On September 30, 2014, the new government of Afghanistan signed the now nearly year old Bilateral Security Agreement (BSA) with the United States.[i]  The agreement will become effective on January 1, 2015 and, thus, permit continued US support of Afghan National Defense and Security Forces (ANDSF).  The BSA also provides needed clarity on lingering issues for contractors, and, at the same time, creates potential new issues.[ii]  This advisory highlights some of the more important provisions and their potential implications for US Department of Defense (DoD) contractors working in Afghanistan including:

  • Taxation and business licenses, which have been a source of great concern for the contracting community;
  • Import, export, and personnel entry and exit requirements;
  • Claims and immunity issues that contractors will face under the new accord; and
  • “Service Support Activities” and special exemptions provided to these contractors in Article 20 of the BSA.

Taxation and Business Licensing

The Special Inspector General for Afghanistan Reconstruction’s (SIGAR) May 2013 audit report, detailed the struggles of DoD contractors and contracting officers dealing with repeated attempts by the Afghan government to impose taxes and penalties on contractors as a result of their performance of DoD contracts in Afghanistan.[iii]  As SIGAR highlighted in its report, portions of the Afghan government for many years ignored prior diplomatic agreements with the United States that DoD[iv] and NATO[v] interpreted as clearly granting exemptions to DoD contractors and subcontractors from Afghan income and other taxes.  The BSA, and concurrently signed NATO-Afghan SOFA, make clear that US and NATO contractors, subcontractors, and their employees that are not resident in Afghanistan are exempt from paying Afghan income tax and “similar or related charges.”[vi]  The Agreement defines “Taxes” broadly to mean taxes or fees by “any governmental authorities of Afghanistan at any level, including provincial and district levels.”  DoD contractors that are not resident in Afghanistan are required, however, to withhold personal income tax for contractor employees that normally reside in Afghanistan or for Afghan nationals.

Thus, after January 1, 2015, US government contractors in Afghanistan should not see further tax bills from Afghan authorities.  It remains to be seen whether (a) Afghan government entities will attempt to collect tax bills before the end of the year, particularly from subcontractors and (b) whether local government entities will fall in line with the central government’s agreement.  Given this uncertainty, some groups have proposed revisions to a current proposed DFARS rule on Afghan taxes.  The American Bar Association, Section of Public Contract Law recommended, in its comments earlier this year, that the DFARS proposed rule be amended to provide flexibility to deal with potential improper enforcement actions by the Afghans instead of leaving contractors to deal with the choice of paying taxes or facing fines and potential jail time.

While the BSA clearly exempts DoD contractors and subcontractors from taxes and duties, they are still subject to registration requirements in Afghanistan.  Article 11 of the BSA states that the Afghan government will develop an “expedited process” for issuing three-year business registrations for DoD contractors and subcontractors.  Contrary to the exemption from fees and taxes, this provision permits the Afghan Investment Support Agency to charge a “reasonable, standard, one-time service charge” for the business registration license.  The provision states that contractors and subcontractors “shall otherwise be exempt from all other Afghan licenses and similar requirements” related to performance of DoD contracts and subcontracts. 

Import/Export and DoD Contractor Employee and Materials Entry/Exit Provisions

The BSA requires that non-resident DoD contractor and subcontractor employees working in Afghanistan obtain visas for entry and exit from Afghanistan, if required by Afghan law.  The BSA states that if DoD contractor employees are required to obtain visas to enter Afghanistan, the employees or their employers may obtain one year or more multiple entry and exit visas.  A Joint Commission set up by the BSA is authorized to define “exceptional situations” where visas can be issued to DoD contractor employees when they arrive in Afghanistan.[vii] 

DoD contractors will also be permitted to import and export materials related to the performance of their contracts without taxes and duties or inspection by Afghan authorities.  The Afghan government is, however, granted the right to verify the contents of containers brought in by DoD contractors or subcontractors if they present evidence that the contractor is “abusing the authority” to import goods without verification.  The BSA sets out a process where US forces will open and inspect DoD contractor containers in the presence of their Afghan counterparts in these situations.  The BSA gives similar inspection rights to the Afghan government for contractor employee personal effects, which also may be brought into the country without taxes and duties or inspection by Afghan authorities. 

Compliance with Afghan Law and Claims

The BSA has an aspirational provision that states that it is the duty of “members of the [US armed] force[s] and of the civilian component to respect the Constitution and laws of Afghanistan and to abstain from any activity inconsistent with the spirit of this Agreement . . . .”  While this provision does not include DoD contractors, FAR and DFARS provisions governing contractor performance in Afghanistan do require compliance with local laws.[viii]  However, the BSA does state that the Afghan government “maintains the right to exercise jurisdiction over United States contractors and United States contractor employees.”  Thus, unlike members of the United States armed forces and DoD civilian component personnel, under the BSA, DoD contractors and subcontractors and their employees can be arrested, summoned into Afghan courts for criminal matters, and brought into civil disputes.

With regard to claims, the BSA contains mutual waivers with regard to claims for damage or injuries caused by US or Afghan forces and members of their civilian component “arising out of performance of their official duties in Afghanistan.”  Claims against US contractors and their employees by the Afghan government are not waived.  And, unlike the process for third party claims against US forces, which defers to US law, there is no provision for settlement of claims against US contractors or their employees.  Thus, DoD contractors may need to consult with Afghan legal experts when faced with claims by third parties or the Afghan government for damages or injuries even if they arise from the performance of a DoD contract.

Service Support Activities

Many contracts in Afghanistan may be designated as service support contracts, whether combat service support (such as dining facilities for soldiers and other basic services), health care service support, or other operations in support of US forces.[ix]  Article 20 of the BSA addresses these “Service Support Activities” and provides that DoD contractors undertaking service support activities are accorded greater privileges than other DoD contractors:

5.  The activities, and any organizations undertaking the activities referred to in this Article, are integral parts of United States forces and shall be accorded the same fiscal and customs exemptions granted to United States forces, including those provided in Articles 16 and 17 of this Agreement.

Articles 16 and 17 of the BSA address import/export rules and taxation.  Thus, classification as a service support contractor could have advantages.  For example, the inspection regime that applies to contractor imports, but does not apply to imports by US forces in Article 16, may not apply to DoD contractors if they meet the test in Article 20.  Contractors should check with their cognizant contracting office to determine whether their contract falls under the “Service Support Activities” Article of the BSA.