• Service: Tax, Global Indirect Tax, Mergers & Acquisitions, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Date: 11/23/2012

Iraq – open for business 

After enduring years of conflict and economic sanctions, Iraq is making strides in its efforts to return to its pre-war prosperity. As its security improves and its stability increases, Iraq is undertaking massive reconstruction projects to restore its infrastructure and develop its economy.

In fact, Iraq’s economy has been growing at an average rate of 4.5 percent for the past several years, and the country’s National Development Plan for 2010–2014 committed USD100 billion in government spending on reconstruction and development projects over 5 years. Priority areas include oil and gas, power and utilities, information technology, pharmaceuticals, biotechnology and health care, housing, and agribusiness.

Improving the legal framework

Foreign participation is vital to these efforts, and the Iraqi government has instituted a series of legal reforms, incentives and exemptions to facilitate foreign investment. Iraq’s National Investment Law, passed in 2006, instituted a legal framework for protecting foreign and domestic investors. The Commercial Court of Iraq was established in 2010 to provide a specialized mechanism for handling disputes involving foreign investors. The Iraqi government is working with the World Bank, the United Nations and other organizations to convert its over 175 state-owned enterprises into market-based companies.

Investment incentive regime

Unlike other foreign investment regimes in the region, Iraq’s regime applies to all investments except oil and gas and financial services companies. Among other benefits, an investment license granted under this regime exempts the foreign investor from taxes and fees for up to 10 years, with the possibility of a 5 year extension. Import fees are waived for the first 3 years of a foreign investor’s commercial activities, and import fees for the next 3 years can be waived on items imported to expand, develop or update the initial investment project. Also rare among countries in the region is Iraq’s lack of foreign ownership restrictions – offshore investors can hold 100 percent of an Iraqi company’s share capital. Foreign companies can establish an Iraqi company quite easily, with only a minimum capitalization of USD1,000. Even though conditions are improving, Iraq’s regulatory framework can still be cumbersome and confusing. For example, the registration process can take anywhere from two to six months to complete if a security check is required. Companies expanding into the country can smooth their entry by seeking local advice to help navigate such regulatory procedures.

Licensing for oil and gas projects

Following over 30 years as a nationalized industry, Iraq has been opening its oil sector to foreign investment. In May 2012, the country held its fourth round of competitive licensing bidding for oil and gas contracts. The first three rounds were for service contracts to expand existing oil production, while the fourth round targeted gas exploration. Each bidding round succeeded in raising significant foreign investment. Even though contract terms were tilted in Iraq’s favor in terms of state participation, production targets, taxes and royalties, the enormous size of Iraq’s known reserves won participation from several global oil and gas majors. Other important selling points were protection from pricing risk, comparatively lengthy contracts – 20 years for production service agreements, with a potential 5 year extension and 30 years for exploration agreements – and the ability to form relationships with the Iraqi authorities to facilitate access to future investment opportunities in the sector.

Updating the tax system

As with other parts of Iraq’s regulatory and physical infrastructure, Iraq’s tax system has suffered from neglect over the past decades and is in need of modernization. For a foreign company, Iraq’s tax system is relatively simple. Liability for tax depends on whether the company is doing business in or with Iraq:

  • Companies doing business in Iraq, such as signing contracts, receiving payments and performing services, have to register and pay tax.
  • Companies doing business with Iraq, such as exporting materials to third parties, are not subject to Iraqi tax.

With no thin capitalization rule, no international tax treaties, no tax on distributions of foreign profits, and no foreign currency controls, Iraq’s international tax system remains underdeveloped and its tax authorities lack experience in dealing with non-residents. Nevertheless, Iraq’s general corporate tax rate is 15 percent, and income from limited liability companies and joint stock companies is taxed at a fixed rate of 15 percent (the corporate income tax rate for oil and gas and related industries is 35 percent). Because Iraqi tax rates are low and the potential for profits from investment in Iraq is high, many companies are willing to accept a higher level of tax risk.

Further, Iraqi tax inspectors are usually quite open and approachable, and they are often willing to give companies some comfort on proposed tax positions through non-binding written opinions. In the future, Iraq’s tax and regulatory regimes are expected to undergo additional reforms designed to internationalize the country’s economy. As revenues from oil and other sectors continue to fuel the country’s growth, there is little doubt that Iraq will continue to rise as a destination of choice for international investors.

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