Investment interest in Iraq continues despite complex regulatory environment — Deloitte

Iraq regulatory environment

Iraq continues to be a complex jurisdiction in which to operate, and this is the case from a tax perspective, as the legislative framework and approach of the tax authority continue to evolve. However, according to Deloitte’s latest report “Doing business guide – understanding Iraq’s tax position,” the country still offers numerous investment opportunities, particularly in the energy and security sectors.

Iraq’s 2015 Budget Law introduced a number of provisions aimed at broadening the tax revenue base through introduction of new sales taxes, applicable to consumer products such as tobacco and internet services, amongst others, in addition to the implementation of the long-awaited customs duty law. Personal income taxes for employees working in Iraq were also targeted, with a reduction in the legal allowances and tax bands applicable to both Iraqi nationals and expatriates alike. All of this results in a scope of taxation that is much broader than many neighboring countries in the Middle East.

“Tax has historically been regarded as being relatively low down the agenda for countries in the Middle East, but the landscape is changing. Tax authorities across the region increasingly view tax as a critical source of sustainable revenues in light of falling oil prices, and Iraq is no exception. We are witnessing a growing awareness of the importance of broadening tax revenues, while the tax authority in Iraq has looked to its peers in the region, and has proactively sought technical training, including from authorities in neighboring jurisdictions” explains Alex Law, International Tax and M&A Tax Leader at Deloitte Middle East.

The effects of failure to comply can be far reaching. “One of the most salient challenges for multinationals in the region is in relation to the repatriation of profits out of Iraq – in the form of paying suppliers from Iraq to non-Iraq territories or even paying dividends” said Law. “The Central Bank of Iraq has issued regulations and is enforcing procedures already in operation which require entities to obtain a tax clearance as a prerequisite to move funds out of the country.”

Key findings from the Deloitte report:

  • While the economy of Iraq remains highly dependent on the oil sector, non-oil sector growth will be important for country’s long-term focus on achieving greater economic and infrastructure stability.
  • The Federal Budget Law of 2015 relied upon certain targets and assumptions, which many may have regarded as ambitious. However as oil prices are expected to remain deflated through 2015 and 2016, together with a heightened requirement for expenditure on defense and rehabilitation, generation of additional revenues through tax collection is likely to be critical.
  • The vast infrastructure and development needs of the region are market opportunities for businesses reviewing their investment prospects.

“Although investors are concerned with the security of Iraq, increasingly we are seeing greater concern from small and medium sized enterprises who find the regulatory and compliance requirements challenging to navigate,” said Ayad Mirza, Office Managing Partner in Iraq. “As a result, it remains critical now more than ever for foreign businesses to take steps to get their housekeeping in order from the beginning in order to mitigate the risk of challenges later on,” concluded Mirza.