Overview
In general, all businesses and organizations that procure goods or services are required to comply with contractor withholding tax obligations, ensuring proper tax deductions on payments made to contractors in accordance with Article 72 of the Afghanistan Income Tax Law.
However, in certain cases where procurements are made outside Afghanistan, the law provides a specific exemption from contractor withholding tax. This exemption applies under defined conditions, which are outlined below.
Regulatory Reference
The Afghanistan Revenue Department (ARD) Technical Committee, in its Decision No. 15, Section 1, dated July 31, 2013, stated the following:
“If the service provider exists outside of Afghanistan and provided the services outside of Afghanistan to Afghan companies, this will not be eligible to contractors tax, otherwise they will be eligible for contractor tax payment.”
Explanations:
- If an Afghan-registered organization can demonstrate that the services were both provided and paid for outside Afghanistan, the payment will not be subject to withholding tax.
- Conversely, if services are provided by a foreign entity to an Afghan company within Afghanistan, or the payment originates from inside Afghanistan, the Afghan company is required to withhold contractor tax on the payment.
Conclusion
All businesses and organizations in Afghanistan must comply with contractor withholding tax rules under Article 72 of the Income Tax Law. However, exemptions apply in certain foreign procurement cases.
As per the ARD Technical Committee:
- If goods or services are both provided and paid for outside Afghanistan, no withholding tax is required.
- If goods or services are delivered within Afghanistan or paid for from a bank account or source of funds inside Afghanistan, withholding tax must be deducted.
A careful assessment of the location of service delivery and payment is essential to determine tax obligations and ensure compliance.