Tax authority of Iraqi Kurdistan discusses proposed tax reform
On 9 November 2016, the Kurdistan Regional Government (KRG) Tax Authority organized a focus group session to discuss the current tax system in the Kurdistan Region of Iraq (KRI) and address fundamental tax reform strategies. The session was led by the Director General of the KRG Tax Authority and attended by various taxpayer representatives in the KRI, including EY tax professionals based in Erbil.
The main tax system reform considerations discussed during the session included the following:
The application of the self-assessment method is expected to take effect prospectively starting from tax filings relating to fiscal year (FY) 2016 onwards. Accordingly, tax filings for earlier years (i.e., prior to FY2016) may not be made under the self-assessment method. Furthermore, it is expected that the self-assessment method will be available to specific taxpayers during the initial stages of its implementation, until it is fully integrated into the KRG Tax Authority’s systems.
The taxpayers to whom the self-assessment method will be available should be announced soon by the KRG Ministry of Finance and will be selected based on the volume of the taxpayers’ revenues.
No further information on the matter was provided by the KRG Tax Authority. There was also no indication that the taxpayers will be afforded the opportunity to comment on the proposed self-assessment income tax return.
Historically, the KRG Tax Authority’s practice did not apply the statute of limitations as per the federal Income Tax Law. Instead, the KRG Tax Authority would close a taxpayer’s tax file upon the conclusion of the mandatory tax audit and the issuance of the tax assessment for a given year. As a proposed change of practice, the Director General explained that the KRG Tax Authority intends to start applying the statute of limitations of five years as per federal Iraq’s Income Tax Law. The application of the statute of limitations will take effect starting from the tax filings related to FY2016. Based on the current understanding the earlier years’ tax filings (i.e., prior to FY2016) should not be affected by the soon-to-be applied statute of limitations in respect of prior years’ filings.
No formal plans were put forward by the KRG Tax Authority explaining how they intend to implement these changes within the contemplated timelines as communicated at the meeting. However, it is the KRG Tax Authority’s intention to start applying these reforms starting from FY2016. It is important to note that this does not represent an official communication from the KRG Tax Authority, which should take place in writing and in line with the KRG Tax Authority’s approval process. Accordingly, there may be modifications prior to the official communication.
The main tax system reform considerations discussed during the session included the following:
Self-assessment method
The Director General of the KRG Tax Authority explained that a corporate income tax self-assessment method will be introduced together with a prescribed self-assessment income tax return. Under the self-assessment method, the KRG Tax Authority will accept the self-assessment as reflected in the prescribed tax return and the accompanying audited financial statements. A draft income tax return that is currently being considered by the KRG Tax Authority for the self-assessment method was presented by the Director General, who also indicated that the final format of the prescribed income tax return will soon be published on the KRG Tax Authority’s website NS for use by taxpayers.The application of the self-assessment method is expected to take effect prospectively starting from tax filings relating to fiscal year (FY) 2016 onwards. Accordingly, tax filings for earlier years (i.e., prior to FY2016) may not be made under the self-assessment method. Furthermore, it is expected that the self-assessment method will be available to specific taxpayers during the initial stages of its implementation, until it is fully integrated into the KRG Tax Authority’s systems.
The taxpayers to whom the self-assessment method will be available should be announced soon by the KRG Ministry of Finance and will be selected based on the volume of the taxpayers’ revenues.
No further information on the matter was provided by the KRG Tax Authority. There was also no indication that the taxpayers will be afforded the opportunity to comment on the proposed self-assessment income tax return.
Statute of limitations
As per federal Iraq’s Income Tax Law, there is a statute of limitations of five years during which the Iraqi tax authority has the right to reopen the tax file of a taxpayer and assess additional taxes.Historically, the KRG Tax Authority’s practice did not apply the statute of limitations as per the federal Income Tax Law. Instead, the KRG Tax Authority would close a taxpayer’s tax file upon the conclusion of the mandatory tax audit and the issuance of the tax assessment for a given year. As a proposed change of practice, the Director General explained that the KRG Tax Authority intends to start applying the statute of limitations of five years as per federal Iraq’s Income Tax Law. The application of the statute of limitations will take effect starting from the tax filings related to FY2016. Based on the current understanding the earlier years’ tax filings (i.e., prior to FY2016) should not be affected by the soon-to-be applied statute of limitations in respect of prior years’ filings.
Tax Identification Number
The Director General also explained that the current manual system applied by the KRG Tax Authority for numbering documents will be replaced by an automated Tax Identification Number (TIN) system. The system will assign a unique TIN to each taxpayer in the KRI to be used across the KRG Tax Authority’s directorates in Erbil, Sulaimani and Dohuk. The aim of the TIN system is to improve tax administration and to centralize the tracking of any changes or updates in a taxpayer’s tax file at the KRG Tax Authority.No formal plans were put forward by the KRG Tax Authority explaining how they intend to implement these changes within the contemplated timelines as communicated at the meeting. However, it is the KRG Tax Authority’s intention to start applying these reforms starting from FY2016. It is important to note that this does not represent an official communication from the KRG Tax Authority, which should take place in writing and in line with the KRG Tax Authority’s approval process. Accordingly, there may be modifications prior to the official communication.