U.S. Companies Confusion over the Applicability of Afghani Tax Exemptions to DOD Contractors

SECRETARY OF DEFENSE CORRESPONDENCE ROUTING SLIP

Action Agency: UNDER SECRETARY OF DEFENSE FOR ACQUISITION, TECHNOLOGY & LOGISTICS Action Required: REPLY DIRECT - COMPONENT HEAD MUST SIGN Coordinate With: GC USP Document Type: INCOMING Special Instructions: FORWARD COPY OF REPLY TO CMD, R00M 3C843 Subject: U.S. COMPANIES CONFUSION OVER THE APPLICABILITY OF AFGHANI TAX EXEMPTIONS TO DOD CONTRACTORS

Suspense Date: July 1 2011 Routing Date: June 13 2011 CONTROL #: OSD 07202-11

INFORMATION DISTRIBUTION OFFICE DEPUTY SECRETARY OF DEFENSE EXECUTIVE SECRETARY EXECUTIVE SECRETARY REAR UNDER SECRETARY OF DEFENSE FOR POLICY UNDER SECRETARY OF DEFENSE, COMPTROLLER UNDER SECRETARY OF DEFENSE FOR PERSONNEL & READINESS DIRECTOR, ADMINISTRATION & MANAGEMENT DEPARTMENT OF DEFENSE GENERAL COUNSEL CHAIRMAN OF THE JOINT CHIEFS ,OF STAFF SECRETARY OF THE ARMY SECRETARY OF THE AIR FORCE SECRETARY OF THE NAVY OSD 07202-11

 

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Marion C. Blakey
President and Chief Executive Officer
AEROSPACE INDOSTRIES ASSOCIATION
1000 Wilson Boulevard, Suite 1700
Arlington, VA 32209-3928
(703) 358-1000
June 8, 2011

The Honorable Hilary Rodham Clinton
U.S. Department of State
2201 C Street, NW
Washington, DC 20520

The Honorable Robert M. Gates
U.S. Department of Defense
1000 Defense Pentagon
Washington, DC 20301

Dear Secretary Clinton and Secretary Gates:

On behalf of the more than 350 members of the Aerospace Industries Association (AIA)I am writing this letter to raise an issue that is having a serious impact on U.S. companies supporting U.S. Government (USG) military operations and foreign policy in Afghanistan. The issue concerns the confusion over the applicability of Afghani tax exemptions to Department of Defense (DOD) contractors. The DOD's position is that the exemptions apply to both DOD prime contractors and their subcontractors, and the Afghani Ministry of Finance (MOF) Is taking the Position that the exemptions only apply to DOD prime contractors. The potential impact has ranged from the detention of contractor personnel and seizure of contractor property, contractors being precluded from performing work and DOD treating the taxes as "unallowable, to otherwise avoidable tax audit compliance costs. We respectfully request that the DOS and DOD move to immediately resolve this issue with the Afghani government. As you are aware, paragraph four of the U.S. - Afghanistan Bilateral Agreement, ratified by the Afghani Government through Diplomatic Note Number 202 on May 281 2003, provides that

The Government of the United States of America, its military and civilian personnel, contractors and contractor personnel shall not be liable to pay tax or other similar charges [landing, navigation, over flight or parking charges or overland transit fee or tolls] assessed within Afghanistan.

Although the language in the Bilateral Agreement (Note 202) seems to imply that USG subcontractors are not liable for taxes, the MOF informed businesses performing work under DOD contracts that they must collect Afghani taxes from their subcontractors or their business 1icerses will be revoked. Once a license is revoked, the MOF can remove the contractor from Afghanistan, detain contractor/subcontractor personnel, and seize equipment. Any of these actions will send a dangerous message to the contractor community and, in turn, will adversely impact our ability to support U.S. foreign policy and military operations in Afghanistan.

Both the DOD General Counsel, In a March 28, 2011 fact sheet, and the Commander of International Security Assistance Force/U.S. Forces - Afghanistan, by letter to the MOF dated March 9, 2011, have confirmed that under the Bilateral Agreement (Note 202) and Military Technical Agreement, DOD contractors, subcontractors and their non-Afghani employees are exempt from taxation by the Government of Afghanistan. This position competes with the position by the MOF. As such, the DOD has instructed its contractors and their subcontractors to ignore Afghani tax bills - effectively making the taxes, when paid, unallowable costs.  As a measure of caution, individual companies may request private letters of rulings from the MO seeking tax exemption status in the hopes that the MOF would agree. This precautionary measure, regardless of how the MOF rules, results in additional contractor costs that the DOD may also view as unallowable. If the taxes are required and are deemed as unallowable there will be a negative financial impact on the DOD contractors.

In addition, DOD contractors and their subcontractors are incurring tax audit compliance costs -- costs that would be avoided if there was a consensus between the MOF and the USG. Simply stated, the confusion has led to go/no go decisions for DOD contractors and their subcontractors.

Finally, certain DOS programs are taxable and contain DOS programs an exempt from Afghani taxation, creating an additional layer of confusion. There is no benefit to the USG when contractors receive different tax treatment depending an the agency they serve. It is our view that the preferred outcome is that all USG contractors have the same tax-free treatment regardless of which USG agency has contracted for their services.

We strongly request that the DOS and DOD work together to resolve this issue with the MOF, including obtaining the MOF's acknowledgement that the USG's position applies to all contractor work in Afghanistan since 2001 and that rulings from or other filings with the MOF are not required to establish tax exemptions for USG work. We would prefer that all USG contractors, both prime and subcontractor, working an behalf of the USG in Afghanistan, be exempt from all Afghani taxes (corporate, business profit, personal, etc.). However, if the USG decision is that USG contractors must pay Afghani taxes, contractors should be reimbursed for those taxes by the USG. Either position is workable, but the current confusion cannot be sustained. I would be happy to discuss this important issue further with you or your designated representatives at your convenience.

Best regards,

Marion C. Blakey