VZCZCXRO7178
RR RUEHBC RUEHDA RUEHDE RUEHIHL RUEHKUK
DE RUEHGB #0228/01 0281602
ZNR UUUUU ZZH
R 281602Z JAN 09
FM AMEMBASSY BAGHDAD
TO RUEHC/SECSTATE WASHDC 1450
INFO RUCNRAQ/IRAQ COLLECTIVE

UNCLAS SECTION 01 OF 03 BAGHDAD 000228 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON IZ
 
SUBJECT: GOVERNMENT OF IRAQ TAXES: SOMETHING OLD, SOMETHING NEW, 
SOMETHING BORROWED 
 
¶1.  (SBU) Summary:  As businesses and individuals step up commercial 
activities and as oil revenues languish, the GOI is devoting more 
attention to other sources of revenues, particularly taxes.  The GOI 
tax regime is partly old, based on administrative provisions dating 
from 1982, and partly new, with a low maximum uniform rate of 15 
percent for both corporate and individual income tax, a product of 
the Coalition Provisional Authority.  The Tax Commission is also 
borrowing from international best practices by negotiating bilateral 
tax treaties to pave the way for international investors.  The age 
old question is still collection, painful for both tax collector and 
payer alike; the Commission welcomes any USG assistance on 
collections.  The Commission is also interested in a double taxation 
treaty with the United States. End Summary 
 
Tax Overview: Low and Flat 
-------------------------- 
¶2.  (SBU) Emboffs recently met with Taleb Muhsen Jaber, Director 
General, General Commission for Taxes (the Commission), Ministry of 
Finance, to discuss developments in taxation.  With oil revenues 
declining, attention is increasing on other revenues that the GOI 
can tap.  Non-oil revenues account for around five percent of total 
federal government revenues.  Corporate and income taxes only 
accounted for seven percent of non-oil revenues in 2007 and would 
increase to a modest 10 percent under the 2009 proposed budget. 
However, the anticipated revenue from these sources in 2009 would be 
USD 577 million, nearly a four-fold increase from actual collections 
in 2007. 
 
¶3.  (SBU) Taleb explained that prior to 2003 the highest corporate 
tax rate was approximately 40%.  After 2003 the tax rate was reduced 
to a maximum of 15% for both corporate and individual income taxes. 
As a general matter, Taleb thought that the post-2003 lower tax 
rates, enacted by the Coalition Provisional Authority, should 
encourage investment and encourage economic growth.  Income Tax Law 
Number 113 of 1982 is still applicable with respect to financial 
issues and fines for tax infractions. 
 
¶4.  (SBU) Among the other taxes the Commission imposes are: (1) 
sales tax (10 percent charged to customers in "deluxe and first 
class hotels and restaurants); (2) real estate transfer tax (rates 
of 3 percent graduated to 6 percent based on the value of the 
property, down from 40 percent prior to 2003); (3) real estate 
rental tax (10 percent; 35 percent prior to 2003); and (4) vacant 
land tax (two percent) which is intended to encourage development of 
the land (farmland is exempt).  Taleb reported that there is a study 
underway to ascertain whether and how the sales tax could be 
expanded to cover other areas, possibly including imports. 
 
Collection Rates: Corporate Captives; Low Compliance by Individuals 
 
--------------------------------------------- ---------- 
¶5.  (SBU) Taleb explained that most companies pay their taxes on 
time.  In order to conduct business with the public sector, a 
company must have a certification from the Commission verifying that 
they have paid their taxes.  Regarding individuals, Taleb estimated 
that the payment rate by individuals is around 25 percent to 30 
percent of the potential tax due.  Employers are responsible to 
deduct taxes from an employee's wages. (Note: Corporate income taxes 
collected in 2007 totaled USD 119 million, close to the budgeted 
amount while individual income taxes collected were USD 27 million, 
only 20 percent of anticipated amount in the budget. End note). 
 
¶6.  (SBU) Emboffs asked whether the Commission has any special 
programs to improve tax collections, such as a large taxpayer unit. 
Qprograms to improve tax collections, such as a large taxpayer unit. 
Taleb noted that the European Union has offered training to the 
Commission to improve collections.  He stated that he is open for 
assistance and advice from the US Internal Revenue Service, claiming 
this would be beneficial.  He also offered that the Commission is 
surveying the public to assess its performance. (Note: The 
Commission's General Directions for Citizens politely declares that 
it "looks forward to provide you with the best services and to 
ensure your safe position (by protecting you against penalties due 
to tax avoidance.) end note.) 
 
Corporate Taxes and Bilateral Tax Treaties: Thinking Ahead? 
- --------------------------------------------- --------- - 
¶7.  (SBU) The "Income Tax Guide for Corporations" (found on the 
Commission's website at www.iraqtax.org in English as well as 
Arabic) indicates that any joint-stock or limited liability company 
incorporated under Iraqi or other laws where the place of management 
or control is in Iraq is subject to the corporate income tax as an 
Iraqi resident person.  The tax is imposed on the income of the 
Iraqi resident person which arises inside or outside Iraq, 
regardless of the place of receipt.  Foreign companies that are 
registered or otherwise have a permanent establishment in Iraq are 
subject to the corporate income tax only on their income earned in 
Iraq. 
 
¶8. (SBU) Taleb stated that he recognizes the need for foreign 
 
BAGHDAD 00000228  002 OF 003 
 
 
companies operating in Iraq to avoid double taxation of income if 
the company's home tax regime taxes income regardless of the place 
of receipt.  Avoidance of double taxation of income can be addressed 
through tax treaties.  He explained that the objective of these 
treaties is to attract foreign investment by facilitating the 
movement of capital and labor.  Iraq currently has tax treaties with 
Iran, Syria, and Lebanon and is negotiating treaties with the Czech 
Republic, Oman, and Malaysia.  Taleb hopes that treaties under 
negotiation will be concluded this year.  He suggested that a 
bilateral tax treaty with the United States would be useful. 
 
Individual Income Taxes: Need for Outreach 
------------------------------------------ 
¶9.  (SBU) Tax on the income of individuals starts at 3 percent for 
the first IQD 250,000 (USD 210) then graduates to the top rate of 15 
percent for income over IQD 1,000,000 (about USD 850). The tax is 
assessed on the worldwide income of an Iraqi resident person and on 
Iraqi source income of a non-Iraqi person resident in Iraq or a 
non-resident Iraqi person.  Exemptions to the income tax include 
foreign persons and companies providing assistance to Iraqis that 
are registered under CPA Order Number 45. (Details are found on the 
Commission's website:  Http:// 
www.iraqtax.org/english/pdf/Income%20Tax%20La w%20113 
(1982)%20as%20amended%20by%20CPA%20Orders%20( English) 
.pdf). 
 
¶10. (SBU) Taleb, noting the difficulty with collecting individual 
income taxes, explained that the Commission has a public outreach 
program to explain its procedures.  Taleb admitted there is a 
problem with individuals who portray themselves as intermediaries 
between taxpayers and the tax authorities and claim they can 
negotiate deals with the tax agency.  These arrangements do not 
always work out for the best. 
 
¶11.  (SBU) Taleb stated that the information submitted by taxpayers 
is kept confidential and cannot be released without an order from a 
judge.  Recently the Commission on Integrity has sought records kept 
by the Commission in order to combat corruption.  Taleb stated their 
records are maintained for 10 years per state regulations on 
official documents. 
 
Tax Evaders: A Second Chance 
---------------------------- 
¶12.  (SBU) Individuals who are suspected of avoiding taxes can be 
referred to the judicial system for prosecution.  Taleb noted that 
if the defendant chooses to do so before his trial, he may settle 
the case with the government by paying twice the owed amount. 
 
¶13.  (SBU) Taxpayers with past-due amounts owed to the government 
are subject to interest charges equal to the Central Bank of Iraq 
interest rate.  Taxpayers have a 21-day grace period to pay their 
taxes after the due date of the outstanding balance before being 
subject to interest charges. 
 
¶14.  (SBU) Taxpayers are required to file tax returns for the 
previous tax year by the end of the fifth month of the subsequent 
tax year.  If the Commission believes that the taxpayer made an 
error on his tax return, the Commission can correct the tax return. 
If the taxpayer believes the correction is in error, he can appeal 
the correction to the Commission or a representative of the Director 
General.  If the taxpayer receives an unfavorable reply he is 
allowed to appeal the decision to the tax appeals court.  This court 
consists of a first degree judge and two Director Generals from the 
Ministry of Finance.  If the taxpayer is still not satisfied with 
the results he can appeal it one level higher to another appeals 
court consisting of a judge of the first degree, two Ministry of 
Qcourt consisting of a judge of the first degree, two Ministry of 
Finance Director Generals, and an individual from the private sector 
(note: this final appeal is made to the Court of Cassation. End 
Note).  No further appeals are allowed after a decision is rendered 
by this court. 
 
¶15.  (SBU) Taleb advised that the Commission has an audit and 
investigations unit which is tasked with investigating allegations 
of tax fraud by individuals and businesses.  Taleb also stated the 
Iraqi Inspectors General have the authority to investigate 
individuals for violations of Iraqi tax law. 
 
Comment 
------- 
¶16.  (SBU) Tax revenues in Iraq have nowhere to go but up.  In a 
society where few have paid taxes for one reason or another, 
instilling a culture of compliance will take time.  Withholding 
income at the source is a common method to help ensure payment of 
individual income taxes.  A broader based sales tax, as Taleb 
suggested they are studying, could also reap rewards in the near 
term.  Embassy will further explore Taleb's request for assistance 
with respect to collections. 
 
¶17.  (SBU) We also encourage Washington agencies to consider 
 
BAGHDAD 00000228  003 OF 003 
 
 
possible negotiations with Iraq on a double taxation treaty.  Steps 
like this which normalize bilateral relations and improve conditions 
for U.S. investors will be the subject of discussions under the new 
bilateral Strategic Framework Agreement. 
CROCKER