Contributed By Shajjan & Associates
The tax controversies in the jurisdiction of Afghanistan cannot be attributed to one cause. Some of the controversies arise during the first step when the primary assessment of the annual tax obligation is being performed by the assigned tax case manager. Others may arise as a result of a tax audit when the tax obligations are being assessed and scrutinised in more detail. Withholdings ‒ specifically payroll and vendors’ tax ‒ are other aspects of tax controversies where in some cases the tax authorities and the taxpayers hold different positions. For instance, according to Tax Manual No 05 of the Afghanistan Revenue Department (ARD), a company can enter into an independent employment contract with an employee where the employee will be responsible for the payment of his or her annual tax obligations, including for the revenue generated from the aforementioned employment contract. During the tax assessment and audit process, ARD will pursue the employer instead of the independent contractor for the tax of payments made to the contractor. In general, tax controversies may arise at any time as the system is not transparent and a large number of the tax officers at various levels are not well educated or trained.
The intensity and volume of controversies differ at each stage of tax assessment. The majority of the controversies arise during the audit process where all tax obligations are inspected in more detail and with great focus on uncovering fraudulent tax submissions and shortcomings in the financial data. One aspect of tax controversy is the taxation of dividends that has been disputed for a long time among the taxpayers and the tax collecting authorities. This issue is mostly associated with the companies that provide services to the government of the United States and NATO forces inside Afghanistan under the Bilateral Security Agreement and the Status of Forces Agreement. Contracts held with the US government and NATO forces are granted tax exemption certificates (TECs) under a streamlined procedure. According to these TECs, all payments made to US-defence and NATO contractors are tax exempt. A controversy arises when it comes to the income distribution on dividends. According to ARD, tax should be paid on dividends, while the contractors say that once the revenue has been declared tax exempt, there will be no tax on its distribution to the shareholders and dividends will acquire exempt status.
Tax controversies in Afghanistan often arise for the following reasons:
A proper approach to all the aforementioned problems will help in mitigating various tax controversies. It is important for taxpayers to know where their tax monies are spent, and the government often does not provide such details. Taxpayers often complain about a lack of basic services that need to be provided. The safety of taxpayers is also a major issue. The government has failed to provide security for large taxpayers and, as a result, businesspeople often leave Afghanistan and try to reinvest in other countries such as Turkey, Dubai and Central Asia.
A proper mechanism for appreciating and acknowledging taxpayers needs to be introduced. If the entrepreneurs are well educated regarding the applicable tax procedures, there will be less chance of any tax controversy.
Inclusiveness is another reason for tax controversy. The current tax jurisdiction may not cover a broad range of contemporary tax and financial issues or it has been narrowed to only include the current tax practices without considering the contingency principle.
In some instances, the perception of the parties may be contrary to the jurisdiction. This is also directly connected to the lack of tax education and the lack of well-defined and clear tax procedures.
Afghanistan does not follow the BEPS recommendations or the EU’s measures to combat tax avoidance. However, it follows the UN model in certain instances. To this date, Afghanistan does not have any tax treaties with other countries but it is in the process of negotiating a double taxation treaty with Turkey, Iran, the United Arab Emirates and Pakistan.
The Income Tax Law provides that “where any person enters into any transaction or arrangement with the intent to cause reduction of liability to pay tax, the Ministry of Finance may disregard such transaction or arrangement and assess all persons affected by the transaction or arrangement as if the disregarded transaction or arrangement had not taken place.” It further provides that any person who evades income tax shall be required to pay the income tax due and additional tax as follows:
According to the Income Tax Law, the following additional taxes may be charged in case of non-compliance.
Previously, companies were randomly selected for an audit process. Currently, companies are audited based on a specific percentage of risk that is processed by a computerised system of the ARD at the department of risk analysis. This analysis is done based on the degree of compliance, past audit results, provision of the necessary financial data and financial ratios of a taxpayer, provision of the required documents and papers in time clearance of the annual tax obligations, etc.
According to the Income Tax Law, a company shall be audited for the last five years of its operation or less if the authorities deem it necessary, but the five-year period cannot be exceeded.
Risk analysis is not the only basis for conducting a tax audit. Some other factors also play an important role, for instance, the capacity of conducting the audit process is limited by the small number of auditors in an audit department and each audit team simultaneously works on multiple cases. If a specific audit team finishes the assigned task, new companies will be referred to them for the audit of their tax obligations.
Manual screening is another option for conducting a tax audit and involves selecting audit cases based on the staff’s knowledge of the taxpayer's behaviour and environment. Manual screening should only be utilised in conjunction with special projects and only with the approval of the director general of the revenue department. ARD will also conduct a random audit of taxpayers.
When a company is selected based on one of the aforementioned methods of selection, the assigned audit team will send an official notification letter to the taxpayer. This letter will outline the years selected for audit and all other aspects and scope of the audit process.
While ARD emphasises the quick execution of the task, an audit is an open-ended process and its conclusion depends on the conditions, size of the business and how quickly the required financial data are provided. Moreover, the audit team's ability to conduct the audit has a direct impact on the time period for concluding an audit case. The time span for an audit could be shortened by precise communications between auditors and taxpayers and the avoidance of unnecessary procrastination.
Tax audits are conducted both in the tax authority’s office (a desk audit) and on the taxpayer’s premises (a field audit).
Desk audits are generally used as a preliminary examination of declarations by analysing the accuracy, completeness, ratios and crosschecking of information to determine if further audit or investigation is warranted. Desk audits are done in the office utilising information available within ARD.
Field audits are conducted on site at the taxpayer's place of business or at a location where the records may be maintained. They entail the examination of a taxpayer’s books and records, including the validation of information contained within the tax returns against sources, documents or other third-party data to determine whether the information presented is correct.
The primary objective of an audit is to ensure the timely, complete and accurate submission of annual tax returns, business receipt tax, all kinds of withholding tax and all other tax obligations that have been addressed in the Income Tax Law. Secondly, an audit ensures that the submitted financial figures are backed by a proper financial record or books. Outlined below are the important elements an auditor will check for accuracy while auditing the tax obligations of a company.
There is no applicable information in this jurisdiction.
Tax audit is a lengthy process that will take a long time, and the bureaucratic nature of the tax authorities and the required paperwork will further lengthen this process.
If the requirements outlined in 2.4 Areas of Special Attention in Tax Audits are met and there is a supporting document for each transaction, the audit process will be concluded at the earliest possibility. Outlined below are some key documents that play a key role in a smooth and timely audit:
If the taxpayer is not happy with the declared assessment from the tax authorities, they can lodge a claim in a specific form of ARD within 45 days of receiving the tax assessment declaration. If, for valid reasons, a taxpayer is unable to file the objection, he or she can apply for an extension of the time to file an appeal. If the tax authorities consider the provided reasons to be reasonable, they will approve the application and will inform the taxpayer in writing. The extension period for filing an appeal will not exceed 15 days of the due date in addition to the 45 days, unless the tax authorities decide differently.
According to the Tax Administration Law of Afghanistan, the Tax Administration is required to make a decision on an administrative claim within 60 days of receiving the complaint and inform the taxpayer in writing within 30 days of the decision being made.
If the taxpayer does not receive a decision within 90 days of filing the claim, he or she may appeal to the Tax Disputes Resolution Board and notify the Taxation Administration in writing of the appeal.
After lodging a claim, the Tax Administration will reassess a taxpayer’s case and will declare its second decision based on the provided reasonable grounds. If a taxpayer is not satisfied with this second decision, he or she can apply to the Tax Disputes Resolution Board within 30 days of the declaration of the decision.
If a taxpayer is not satisfied with the decision of the Tax Disputes Resolution Board, he or she may refer to a court of competent jurisdiction within 30 days of receiving the decision, otherwise the decision of the board shall be final and enforceable.
As mentioned in 4.1 Initiation of Judicial Tax Litigation, the first stage of a court tax procedure is to lodge the claim within 45 days, then the tax authorities will reassess the case within 60 days and will inform the taxpayer in writing within 30 days of their decision.
If a taxpayer is not satisfied with the decision made after his or her objection or if no decision has been made within 60 days after submitting the notice of objection, the taxpayer may refer the matter to a court of competent jurisdiction. The referral must be made within 30 days of either the decision on objection or the expiry of the 60-day time limit.
According to the Tax Administration Law, the validity of a taxation decision, a notice of decision or any other document issued or executed under any tax law shall not be voided due to any minor deficiency or mistake which does not affect the overall meaning of the document.
According to the Tax Administration Law, the taxpayer shall prove the incorrectness of the taxation decision at any stage of a dispute. Initiation of a taxation dispute cannot prevent collection of tax. The taxpayer shall be limited in an application to the Tax Disputes Resolution Board or appeal to the court on the grounds stated in the objection unless the board or the court grants the taxpayer leave to add new grounds.
In the event of a dispute over a decision made by the tax authorities, taxpayers are required to provide a reasonable ground for their position. A taxpayer might have a chance to win if the disputed issue is not addressed in the jurisdiction and where he or she can provide their reasons and argue for the issuance of a specific ruling for the resolution of the disputed issue or decision.
If an issue is addressed in the jurisdiction and the controversy is raised due to the different interpretation, then both parties have an equal chance of winning. However, when a disputed issue is clearly addressed in the tax jurisdiction, there is no chance for the taxpayer to win. Therefore, a taxpayer should not file any claim until he or she consults with a tax expert who has sound knowledge of Afghanistan laws and the judicial system.
There is no applicable information in this jurisdiction.
The judiciary is comprised of preliminary, appellate and supreme courts. All matters, including tax, are appealable from the preliminary court to the appellate and then to the Supreme Court of Afghanistan. In each court there are different tribunals, including a tribunal for commercial disputes which deals with the tax-related issues. The Commercial Court of Afghanistan was authorised to deal with tax-related matters. Recently, under the umbrella of this court, a new court for banking and taxation issues was established in Kabul. This court deals with all banking and tax-related issues at the preliminary and appellate level. In provinces, a similar structure is expected to be established; until then, tax-related matters shall be dealt with by the civil court of each jurisdiction.
The time limit for lodging an appeal to the Supreme Court is three months from the date of the decision of the appellate court. In commercial matters, which includes taxes, the Supreme Court can review its own decision on the following grounds:
If the applicant does not agree with the tax assessment of the Tax Administration of Afghanistan, he or she can object within 45 days from the date of receiving the decision notice if they have valid reasons. This time limit is further extendable (with valid reasons) for a further 15 days, unless the Tax Administration decides otherwise. The Tax Administration is required to make a decision within 60 days and has a further 30 days to inform the applicant. If the applicant/taxpayer does not hear from the administration within 90 days from the time of application, he or she is eligible to notify the Tax Disputes Resolution Board.
If the taxpayer is not happy with the Tax Administration’s decision, he or she can apply within 30 days to the Tax Disputes Resolution Board of the Administration. The decision of the Board is final unless challenged by the taxpayer within 30 days.
The taxpayer has the right, within the limited time period, to appeal to the Banking and Tax Court, which falls under the umbrella of the Commercial Court of Afghanistan. The decisions of the preliminary Banking and Tax Court are appealable to the appellate Taxation and Banking Court and, if required, to the Supreme Court of Afghanistan. The decision of the Board or the concerned court is final. The Tax Administration is responsible for enforcing the final decision of the Board or of the concerned courts.
Tax appeals are divided into two different stages.
For the purposes of review of objection of taxation decisions under the Tax Administration Law, a Tax Disputes Resolution Board shall be established with the following composition:
Taxation and Banking Court
At first instance, the preliminary Taxation and Banking Court decides on the cases appealed from the Tax Disputes Resolution Board. Preliminary courts are composed of the head of the court and two bench members. At second instance, the appellate Taxation and Banking Court decides on the matter. The composition of the appellate court is similar in number to the primary court. At third instance, the Supreme Court of Afghanistan, upon request of the applicant, reviews the dispute. The high council of the Supreme Court refers the issue to the commercial disputes tribunal. The commission for reviewing commercial cases shall be comprised of a judicial adviser from the civil division and a judicial adviser from the public security division; it is chaired by one of the members of the Supreme Court in the civil and public rights division.
In Afghanistan, no ADR mechanism is available for tax disputes. The Tax Administration Law specifies the tax dispute mechanism and outlines the procedure for tax disputes settlement; see 7.4 Stages of Administrative Processes and Criminal Cases.
In practice, very few cases reach trial, and most of the tax-related disputes are resolved with the relevant tax authorities, thereby enabling the taxpayer to reach an agreement with the authorities on the amount of taxes and penalties due to be paid.
There is no ADR mechanism available in Afghanistan, except the Tax Disputes Resolution Board established under the umbrella of the Ministry of Finance.
No mediation or arbitration system for tax disputes exists in Afghanistan. To reduce the tax assessment, the interest due or any penalties, the Ministry of Finance could pass specific rulings; see 6.4 Avoiding Disputes by Means of Binding Advance Information and Ruling Requests.
There are two types of rulings in Afghanistan: a general ruling and a private ruling. The Ministry of Finance may issue an income tax manual and separate public and private rulings regarding income tax for the better administration of the provisions of the tax laws. Taxpayers often request private rulings when there is ambiguity in law, or they have a different circumstance and want to make sure that no disputes or additional taxes arise in the future. The only limitation to the rulings is that they cannot be contrary to the tax laws. Also, the taxpayer has a right to receive written information from the Tax Administration concerning his or her situation.
A public ruling is the Ministry of Finance’s position, in writing, regarding the application of the Income Tax Law to an issue which affects many taxpayers. For example, the Ministry of Finance has issued a public ruling regarding the termination of "tax holidays" under the Law on Domestic and Foreign Private Investment in Afghanistan. The Ministry of Finance will continue to issue public rulings on matters of importance as and when required. It remains the sole discretion of the Ministry of Finance to decide in what circumstances to issue a public ruling and the position it takes regarding the interpretation and application of the tax laws. A private ruling is the Ministry of Finance’s position, in writing, regarding the application of the Income Tax Law to an issue which affects a certain, identified person or a group of persons. The Ministry of Finance will provide its position on the application of the Income Tax Law on the facts, supported by evidence where appropriate, provided by the applicant for the private ruling. A private ruling can only be issued on the interpretation of the Income Tax Law. This process cannot be used to clarify the application of other laws. In both events (public rulings and private rulings), the Ministry of Finance will be bound by its interpretation of the law. If at a later date it is established that the rulings are contrary to the tax laws, then the taxpayer will not be responsible for the consequences.
Entities cannot use an ADR mechanism to settle tax disputes. Both the Income Tax Law and the Tax Administration Law clearly outline the dispute resolution mechanism and this does not include mediation or arbitration.
There is no applicable information in this jurisdiction.
Generally, if a taxpayer acts in compliance with a manual, ruling (private or public) or guide that will later be proved to be contrary to the provisions of the tax laws, the taxpayer will not be subject to additional tax and penalties. However, if the tax authorities determine that the exact taxes were not paid accurately, then the taxpayer is subject to administrative and criminal tax offences.
Some of the additional tax assessment or the applied tax penalties were listed in 1.5 Additional Tax Assessments. Below are some other additional tax assessments that are associated with tax infringement.
If a person enters into any transaction or arrangement with the intention of reducing his or her liability to pay tax, the Ministry of Finance may disregard such transaction or arrangement and assess all persons affected by the transaction or arrangement as if the disregarded transaction or arrangement had not taken place. Any person who evades income tax must be required to pay the income tax due and additional tax as follows:
Transactions between connected persons where any amount paid or payable in a transaction between connected persons is different than the amount that would be paid or payable had the transaction taken place between unconnected persons; when determining the tax liabilities of the connected persons, the Ministry of Finance may substitute the amount that would be paid or payable had the transaction taken place between unconnected persons. The purpose of this provision is to ensure that taxpayers do not engage in transactions with related persons in order to achieve a tax benefit that could not have been obtained had the transactions taken place between unrelated parties. The Ministry of Finance believes that this provision is consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995).
Taxpayers are “connected” with each other if their actions are controlled by the same person or entity. For this purpose, a taxpayer’s spouse, brothers, sisters, children and parents will all be considered connected to each other. Whether or not other taxpayers are under the control of the same person will be determined based on the facts and circumstances.
The ARD may use a number of different methods to determine what the correct price would be between unconnected persons. Each method relies on different types of unconnected transactions to determine the appropriate taxable income. Thus, to determine the best method, the ARD should consider the similarity between the connected transactions and unconnected transactions used with respect to each method.
The Tax Administration Law lists ten different additional taxes, including additional taxes for tax evasion. If a tax penalty is imposed based on a court order, the tax under administrative infringement shall cease to apply. A 5% tax on late payment is an exception which has been addressed in Article 34 of the Tax Administration Law. If, during a court trial or reassessment, the tax payable to which an additional tax was imposed is amended, the additional tax related to the tax shall be recalculated. It is worth highlighting that in tax disputes no one can go to the court directly. The process of dispute settlement is specified under the Tax Administration Law. Only if the decision of the Board is not acceptable can the parties resort to the court.
If a taxpayer has acted based on a manual, ruling or guide issued that will later be proved to be contrary to the provisions of the tax laws, the taxpayer shall not be subject to additional tax and penalties.
An administrative infringement process can evolve into a criminal case as per the tax laws. In the event of non-compliance, the tax authorities advise a taxpayer in writing to clear the due taxes. If the written notice from ARD remains unanswered and the taxpayers do not report to the authorities, ARD will apply some compliance measures to enforce the taxpayers to report to ARD and clear their tax obligations. The measures include freezing the taxpayer's bank accounts, putting the president and vice president and other officials of a company on to a no-fly list and, lastly, introducing them to the Attorney General's office for prosecution which leads to criminal prosecution. See also 7.1 Interaction of Tax Assessments with Tax Infringements.
The stages of a tax administrative infringement process and of a tax criminal case are the same and are prescribed under the Tax Administration Law as below.
There is no provision of tax law under which a taxpayer can benefit from reductions of potential fines applicable to the corresponding tax offence where upfront payment of the additional tax assessment is made. If no upfront payment is made, then the taxpayer may benefit from a reduction of fines.
The Ministry of Finance has announced an amnesty on tax penalties and late fees several times in past. On 28 October 2018, the Ministry of Finance announced the extension of a partial amnesty of tax penalties to all taxpayers. This amnesty was previously announced by the Ministry of Finance on 28 January 2018 and required taxpayers to clear their taxes and pay only 5% of the penalties they owed to the government of Afghanistan. The Ministry of Finance reiterated that all taxpayers who had not cleared their taxes for the past years and had not paid the tax penalties during FYs 2002-17 were now required to pay all their taxes and pay only 5% of tax penalties, while the 95% remaining of it would be relieved.
It is possible and common to reach a settlement to prevent a trial. Most tax disputes will not go to trial, and the matter will be resolved between tax offices and taxpayers short of a trial. If a settlement is reached, the relevant tax authority and the taxpayer should enter into a definitive agreement setting forth the relevant facts and the settlement that was reached for penalties at issue.
Appeals against decisions of the primary tax court are possible. If parties are not satisfied with the decision of the primary tax court, then the party who is not satisfied with the decision can appeal. The appeal period is two months from the day the decision of the primary court is made, and the appeal period cannot be extended.
Transactions and operations that have been challenged in Afghanistan under the GAAR, SAAR, transfer pricing rules or anti-avoidance rules give rise to administrative or criminal tax cases if the taxpayers evaded tax or reduced their tax liability inaccurately.
There is no mechanism to deal with double taxation in Afghanistan, and it is not common to use domestic litigation in a cross-border situation. As of now, Afghanistan is not a party to any treaty, bilateral or multilateral double taxation treaty or agreement. However, the Ministry of Finance is in the process of negotiating with a few countries – including India, Pakistan, Iran, the United Arab Emirates and Turkey – to sign such agreements.
The general rule is that tax will be imposed on all income of natural and legal persons derived from Afghan sources in and out of the country, and on the income of residents of Afghanistan derived from non-Afghan sources and from out of Afghanistan in accordance with the provisions of the Income Tax Law. To that end, if the source of income is Afghanistan then Afghan taxes will be applicable and Afghan laws are not concerned with double taxation situations. An Afghan resident is subject to taxation under the Income Tax Law, even if the income is attributable to services performed outside of Afghanistan. Any income tax paid by an Afghan resident to a foreign country shall be taken as credit only against that part of the income tax attributable to the foreign income of the taxpayer. If a resident natural person derives income from more than one foreign country, the income tax credit shall be given in proportion to the income from each country.
However, in relation to foreigners gaining income from Afghan sources, such credit is not applicable and foreigners will be taxed for income derived from Afghan sources without considering their tax treatment in their own country.
According to predominant jurisprudence in Afghanistan, GAAR and SAAR apply in cross-border situations to the extent covered by Afghan laws as Afghanistan is not part of any bilateral tax treaty.
In Afghanistan, international transfer pricing adjustments have not been challenged under domestic tax courts.
Unilateral or bilateral advance pricing agreements (APAs) are not common mechanisms in Afghanistan. The authors understand that Afghanistan is not a party to such unilateral and bilateral agreements.
There is no litigation relating to cross-border situations in Afghanistan.
As of 30 March 2021, Afghanistan is not a signatory to the MLI (2017).
See 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs).
The only procedure the government of Afghanistan applies in tax disputes is the mechanism explained in 5.2 Stages in the Tax Appeal Procedure.
See 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs).
See 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs).
The decisions of the Afghan courts are not publishable; see also 9.1 Application of Part VI of the MLI to Covered Tax Agreements (CTAs).
The most common legal instruments are the mechanisms under the Tax Administration and the court system.
Taxpayers and even the state may involve professionals in settling international tax disputes, but Afghanistan is not signatory to the applicable conventions.
The Tax Administration created a free-of-cost dispute resolution mechanism; see 5.2 Stages in the Tax Appeal Procedure.
The fee for filing a case at the preliminary commercial court is AFN1,000 and AFN1,000 before the appellate court; these fees are paid by the applicant at the beginning of the proceedings. The court fee at the preliminary commercial court is 5% of the disputed amount and is payable by the respondent; the fee at the appellate court is 10% of the total disputed amount and is payable by the respondent. Taxation and Banking Courts follows the same fee arrangements.
The taxpayer can request an indemnity if the court decides that the initial additional tax assessment is null and void, and it is at the discretion of the court to grant any such indemnity.
The dispute resolution mechanism under the Taxation Administration of the Ministry of Finance is free of costs; however, it requires certain timelines and procedures to be followed (see 5.2 Stages in the Tax Appeal Procedure) and, in the event of disagreement, the taxpayer can appeal to the concerned court.
In 2019, the Tax Disputes Resolution Board was established under the supervision of the Ministry of Finance. Most of the tax-related cases are tried and resolved through this Board. Since the Board was established, there has been a huge decrease in the number of tax cases tried in tax courts. The estimated number of tax cases pending in courts is only between five and ten.
Most of the tax-related cases are tried and resolved by the Tax Disputes Resolution Board, and only a limited number of cases which the Board is unable to solve are forwarded to the tax courts. Since its establishment in 2019, the estimated number of cases forwarded to the courts is six. Cases forwarded to courts are mostly high-value cases amounting to AFN100 million.
It is common understanding among the judges that taxpayers evade their taxes, therefore in most cases the tax authorities succeed in tax-related litigations.
It is crucial that taxpayers obtain the best possible advice at as early stage as possible, preferably prior to filing tax returns as this would minimise the risk of a dispute. Successful tax controversy litigation requires as thorough an investigation of the facts as is commercially feasible.
Tax controversies are no different when it comes to importance of time. Once the ARD conducts its audit, the taxpayer has only 30 days to file an objection on the audit report to the Tax Disputes Resolution Board; after 30 days no claim can be entertained. If the taxpayer is dissatisfied with the decision of the Tax Disputes Resolution Board, the taxpayer again has only 30 days to raise a claim before the tax court. The taxpayer should double check all the related tax documents before submitting them to the ARD to make sure that every tax law and regulation has been correctly applied in order to avoid tax controversies in the initial stage.