In Iraq, employers have several tax responsibilities. These include social security contributions and income tax withholding.

Social Security Contributions

Employers must contribute to the social security fund on behalf of their employees. Contribution rates vary depending on the employer's industry and categorization:

• General Rate: 12% of gross salary
• Oil and Gas Sector: 25% of gross salary
• Kurdistan Region: 12% of gross salary

Income Tax Withholding

Employers are required to withhold income tax from employee salaries under a 'pay-as-you-earn' (PAYE) system. Tax rates are progressive, ranging from 3% to 15% based on taxable income levels.

Exemptions

In practice, employers may be able to apply for formal exemptions from social security contributions for expatriate employees working in Iraq.

Payment Deadlines

• Income Tax: Taxes withheld from employees must be paid to the tax authorities by the 15th of each month. Employers must also submit annual tax returns on behalf of their employees.
• Social Security: Monthly contributions are due on a schedule determined by the social security authorities.

Penalties

Failure to comply with tax and social security obligations can result in significant penalties and late payment interest.

Additional Considerations

• Oil and Gas Sector: Companies operating in the upstream oil and gas industry and their subcontractors are subject to a higher corporate income tax rate of 35% (Law No. 19 of 2010).
• Stamp Duty: Levied on certain documents at rates between 0.1% and 3% (0.1% in the Kurdistan region).

In Iraq, employers withhold income tax from employee salaries under a 'pay-as-you-earn' (PAYE) system, in accordance with the Iraqi Tax Law. The tax rates are progressive, as follows:

• Up to IQD 250,000: 3%
• IQD 250,001 to IQD 500,000: 5%
• IQD 500,001 to IQD 1,000,000: 10%
• Above IQD 1,000,000: 15%

Standard Exemptions

Each employee is entitled to a tax-free legal allowance of IQD 1,000,000 per month.

Social Security Contributions

Currently, there are no social security contributions directly deducted from an employee's salary in Iraq.

Important Considerations

The income tax withheld by employers under the PAYE system is considered the final tax liability for employees. Employees are generally not required to file individual tax returns in Iraq. Tax laws are subject to change, and it may be beneficial to consult a tax advisor for the most up-to-date information and guidance on potential future deductions.

Iraq currently lacks a comprehensive Value-Added Tax (VAT) system. However, various forms of indirect taxation affect services to different extents.

Sales Tax on Specific Services

Certain services in Iraq are subject to sales tax. These include:

• Hospitality: First-class hotels, restaurants, and tourism-related services bear a 10% sales tax.
• Telecommunications: Mobile and internet plans carry a 20% sales tax.
• Transportation: The importation of cars and airplane ticket sales have a 15% sales tax.
• Luxury Goods: Cigarettes and alcoholic beverages bear a 300% sales tax.

VAT Considerations for Service Providers

• Registration: Although there's no general VAT registration requirement, businesses providing taxable services may need to register with the relevant tax authorities, depending on their services' nature.
• Invoicing: Businesses providing taxable services may need to issue invoices with specific details to ensure compliance and facilitate sales tax collection.
• Compliance: It's crucial to stay updated on any changes or introductions of VAT or similar taxes that affect services. Consulting a tax advisor is recommended since the absence of a formal VAT doesn't guarantee complete freedom from indirect tax obligations.

Potential Future VAT Implementation

There have been discussions and proposals about potentially implementing a Value-Added Tax (VAT) system in Iraq. If implemented, this would have significant implications for businesses offering services, particularly:

• Increased Costs: VAT would likely add to the cost of services for consumers.
• Compliance Obligations: Businesses would need to register for VAT, charge VAT on their sales, and file regular VAT returns.

Important Note

The tax landscape in Iraq can change. Stay updated on the latest developments regarding sales tax and the potential introduction of VAT, as this will directly impact services offered within the country.

Iraq's primary framework for tax incentives is the National Investment Law No. 13 of 2006 (as amended). Eligible projects may receive a 10-year corporate income tax exemption, exemption from customs duties on imported goods required for the project, and a potential extension of the income tax exemption to 15 years for strategic investments or mixed ventures with majority Iraqi ownership.

Tax Incentives in Specific Sectors

Iraq offers targeted incentives to promote investment in specific sectors:

• Agriculture: Duty-free imports of essential agricultural equipment and machinery.
• Industrial Projects: Newly established industrial projects in qualifying sectors may benefit from additional tax and customs duty incentives.
• Renewable Energy: Projects in renewable energy may be eligible for tax and other incentives.
• Free Zones: Businesses operating within designated free zones enjoy more generous tax exemptions, customs duty waivers, and other benefits.

Additional Incentives

Foreign investors have the right to repatriate profits and capital generated within Iraq. For qualifying projects, the government may provide land at subsidized rates. Investors also have flexibility in bringing in necessary foreign workers when the expertise is not available within Iraq.

Applying for Incentives

To apply for these incentives, you need to obtain an investment license from either the National Investment Commission (NIC) for projects within Iraq (excluding the Kurdistan region) or the Kurdistan Regional Investment Commission for projects within the Kurdistan region. Ensure your project meets the required criteria in terms of investment size, job creation, and contribution to strategic sectors. Then, submit a formal application to the relevant investment authority for review and approval of tax incentives and other benefits.