Rent Tax in Afghanistan: A Guide

Author: Matt Nissley, CPA

Rent Tax in Afghanistan: A Guide

Article 59 of the Afghan Income Tax Law requires the withholding of rent tax on rent payments to landlords for buildings and houses that are used for business purposes. Rent tax must be remitted to the ARD (Afghanistan Revenue Department) within 15 days after the end of the month in which rent was paid. The rent tax withholding amounts are as follows:

Monthly Rent	Withholding Amount
0 to 9,999 AFN	0%
10,000 to 100,000 AFN	10% Flat
Over 100,000 AFN	15% Flat

Rent tax withholding is usually straightforward. Nonetheless, there are certain areas of application of the law which can prove challenging at times. This guide provides a thorough overview of the law on rent tax withholding and how to handle various situations that arise in practice. Key reference documents include Article 59 from the Income Tax Manual and Taxpayer Guide 1.

Rent Withholding and Calculations

1. Tax Rates. Rent tax withholding rates are flat rates, which is different than the progressive rates seen with wage tax withholding. It is worth noting that there is a discrepancy between Article 59 of the Income Tax Law and Taxpayer Guide regarding on which amount the 10% rate comes into effect. Article 59 of the Income Tax Law states that the withholding requirement comes into effect when monthly rent is AFN 10,000 or higher, whereas Taxpayer Guide 1 states that the withholding requirement comes into effect when monthly rent is more than AFN 10,000. Quest’s position is that the law itself holds more weight than the taxpayer guide and therefore recommends withholding rent tax on a rent contract with a price of AFN 10,000 per month. 
   
   
2. Property Subject to Withholding. Property that is rented for business purposes or offices, whether the tenant is a legal or natural person, is subject to rent tax withholding. This includes property rented by a legal person where the occupant of the property is a natural person (for example, a house rented by an NGO for an expat employee to live in). However, if a natural person rents property for personal use, rental payments are not subject to rent tax withholding.
   
   
3. Application of Withholding Rates. The rent tax withholding rates should be applied to each separate rent contract. For example, if an organization rents three different properties with three separate contracts at a price of AFN 70,000 each, rent tax should be separately calculated on each AFN 70,000 property using the applicable 10% rate rather than aggregating the properties and using a 15% rate on the aggregate AFN 210,000 total monthly rent amount. This holds true even if the landlord is the same for all three contracts, though a single property rented by a landlord to a single tenant should not be broken up into multiple separate contracts for different parts of the property to try to reduce rent withholding tax.
   
   
4. Withholding vs. Paying Tax on Top of the Contract Price. The law is designed so that rent tax should be withhold from the gross contract price so that the financial burden of the tax falls on the landlord rather than the entity making payment. For example, if a business rents office space with a contract price of AFN 50,000 per month, the business should withhold AFN 5,000 (10%) and pay AFN 45,000 to the landlord. However, what often happens is that the landlord will refuse to accept tax withholding and insist on receiving payment equal to the full gross price. In the example above, this means that the business would pay AFN 50,000 to the landlord and then remit an additional AFN 5,000 tax to the ARD, bringing the total cost of the property to AFN 55,000 per month. Quest’s recommendation is that organizations should not give in to landlords who refuse to accept lawful rent tax withholding. Organizations should treat the contract price as the gross price, calculate and withhold tax on that gross price, and only pay the net amount to the landlord. If the landlord claims that the tenant has not paid sufficient rent as per the contract, the law sides with the tenant. Article 59(3) explicitly states “In the event of a dispute about the amount of rent owed by a tenant, the tenant will be treated as having paid to the landlord as rent any tax that was paid to the relevant authorities under this Article.” The best approach is to avoid such disputes in the first place by ensuring that the rent contract explicitly states that the contract price is the gross rent amount and that taxes will be withheld from the gross amount as per the law.
   
   
5. Rent Tax Withholding as an Advance Payment. When entities withhold rent tax from payments to landlords and remit the tax to the ARD, this tax withholding is an advance payment against the landlords’ final annual tax liability under the income tax law. The landlords can claim all rent tax withholding as a credit against their final annual tax liability. It is also worth noting that landlords are liable to pay annual tax on all rental income regardless of whether rent tax is withheld by the tenant.
   
   
6. Requirement for Tenants to Withhold. Another tactic that landlords often employ to escape rent tax withholding is to claim that they will pay the tax themselves and thereby relieve the tenant of the responsibility to withhold and remit tax. In some cases, this clause is even written directly into rent contracts. However, this approach is not permissible by the law, as the law is clear that tenants themselves are responsible to withhold and remit tax on relevant properties.
   
   
7. Rent In-Kind. Rent payments include not only cash paid to the landlord as well as rent tax paid by the tenant to the relevant authorities, but also any kind of valuable consideration provided by the tenant to the landlord as rent. As per Article 59(4), this includes “the cost of repairs, renovations, or improvements to the property carried out by the tenant.” The point is that landlords cannot artificially reduce their taxable rent income by having tenants make valuable improvements to the property in lieu of cash rent payments.
   
   
8. Assessed Market Value of Rent. If the ARD determines that a rent contract is less than market value, Article 59(5) gives the ARD the right to determine the market value of rent and assess tax accordingly. This gives the ARD recourse to collect a fair tax amount in cases of landlords and tenants who make a written rent contract for less than market value, regardless of whether secret payment is made by the tenant to the landlord of the amount that constitutes the difference between the written contract and actual market value of rent.
   
   
9. Payments in Foreign Currency. If rent payments are made in any currency other than AFN, the payment amount (and related tax due) should be converted to AFN using the official exchange rate on the date of payment.
   
   
10. Property-Dealer Contracts. If a property dealer is involved as a broker between the landlord and tenant, the property dealer will produce a pre-printed contract from a book provided by the Ministry of Justice and require this contract to be signed. However, organizations that rent property often want to negotiate customized terms and conditions with the landlord and include such terms and conditions in the official rent contract. Further, in the case of international organizations, they often want the contract to be in a foreign language in addition to a local language. Organizations often end up signing two contracts for the same property: 1) the contract provided by the property dealer, and 2) the customized contract negotiated between the landlord and tenant. The customized contract will be accepted by government institutions as an official contract if it is stamped by the local Wakil Guzar (community representative) and authenticated by the relevant local Municipality office. From a rent tax perspective, the important thing is that the contract period and gross rent amounts are the same in the two contracts, even if other points are different.
    
    
11. Rent Contract Cancellation. If a rent contract is cancelled before the original end date listed in the contract, it is important to have a formal rent contract cancellation document to prove to the ARD that no rent tax is due for the period after contract cancellation. Even in cases where a rent contract comes to term but will not be renewed, it may be helpful to have a formal “notice of non-renewal” document between the two parties to prove that no subsequent rent contract was signed.
    
    

Rent Tax Payment & Reporting

1. Reporting and Payment Deadline. Tenants that withhold rent tax are required to submit a monthly rent tax form to the ARD along with remittance of the tax by the 15th of the monthly after which rent is paid.
   
   
2. Reporting Rent in the 0% Bracket. The monthly rent tax form has a section to report gross rent payments in the 0% tax bracket. In practice, the ARD does not require this section to be filled out, and having a rent payment in the 0% tax bracket does not legally trigger the requirement for a monthly rent tax form to be filed with the ARD. However, businesses may want to fill out this section so that the gross rent amount reported as a deductible expense on the annual income tax return reconciles to the monthly rent tax forms.
   
   
3. Prepayments of Rent. Organizations often prepay rent for some number of months. Reporting on prepaid rent is currently one of the biggest challenges related to rent tax withholding. The first thing to clarify is that if an organization withholds rent tax on a prepayment of rent, the entire amount of rent tax withheld must be remitted to the ARD by the 15th of the subsequent month. Organizations are not permitted to keep the government’s money with themselves for a period of months by remitting only a portion of the tax every month thereafter over the period of months covered by the prepayment. Regarding how to report the prepayment of rent on the monthly rent tax forms, it is worth examining the current practice vs. the actual requirements of the law.
   
   
   1. Current Practice. The general practice at the time of writing this article is that the Tax Office asks taxpayers to spread out a prepaid rent amount evenly across monthly tax forms for the entire period of prepayment. For example, if an organization prepays six months of rent in January (for the period January – June), the organization would file six monthly rent tax returns with the total gross rent amount and related tax spread out evenly over the six forms. These forms can be “pre-filed,” meaning that all six rent tax forms can be filed upfront at the time of making the prepayment.
      
      However, Quest has occasionally seen the Tax Office handle thing differently in cases of organizations that prepay rent in various months for multiple different properties. In such cases, the Tax Office sometimes asks the organization to report the full amount of rent prepayment (and related tax) in the same month’s rent tax form that the prepayment was made. So, in the case of a six-month prepayment that happens in the first month, the entire amount of prepaid rent would be reported in the first month, with rent tax returns for the following five months being reserved for rent payments made on other properties. The reason for handling things differently for organizations that have multiple different properties with prepayments is that the reconciliation of tax remittances to the monthly rent tax forms is easier.
      
      
   2. The Legal Requirement. The actual technical requirement of the law is that gross rent amounts and related rent tax should be reported in full in the month that cash payment is made. So, in the case of the organization that has only one property under rent and prepays six months of rent in the first month, technically that organization is required to report all six months of rent and related tax in the first month’s rent tax form, with no requirement to file rent tax forms in the following five months. In fact, this was the common practice at the ARD before the SIGTAS system (the ARD’s taxation software) was introduced.
      
      Given that the Islamic Emirate of Afghanistan is currently not enforcing and collecting any tax fines and penalties, taxpayers can generally handle the reporting of prepaid rent as per the instructions of the Tax Office (whatever that may be) without consequence. However, if fines and penalties are ever re-instituted, it is important to recognize that the law only requires a rent tax form to be filed in the month of payment and that the ARD does not have legal grounds to require the filing of rent tax forms for months in which rent payments are not made (and charging penalties for failure to do so).
      
      
4. Reporting Rent on Multiple Properties.
   
   
   1. The Legal Requirement. Technically, the proper way to handle rent payments on multiple properties is to aggregate all payments (including multiple-month prepayments) that happen in each month onto a single monthly rent tax form. The first page of the rent tax form requires reporting aggregate gross rent payments and tax withheld amounts on all properties across all three different tax brackets (0%, 10%, and 15%). The details of every individual rent payment on each property must be reported on the second page of the rent tax form, including the landlords’ names, TINs (Taxpayer Identification Numbers), etc.
      
      
   2. Alternative Practice. In cases where the Tax Office has asked the taxpayer to spread out rent prepayments evenly across multiple monthly tax forms for the entire period of prepayment (rather than report the entire prepayment in a single month’s rent tax form), the rent tax forms for future months become “used” in SIGTAS and are not subsequently available for reporting other rent payments on additional properties. In this case, the Tax Office has instituted a practice of opening a “branch office” in the SIGTAS system for each additional property under rent so that new monthly rent forms become available for that property. This is a “workaround” solution and is not how SIGTAS was designed to be used. 
      
      
5. Providing Copies of Rent Tax Forms to Landlords. After monthly rent tax forms have been cleared and stamped at the ARD, the organization must provide a copy of the stamped detail sheet to the landlords from whom tax was withheld. This is the only way that the landlords can then claim a credit for the amount withheld against their subsequent annual tax liabilities. Quest recommends that organizations proactively provide these detailed tax forms to all landlords, rather than providing them only upon request.
   
   
6. Reconciliation. Quest recommends that organizations reconcile rent expense in the general ledger to rent tax forms on a regular basis. The Tax Office will compare rent expense on the annual income tax return to the aggregate rent amount reported on the 12 monthly rent withholding tax forms, and organizations should be prepared to explain any reconciling items that may exist.
   
   

Conclusion

Dealing with rent tax withholding can certainly be challenging, but this guide will help you deal with the most frequently encountered scenarios. If you have faced a challenge with rent tax withholding that is not covered in this guide, please do let us know by leaving a comment below or emailing us at [email protected].