The hidden costs of doing business in Afghanistan

Construction workers lay fresh asphalt on a section of a major road that runs through the Panjshir province as part of a project by the Provincial Reconstruction Team Panjshir and the U.S. Agency for International Development in Afghanistan. U.S. development contractors have complained for years about Afghan officials’ heavy-handed tactics to collect illegitimate taxes on U.S. foreign assistance. Photo by: U.S. Air Force / isafmedia / CC BY

Development contractors operating in Afghanistan are hopeful they have found common ground with the country’s government over a long-standing series of tax disputes that have caused some companies to consider leaving Afghanistan outright.

Contractor representatives and U.S. officials met with Afghan Minister of Finance Eklil Ahmad Hakimi at the country’s embassy in Washington, D.C., earlier this month. The minister, in town for the World Bank’s spring meetings, informed attendees of his intention to issue an order that would “de-couple” a company’s disputed back taxes from its current ability to acquire a business license, according to representatives from the Professional Services Council, a lobbying group for U.S. contractors.

U.S. contractors working in Afghanistan hope that means they will no longer see visas withheld, employees placed on “no-fly” lists, or threats of incarceration for not paying taxes they believe U.S.-Afghan bilateral agreements prohibit in the first place. They also hope it means less time operating without a business license, a precarious — and illegal — status that leaves companies prone to seeing visa applications denied, imports blocked and assets seized.

While there is broad agreement that U.S. foreign assistance grants and contracts are exempt from most forms of taxation by the recipient country, in Afghanistan, as in other transitional countries where similar issues have arisen, differing interpretations, inconsistent administrative practices and the large sums of money involved have given rise to disputes.

U.S.-Afghanistan reconstruction efforts are subject to a menagerie of rules and regulations, brokered as recently as the 2014 Bilateral Security Agreement and as long ago as the 1951 Point Four General Agreement for Technical Cooperation. In the intervening years, a multiplicity of actors, and challenging administrative environments have combined to complicate the question: who owes what to whom, and under which circumstances?

“Ambassador [P. Michael] McKinley and his team at our Embassy in Kabul engage the highest levels of the Government of Afghanistan to ensure that U.S. foreign assistance is not subject to Afghan taxation, and that existing obligations to exempt such assistance are honored,” Noel Clay, a State Department spokesman, wrote to Devex.

An email from the Embassy of Afghanistan in Washington, D.C., confirmed that the Afghan government has a similar interpretation of the bilateral security agreement prohibiting taxation of U.S. foreign assistance.

Contractor representatives have welcomed the United States government’s “intercession” on their behalf. “We’re in the best place we’ve been in quite a while,” said Alan Chvotkin, executive vice president and counsel of the Professional Services Council.

Prominent figures in the U.S. Congress have also taken an interest.

"It makes no sense for governments we are trying to help to levy taxes against those who are providing the aid free of charge. It's illogical and insulting to U.S. taxpayers." said Tim Rieser, foreign policy aide to Vermont Sen. Patrick Leahy.

Leahy has supported measures to prohibit tax on assistance contracts. The 2016 U.S. funding bill, for example, included a provision that threatens to withhold foreign assistance in 2017 at an amount twice that of any illegitimate taxes imposed.

"If there are loopholes that are enabling governments to circumvent the law, we need to fix it," Rieser said.

The ongoing dialogues between contractor groups, U.S. officials and their Afghan counterparts do not necessarily mean that companies will see the back taxes they continue to dispute wiped away — though contractors and their advocates hope this could happen. Regardless, disputed back taxes should not prevent a contractor’s receipt of a business license to operate now and in the future.

Question marks remain over implementation, however. Devex has learned that the day after the meeting at the embassy, one development company was denied its business license for lack of a tax clearance letter — which should not happen under the proposed rules as the finance minister described them. The delay may be a natural consequence of bureaucracy, said Chvotkin. President Ashraf Ghani’s administration is still working to clear the air of some practices inherited from former President Hamid Karzai.

One reason the tax dispute issue has attracted attention is that in addition to development companies, it has also rankled major U.S. defense contractors. These firms are subject to different bilateral agreements than those governing development contracts and tend to benefit from more powerful constituencies. One company, KBR, Inc., has concluded its current contracts and left Afghanistan, in part because of concerns about the tax issue, according to sources familiar with the company’s decision.

KBR, Inc. is “willing to support future U.S. efforts if called upon, as long as the operating environment is fair and open for contractors,” a company spokesperson wrote to Devex, citing, “serious concerns about the Afghan government retroactively assessing substantial Afghan taxes against contractors when none are due.”

“The [Afghan] Finance Ministry has committed to resolve these matters and we sincerely hope that occurs,” the spokesperson added.

Some of the recent changes have also reinforced a pattern — concerning to some — of treating development assistance and military spending as part and parcel of the same reconstruction enterprise.

Contractors’ U.S. government point of contact for business license issues, for example, will not be a State Department or U.S. Agency for International Development official, but rather an officer in the Department of Defense, despite the fact that military and civilian contracting are governed by different treaties and agreements.

That should not be a problem, said Chvotkin, so long as each subset of the contractor community see its differing rights upheld.

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About the author

  • Michael Igoe

    Michael Igoe is a Senior Reporter with Devex, based in Washington, D.C. He covers U.S. foreign aid, global health, climate change, and development finance. Prior to joining Devex, Michael researched water management and climate change adaptation in post-Soviet Central Asia, where he also wrote for EurasiaNet. Michael earned his bachelor's degree from Bowdoin College, where he majored in Russian, and his master’s degree from the University of Montana, where he studied international conservation and development.