for services or a business necessity to enable expat employees to continue working in a stressful context like Afghanistan. R&R is not paid leave (which is a reward for services), but rather something provided only to expat employees who work in contexts which are significantly more dangerous or stressful than their home countries. Quest believes there is a strong argument that R&R costs, when paid directly by the employer (or reimbursed to the employee based on supporting documentation), should not be considered taxable income to the employee. However, the ARD may take a different position and claim that R&R cannot be differentiated from other forms of paid leave that clearly are a reward for services.
Housing in Afghanistan. If an employer provides housing in Afghanistan to an expat employee, the cost of such housing is generally not considered to be part of the employee’s taxable wages if all rental withholding tax requirements are met on the relevant property and the rent expense is recorded on the employer’s books. While housing is typically considered a personal expense (and would therefore be taxable to the employee if paid by the employer), Paragraph 26 of Public Ruling 1384-6 explicitly notes that if an employee “maintains a home or similar ordinary place of residence and is faced with the need for a second place of residence in Afghanistan to carry out employment responsibilities…the provision of accommodation or the reimbursement of accommodation expenses will not form part of the employee’s salary or wages.” Technically the employee is required to provide proof of having a home or similar ordinary place of residence, but in practice, it seems to be generally accepted that employer-provided housing in Afghanistan for expat employees is not taxable to the employee.
Travel. Similar to the treatment of housing for expat employees, Paragraph 25 of Public Ruling 1384-6 states “provision of airfares [by the employer] to travel to and from employment in Afghanistan or the reimbursement of such expenses where the employee retains an ordinary place of residence outside Afghanistan and will return to the ordinary place of residence when employment services have finished” is not taxable income to the employee. Note that this does not apply to travel for personal purposes that may occur between the start and end date of employment.
Food. Similar to the treatment of housing and travel for an expat employee who has a primary place of residence outside of Afghanistan, the provision of food/meals by the employer to an expat employee in Afghanistan is excluded from taxable income to the employee up to $35/day in Kabul and $25/day in other provinces as per Paragraph 28 of Public Ruling 1384-6.
Children’s schooling. If an employer pays for the cost of schooling for an expat employee’s dependent children, such payment would generally be considered taxable income to the employee. This would definitely be the case when the school attended is the same as it would be if the employee was not employed in Afghanistan. However, if an expat employee’s relocation to Afghanistan for employment purposes also causes the employee’s dependent children to attend a different school, it is possible that the employer provision of such education costs – at least the portion of costs that exceed the cost of education in the employee’s ordinary place of residence – may be excluded from taxable income to the employee in accordance with Paragraphs 32-33 of Public Ruling 1384-6.

For items #3-7 above, please note the importance of the employer directly paying the vendor for such expenses or reimbursing the employee based on supporting documentation. If the employer pays an expat employee an allowance to cover these expenses without requiring the employee to submit supporting documentation of actual expenses incurred, the allowance is considered taxable income to the employee as per Paragraphs 30-31 of Public Ruling 1384-6.

Double Taxation

Expats are understandably concerned that their income not be taxed twice (i.e. both in their home countries and in Afghanistan). The Afghan Tax Law is largely unsympathetic to this concern. Article 5 of the Income Tax Law does contain a provision that if a resident of Afghanistan pays income tax to a foreign government on foreign-earned income (i.e. non-Afghan source income), that foreign income tax paid can be claimed as a credit against the Afghan income tax liability calculated on that foreign-earned income. However, this provision is unhelpful for two reasons. First, the only time in practice that the foreign-earned income of an expat resident of Afghanistan gets reported in Afghanistan is when an employer withholds wage tax from the resident expat employee’s salary when the employee is out of Afghanistan (which is the correct thing for the employer to do). This presents a rather narrow range of income that would be eligible for the Afghan foreign tax credit. Second, as previously noted, there is no actual process in place in the ARD for an expat to claim such foreign tax credit, and it therefore remains a theoretical provision of the law only.

Therefore, if double taxation is to be avoided, it is largely dependent on the tax laws of the expat’s home country. Most countries do not require its non-resident citizens to report their foreign earned income. The United States, on the other hand, requires all its citizens to report worldwide income, but offers the foreign earned income exclusion and foreign tax credit as means to avoid double taxation of foreign-earned income. In most cases, U.S. citizens who have paid income tax in Afghanistan can avoid double taxation if they have a knowledgeable tax professional prepare their U.S. income tax returns.

While the individual circumstances of expats who work in Afghanistan vary greatly, there are certainly some cases where double taxation seems unavoidable. The bottom line is that Afghanistan collects tax in accordance with its law, and whether an expat’s home country taxes the same income is irrelevant to the calculation of the Afghan tax liability.

Tax Exemptions

There are some cases where expats are exempt from taxation in Afghanistan. An overview is provided below, though this overview is not necessarily exhaustive.

Mutual exemptions. Article 6 of the Afghan Income Tax Law states that “Non-resident persons are exempt from income tax…provided that the foreign country grants a similar exemption to the non-resident Afghans of that country.” The example provided in the Income Tax Manual is that of a pilot performing services in an aircraft in the airspace above Afghanistan. This pilot is exempt from Afghan income tax if he/she is not a citizen or resident of Afghanistan, his/her employer is a foreign company or government, and his/her government or employer’s government does not tax Afghans in a comparable situation.
Agreements, Treaties, and Protocols. Article 9 of the Afghan Income Tax Law states “The tax liability of foreign governments, international organizations, and their non-resident employees in Afghanistan on income derived from sources within Afghanistan shall be determined by the provisions of existing agreements, treaties, and protocols with the government of Afghanistan.” Several examples are provided as follows:
1. United Nations. Expat employees of the UN who work in Afghanistan are exempt from Afghan income tax as per the Convention of the Privileges and Immunities of the Members of the United Nations document as adopted by the General Assembly of the United Nations on February 13, 1946.
2. Other bilateral agreements. There are various other bilateral agreements signed between Afghanistan and foreign governments and international institutions that provide tax exemption for expats working in Afghanistan (such as SOAG – the Strategic Objective Grant Agreement under which USAID operates – just to name one example). The position of the ARD is that tax exemptions under such bilateral agreements are not automatic, but rather need to be explicitly confirmed by way of a written tax exemption confirmation letter issued by the ARD for each relevant project contract or funding agreement.
3. Protocols. There are some international organizations in Afghanistan that have directly signed a protocol or MOU with a relevant line ministry regarding its operations in Afghanistan that exempt its expat employees from taxes. If the Ministry of Finance was one of the signers of such a document, Quest believes the exemption to be valid. However, if such document was not signed by the Ministry of Finance, it is quite possible that the Ministry of Finance will not view this as a valid exemption.

The Challenging Case of Secondment Agreements

One of the most challenging situations regarding expat taxation is the case of an expat who works in Afghanistan under a secondment agreement, whereby their actual employer, not located in Afghanistan, temporarily assigns the expat to work for an organization that is in Afghanistan. An example secondment scenario would be where the expat relocates to Afghanistan to carry out the relevant work, the salary of the expat continues to be paid by the original employer that is located outside of Afghanistan (“Org A”), the Afghan visa and work permit of the expat is obtained by the organization in Afghanistan to which the expat is seconded (“Org B”), and Org B does not compensate Org A for the services of the seconded expat.

It is clear that the wage income of the expat is subject to Afghan income tax as previously analyzed. The question is, who is responsible to report this income and how does the tax get paid? There are three possibilities:

Org A withholds Afghan wage tax and remits the tax to ARD. This approach is theoretically possible but highly impractical. Org A has no presence in Afghanistan and does not have any mechanism by which to file a tax return in Afghanistan. Org A could certainly attempt to register with the ARD in order to submit tax forms, but in practice this is rarely done. There is no established precedent of the ARD requiring entities located outside of Afghanistan to submit wage withholding tax for employees operating in Afghanistan.
The expat files a personal income tax return in Afghanistan and remits the tax to ARD. This is the approach that makes the most sense if one follows the Afghan Income Tax Law as it is written. However, as previously noted, there is not an established process in place for individuals to file personal income tax returns in Afghanistan, and the ARD historically has not enforced the requirement for individuals to file personal income tax returns. Therefore, this approach also seems impractical.
Org B reports the salary amount on its monthly wage withholding tax return and remits the tax to the ARD. There are also challenges with this approach. First, Org B cannot actually withhold tax from the salary payment to the expat, because it does not control the salary payment. Therefore, Org B can only remit tax (from its own funds) on top of the gross salary amount. Second, Org B likely does not even know what kind of remuneration package Org A provides to the expat, so determining the amount of taxable wages from which to calculate tax is quite difficult (possible solutions to this problem are outlined below). Third, depending on how the accounting records of Org B are kept, the salary expense of the expat may not be reflected on the accounting records, making it difficult to reconcile the salary amounts reported on the monthly wage withholding tax returns to the salary expense reported in the general ledger.

While any of these three approaches can be tried, Quest’s view is that the third approach is the least impractical of them all. The reality is that if the required tax is not paid, Org B bears the most risk. If the ARD finds that tax has not been paid and decides to attempt collection, they will undoubtedly go after Org B to pay the taxes. It is far more effective for the ARD to go after an established organization in Afghanistan, over which it holds leverage, than to attempt to collect taxes from organizations outside Afghanistan or expat individuals who may not even still be working in Afghanistan at the time the collection attempt is made. Of course, Org B could try to argue that it did not have a responsibility to withhold and remit wage taxes since it was not the legal employer of the expat. From an international legal perspective, it is certainly true that Org A is the employer. However, the ARD could counter, with reference to the “Statutes on the Employment of Foreign Citizens by Afghan Organizations,” that Org B is the employer of the expat from an Afghan perspective since Org B provided the visa and work permit.

If Org B takes responsibility to report and pay the wage taxes of the seconded expat, there are several different ways for Org B to determine the amount of taxable wages from which to calculate tax:

The most accurate approach is for Org A to provide Org B with detailed information regarding the expat’s remuneration package. However, Org A may be reluctant to provide Org B with this information for various reasons. Even if Org A agrees to provide the information, there could be a great deal of administrative effort required on a monthly basis for Org B to obtain the information, and any delays in obtaining the information would make local tax filing more challenging.
1. A variant of this approach is for Org A to provide an estimated compensation amount to Org B at the start of each year, and only provide an updated amount to Org B during the year if the compensation materially changes. Org B then uses the estimated amount to calculate and remit taxes on a monthly basis during the year.
Rather than Org B obtaining the expat’s remuneration information directly from Org A, Orb B could ask the expat to voluntarily disclose taxable remuneration amounts. The difficulty with this approach is that the expat may not have an accurate understanding of all the different types of benefits that need to be reported, and there would likely be less formal documentation available.
Finally, Org B could simply estimate a salary amount based on the fair market value of expat labor in Afghanistan for similar positions. This approach is easy to administer and will result in a reasonable amount of tax being paid. The major downside is that it cannot be traced to actual remuneration.

Conclusion

Expat taxation in Afghanistan is indeed challenging, but hopefully this guide helps you deal with the most frequently encountered situations. If you have faced a challenge with expat taxation in Afghanistan that is not covered in this guide, please do let us know by leaving a comment below or emailing us at [email protected].

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^1. These are the thresholds and rates mentioned in Articles 74-75 of the Afghan Income Tax Law. These may not be the current thresholds and rates, however, as the ARD updates the fixed tax regulations from time to time without publishing the changes in official documents.

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