The practical stakes

A foreign company entering Iraq needs to understand two things about how its profit will be taxed, because the position has changed in recent years and the change is not complete. The first is the current direction, which is that the tax authority now leans toward accepting a company’s audited final accounts and taxing the net profit those accounts show. The second is that the older deemed profit approach, under which the authority taxes a percentage of revenue rather than the reported profit, has not disappeared. It still appears in particular situations, and whether a company falls into one of them affects its tax cost.

For a company modelling the return on an Iraqi contract, this is the practical question. Will my tax follow the profit in my accounts, or can it be assessed on my revenue instead. The answer depends on how the company is set up, on the quality of its accounts, and on the type of matter, and a company that does not understand the difference can both misjudge its tax and miss the steps that keep it on the net profit basis.

The legal position

The corporate income tax in Iraq is set out in the Income Tax Law No. 113 of 1982, as amended. The standard rate is a flat 15 percent of taxable profit under Article 13, with a higher rate of 35 percent for foreign oil and gas companies under Law No. 19 of 2010. The rate is not the point that has changed. What has changed is the basis on which the authority decides the profit to which the rate is applied.

  1. The reform toward audited accounts. Following guidance issued in 2023 under Council of Ministers Resolution No. 23527 of 2023, the General Commission for Taxes has moved toward accepting the accounts and financial statements approved by a licensed auditor and certified by the relevant professional body, and toward assessing tax on the net taxable profit shown in those accounts. Where the accounts are accepted, the tax is calculated by applying 15 percent, or 35 percent for oil and gas, to the net profit. A clearance can be issued on that basis, subject to later audit and to coordination between the General Commission for Taxes, the Federal Board of Supreme Audit, and the certified accountants’ body. In March 2024 the Prime Minister’s Office issued an executive order establishing a higher committee to oversee the implementation of this reform and to coordinate with the General Commission for Taxes.
  2. The deemed approach has not ended. Despite this reform, the deemed approach remains part of the system. The authority still applies, in practice, a deemed approach under which a percentage of total reported revenue is treated as the profit, and where this is applied the assessment takes the higher of the deemed tax on revenue or 15 percent, or 35 percent for oil and gas, on the taxable profit. The deemed approach is therefore better understood not as the default it once was, but as an approach that continues to apply in particular cases.

The honest position can be put as follows. Following Council of Ministers Resolution No. 23527 of 2023, the General Commission for Taxes has moved toward accepting audited final accounts and assessing corporate tax on net taxable profit. However, the deemed profit approach continues to appear in practice, in particular for unregistered foreign companies, for unsupported accounts, for certain contract clearance cases, for withholding arrangements, and for Kurdistan Region non-resident tax cases.

Where the deemed profit risk remains

The deemed approach is most likely to apply in the following situations, and a foreign company should know them.

  1. Where the company is not properly registered. For unregistered foreign companies, the calculation has followed separate Trade and Business Regulations issued by the technical committee of the General Commission for Taxes, rather than the route under Council of Ministers Resolution No. 23527 of 2023. An unregistered position therefore carries a higher deemed profit risk.
  2. Where the accounts are weak or unsupported. The acceptance of accounts depends on their being audited and properly certified. Where statements are not audited, they are dealt with under the commercial bookkeeping rules for income tax, and the protection of the net profit basis is weaker.
  3. Where expenses are not accepted. Even where accounts are accepted in the first instance, the assessment can be referred to the post audit committee, which examines the file, requires invoices to support the expenses shown in the accounts, and contacts the company’s bank to verify revenue. Expenses that are not supported can be disallowed, which raises the taxable profit.
  4. Where the self assessment is not accepted. Where the authority does not accept a company’s self assessment, the tax may be assessed on the information available to the authority, and a tax inspection by the General Commission for Taxes remains a standard part of the process in Iraq.
  5. Where the matter concerns contract tax clearance and withholding. The deemed approach continues to appear in cases that turn on contract clearance and on the withholding mechanism, which are dealt with in a separate article in this series.

The Kurdistan Region

In the Kurdistan Region, the deemed approach is used clearly for the taxation of non-residents. Under Instruction No. 7 of 2022 of the Region’s Ministry of Finance and Economy, a non-resident is taxed at 15 percent on a deemed profit determined by the Ministry, with the deemed profit set as a percentage of revenue that depends on the activity. The percentages reported include 50 percent for consultancy, 40 percent for marketing, 20 percent for contracting and services, and 25 percent for mixed contracts covering installation, establishment, operation, and maintenance. A non-resident dealing with the Region should therefore expect a deemed profit basis and should budget on the percentage that applies to its activity.

What this means in practice

  1. Treat registration and strong audited accounts as the route to being taxed on your actual profit. The reform favours net profit, but the protection it offers depends on the company being properly registered and on its accounts being audited and supported.
  2. Keep complete and supported accounts, and retain the invoices for your expenses. Because the post audit committee can require expense support and can contact the bank to verify revenue, accounts that cannot be supported are exposed to a higher assessment.
  3. Register properly, and do not rely on operating without registration. Unregistered foreign companies are dealt with under a different route and carry a higher deemed profit risk.
  4. Budget for the possibility of a deemed assessment where the position is weak. Where accounts are unsupported or a self assessment is not accepted, the assessment can revert to a deemed profit on revenue, and a budget built only on 15 percent of expected net profit would then understate the tax.
  5. In the Kurdistan Region, plan a non-resident position on the deemed profit basis under Instruction No. 7 of 2022, using the activity percentage that applies, rather than on a net profit basis.
  6. Treat contract clearance and withholding matters as areas where the deemed approach still appears, and plan those matters with that in mind.

FAQ

  1. What is the corporate income tax rate in Iraq?
    The standard rate is a flat 15 percent of taxable profit under the Income Tax Law No. 113 of 1982. A higher rate of 35 percent applies to foreign oil and gas companies under Law No. 19 of 2010.
  2. Has Iraq abolished the deemed profit tax?
    No. Following Council of Ministers Resolution No. 23527 of 2023, the General Commission for Taxes has moved toward accepting audited final accounts and assessing tax on net taxable profit. The deemed approach has not ended, however, and it still appears in practice, in particular for unregistered foreign companies, for unsupported accounts, for certain contract clearance and withholding matters, and for non-resident tax in the Kurdistan Region.
  3. Will my Iraqi tax be based on my actual profit or on a deemed profit?
    The current direction is that a properly registered company with audited and supported accounts can expect to be taxed on its net taxable profit. Whether that applies in a given case depends on the company’s registration, the quality and support of its accounts, whether its expenses are accepted, and whether the authority accepts its self assessment. Because the answer turns on these specific points, this is a matter on which advice should be taken. Our tax team would be glad to assist.
  4. How are non-resident companies taxed in the Kurdistan Region?
    Under Instruction No. 7 of 2022 of the Region’s Ministry of Finance and Economy, a non-resident is taxed at 15 percent on a deemed profit determined by the Ministry, with the deemed profit set as a percentage of revenue that depends on the activity, reported as 50 percent for consultancy, 40 percent for marketing, 20 percent for contracting and services, and 25 percent for mixed installation, establishment, operation, and maintenance contracts.
  5. Can I be taxed in a year when my company made a loss in Iraq?
    Where the deemed approach applies, for example in a non-resident withholding case or where accounts are not accepted, tax can arise on a percentage of revenue regardless of a loss. Where audited accounts are accepted and show a loss, the tax should follow the net result. The outcome therefore depends on which basis applies to the company.

How we can help

The system has changed, and the practical question for a foreign company is how to be taxed on its net profit rather than on a deemed profit, and how to manage the cases where the deemed approach still applies. Our tax team advises foreign companies on the acceptance of audited accounts, on managing deemed profit risk and post audit review, and on non-resident taxation in the Kurdistan Region. To discuss how this applies to your operations, please see our Taxation practice or contact the firm. Companies considering how to structure their entry may also find our Corporate Structuring and Corporate and Commercial pages useful.