Iraq's Income Tax Law allows the tax authority to require government departments and the socialist and mixed sectors, or any person, to withhold a percentage not exceeding 10% from amounts due to contractors, and the withheld amounts are not released to them until their tax clearance is confirmed. The actual rate applied is set annually by decision of the General Commission for Taxes depending on the nature of the contract, and this system applies equally to Iraqi and foreign contractors' entitlements.

The Statutory Ceiling on Withholding From Contractors' Dues

Income Tax Law No. 113 of 1982 provides that the tax authority may require government departments and the socialist and mixed sectors, or any person, to withhold a percentage not exceeding 10% from the amounts due to contractors or others associated with them, and the withheld amounts are not paid to them until their income tax clearance is confirmed. The tax authority may also require that the withheld amounts be transferred to it.

Obligations of the Iraqi Contracting Party

The instructions on tax accounting for contracts between Iraqi and foreign parties oblige the contracting party to require the contractor to provide proof of registration with the General Commission for Taxes or one of its branches if the contract value is 5 million dinars or more, and this is made one of the conditions of the contract itself. They also oblige the primary contractors to withhold the prescribed percentage from the dues of the subcontractors they deal with, and to transfer it to the Commission as amounts held in trust on their behalf.

Tax Clearance and Final Account Settlement

The last advance payment is not disbursed and the final account for covered contracts is not settled except with written approval from the General Commission for Taxes within 180 days from the date of completion of the work, evidenced by a tax clearance letter. If this period ends without the clearance requirements being completed, the contracting party is obliged to transfer all amounts due to the contractor directly to the General Commission for Taxes.

Notifying the Commission of a Subcontractor's Work Details

When work is subcontracted, the primary contractor is obliged to provide the branch of the General Commission for Taxes with a letter detailing the work carried out by the subcontractor it dealt with, the total amounts paid to the subcontractor, the amounts withheld from it, and the numbers of the receipts issued for them, in order to obtain the Commission's approval to disburse those amounts.

Notification of Payments Below the Withholding Threshold

Even if a contract does not reach the threshold requiring withholding, the contracting party remains obliged to notify the General Commission for Taxes of payments made to others that exceed one million dinars and up to 5 million dinars per payment for supplying materials, providing services, or carrying out works, every 90 days, without any amount being withheld as a tax deposit in this case.

A Special Rate for Oil-Sector Contracts

In the oil sector, the instructions implementing the law on income tax for foreign oil companies provide that the foreign company withholds 7% of the total payment due to a subcontractor on oil contracts, based on the withholding authority set out in the general Income Tax Law.

Legal References