U.S. companies doing work in Afghanistan to support the war effort are supposed to be exempt from taxes levied by the Afghan government. But the country’s Ministry of Finance (MOF) has taxed these contractors nearly $1 billion since 2008, in apparent violation of agreements signed between Kabul and Washington.

At least 43 contractors have been told by the MOF that they owe a combined $921 million in business taxes and associated penalties, according to the Special Inspector General for Afghanistan Reconstruction (SIGAR).

SIGAR pointed out that the government of Hamid Karzai signed deals with the U.S. Department of Defense, the U.S. Agency for International Aid and other bodies to excuse non-Afghan businesses from paying local taxes as long as they are helping with the war.

Nevertheless, three American defense contractors were improperly assessed nearly $59 million in business receipts and annual corporate income taxes, SIGAR found among the 43 cases it reviewed.

Under the terms of the agreements, both prime and subcontractors are provided tax exemptions, as far as the U.S. is concerned. But Afghan officials claim the deals only apply to prime contractors, leaving subcontractors open to taxation.

Of the $921 million in taxes levied, contractors have paid only $67 million, SIGAR reported.

“As a result of the outstanding assessments, the MOF has restricted contractors’ freedom of movement and refused to renew business licenses, and the Afghan government has even arrested some contractor personnel,” SIGAR wrote in its report (pdf). “The combined effect is the potential interruption of support to U.S. military operations.”

-Noel Brinkerhoff

To Learn More:

Afghan Government Has Levied Nearly a Billion Dollars in Business Taxes on Contractors Supporting U.S. Government Efforts in Afghanistan (Special Inspector General for Iraq Reconstruction)

Afghan Government Has Levied Nearly a Billion Dollars in Business Taxes on Contractors Supporting U.S. Government Efforts in Afghanistan (Special Inspector General for Iraq Reconstruction, May 2013 Audit Report) (pdf)

Forgotten Victims of War…Contractors (by Noel Brinkerhoff, AllGov)

Contractors Outnumber U.S. Soldiers in Afghanistan (by Noel Brinkerhoff, AllGov)

The Other Afghanistan Surge: Contractors (by Noel Brinkerhoff, AllGov)