Since 2015, defense contractors supporting US and NATO forces in Afghanistan under classified contracts have been practically foreclosed from receiving the tax and corollary benefits intended by the Bi-Lateral Security Agreement (BSA) and NATO Status of Forces Agreement (SOFA) due to conflicts between Afghan policies and US/NATO national security obligations.

After years of consternation, on or about May 18, 2018, the US Embassy, Kabul, provided notice that the Afghan Minister of Finance approved a new tax exemption protocol that eliminates the requirement for BSA/SOFA contractors to provide copies of their government contracts or subcontracts – full or redacted.

Since the BSA and SOFA with Afghanistan became effective in January 2015, BSA/SOFA defense contractors have technically had the right to seek an exemption from Afghan taxes that would otherwise have been due on revenue generated within the region. However, generally speaking, the requirements and procedures for obtaining the exemption have placed companies with classified government contracts in a “catch 22” situation. To obtain a tax exemption ruling, the Afghan Ministry of Finance historically required companies to disclose their full contracts without redaction, thereby potentially placing these same contractors in violation of national security regulations imposed by law and contract.

The inability to comply with Afghanistan’s tax exemption process without national security repercussions has not only placed uncertainty around contractors’ finances, but also limited their operational flexibility. Like other foreign businesses seeking to do business in Afghanistan, BSA/SOFA contractors are required to apply for and obtain a business license from the Afghanistan Investment Support Agency (an “AISA License”). One of the key benefits that an AISA License provides to BSA/SOFA contractors is the authority to issue visas for their in-country workforce.

With a three-year term, many of the initial AISA Licenses granted immediately following the 2015 effective date of the BSA/SOFA are coming up for renewal, but the AISA renewal process requires companies to demonstrate compliance with Afghan tax reporting obligations. For many of these contractors with classified contracts, the announcement of the new tax exemption protocol could not have been better timed, particularly with less than five months remaining for companies to apply for the partial exemption from tax penalties announced by the Ministry of Finance in January 2018.

While the newly announced tax exemption protocol should provide greater comfort to facility security officers and chief financial officers alike, companies should still adopt a cautious approach until the industry has an opportunity to observe the practical application of the new process.