Recent updates on the reconciliation of tax retentions

Increased administrative and tax procedural requirements have rendered the tax retention claim process challenging for taxpayers in Federal Iraq. Our article provides insight on how to address them and mitigate the impact on your business.

In Federal Iraq, tax retention remains a critical compliance pillar for both resident and non-resident entities. As per the tax legislation, “tax retentions” (different from withholding tax) should be applied on all contracts deemed taxable in Iraq under the “Trading In” concept. It is closely linked to Corporate Income Tax (“CIT”) and effectively works as an advance payment of CIT. The party effectively suffering the tax is the supplier (recipient of the payment), while the customer (i.e., Payor) remains responsible to retain the tax from the payment it makes to the supplier and to subsequently remit it to the General Commission for Taxes (“GCT”). Following the remittance, the GCT would issue a receipt, further granting the right to the supplier to claim the amount of tax retained as a credit against its CIT liability. 

The tax retention mechanism is designed to provide greater control to the GCT, ensuring business income is taxed appropriately at source even in the case of non-resident suppliers. However, while a CIT credit shall be available for claim at the end of the fiscal year, we are noticing increased challenges and administrative hurdles delaying or preventing the process, leading to operational and financial implications for taxpayers. Indeed, the GCT has tightened the verification procedures for reconciliation and claim of tax retention which resulting in further due diligence for taxpayers to obtain the corresponding receipts from their customers (Payor) in a way that would be compliant to allow the claim against their CIT liability.

Identifying the challenges (Issues we see on a recurrent basis):

Credit allocation: Tax retention receipts older than 5 years, are allowed for offset only against the CIT liability of the year in which they arose. Such rule leads to credits being forfeited, in case the credit exceeds the tax liability of that year, with no possibility for carry forward.

• Mitigation actions (Tried and tested measures): 
  • Establish a protocol requiring Payors to provide formal confirmation and a copy of the GCT deposit slip within 30 days of each invoice payment. 
  • For new contracts, add clauses in contract requiring prompt filing of tax retained (within 30 days) by the Payor to avoid credit allocation issue.

Reporting period mismatch: The financial year in which the payment was made (and hence the tax retention obligation triggered) does not necessarily matches the year in which the taxable revenue was recorded in the books of the supplier.  Such mismatch leads (for historical period older than 5 years where cumulation of credits is not possible) to credit being allocated to wrong financial years and potentially lost.

• Mitigation actions (Tried and tested measures): 
  • Agree ahead with the Payor to ensure its filing captures and reports estimation year as opposed to financial year.  
  • For internal planning, build a central register that maps each contract, expected tax retentions per year and actual tax retention receipts with dates received from each Payor.

Incorrect completion of the declaration: The wrong filling of information on the tax retention declaration can lead to increased processing time at the GCT during the reconciliation process. Example of typical errors are: 

• Mismatch in supplier full legal name 
• Wrong legal entity type 
• Tax Identification Number (TIN) missing or wrongly reported 
• Missing contract information (i.e., number, value and period)
• Financial year vs estimation year mismatch 

Failure to carefully complete the tax retention declaration with correct information would result in automatic rejection from the GCT. Corrections would be required with a need for a formal resubmission of the filing. Therefore, impacting timely allocation of the corresponding credit.

• Mitigation actions:
  • Provide Payors with a receipt format / template to ensure they capture the right Contract ID, period of service, and correct Payee details. 
  • Where receipts lack key information, request rectifications from the Payor in a timely manner to obtain rectification confirmation from the GCT. 
  • Periodic review to ensure all contracts, invoices, and supplier portals of Payors use 100% identical legal name, type and TIN. 
  • In case the receipt is handwritten, it must be reviewed immediately to verify the accuracy and corrective measures needs to be initiated, if needed.

Our team is uniquely positioned to assist you with implementing a tax compliance framework aligned with best practices, so that you can continue to focus on achieving your strategic goals.