Contractors Hit by Almost $1 Billion in Afghan Taxes

U.S. government contractors supporting operations in Afghanistan have been hit with almost $1 billion in potentially inappropriate taxes and penalties from the Afghan Ministry of Finance since 2008, according to a U.S. watchdog agency.

A sample of 43 companies operating under contracts with the Pentagon, State Department or U.S. Agency for International Development has been assessed $921 million of taxes and penalties for unpaid levies, John Sopko, the special inspector general for Afghanistan reconstruction, wrote in a report scheduled for release today.

Under previously negotiated agreements between U.S. agencies and the Afghan government, at least some of the contractors and some categories of income or business receipts should be exempt from Afghan taxes, according to the report. The 43 contractors, none of which were named in the report, have paid only about $67 million of the amount the Afghan government says they owe.

“U.S. agencies need to have assurance from the Afghan government that” U.S. tax dollars “used to build schools, roads, health clinics, water treatment facilities and funds spent to secure the country are not improperly taxed,” Sopko wrote. Employees of some contractors have been arrested over unpaid taxes, and some work supporting U.S. operations may have been interrupted, he wrote.

Taxation Negotiations

Contractor taxation issues will be included in negotiations with Afghanistan about the U.S. presence after the American combat role is slated to end in December 2014, State Department officials told Sopko.

Sopko said his auditors weren’t able to determine the legitimacy of tax demands, in part because of disagreements with Afghanistan about whether some negotiated tax exemptions apply to subcontractors as well as prime contractors.

Afghan revenue authorities also denied requests from Sopko’s auditors for documentation of tax assessments levied against some companies, according to the audit.

U.S. agencies, including the Pentagon, “agree that Afghan taxes levied on non-Afghan contractors working for those agencies are illegitimate.” Sopko wrote.

The State Department, the Pentagon and USAID “appear to be failing” in their effort to prevent the taxation because they lacked a “unified position,” Sopko wrote.

That “has allowed the Afghan government to exploit” differences between the U.S. agencies and “has created an uncertain business environment.”

“The result is that after 11 years of reconstruction efforts” for which Congress has appropriated $89 billion “contractors and U.S. contracting officials alike are unclear as to who” and “what activities are supposed to be taxed,” Sopko wrote.

Sopko heads an independent agency created by Congress to oversee U.S. spending in Afghanistan