American contractors are being to sent to Afghanistan to assist in various projects. These US employees are still required to comply with United States tax laws. Our firm handles a lot of questions from clients working in Afghanistan and planning to start an assignment in Afghanistan on various topics like how the Afghanistan tax system works, their social security system, and ways to help minimize the US expats tax burden. They are also interested in knowing if we are able to provide our specialized tax services to American expats who work and live in Afghanistan. We have compiled a list of these common questions plus more and our expat tax experts have provided the answers.
Guide to Filing – US Expat Tax Tips for Americans Working in Afghanistan
Does Your Firm Provide US Expat Tax Services to Americans Working in Afghanistan?
Yes, our range of expat tax services includes providing assistance to American expats working in Afghanistan.
Are American Expats Working in Afghanistan Required to File US Expatriate Tax Returns?
A US expat is still under obligation to file taxes with the Internal Revenue Service (IRS) even if they are living in Afghanistan. Per the filing requirements, American expats must include all of their earned income, including any from employment in Afghanistan even if it has already been taxed by that nation. A US expat does have the opportunity to reduce their US expat taxes due using tax credits and deductions from their Afghanistan based earned income.
How Can Americans Working in Afghanistan Minimize US Expat Taxes and Avoid Double Taxation?
A US expat who is earning a wage in Afghanistan may be able to avoid being double taxed on that income with one of the following methods:
- Foreign Earned Income Exclusion (FEIE)
- Foreign Housing Exclusion or Deduction
- Foreign Tax Credit
FEIE works by decreasing the US expats taxable income earned in Afghanistan by the first $101,300 for the 2016 tax year. An American expat will first have to meet the physical presence test or bona fide residence test before they can qualify for FEIE.
There are certain foreign housing expenses such as rent and utilities that can be deducted from any income earned by an expat working in Afghanistan. This will only apply to those American expats who also qualify for FEIE.
There is also the possibility of a foreign tax credit or deduction for those income taxes that were paid in Afghanistan.
For the Purpose of Taxation, Who is Considered a Resident of Afghanistan?
An individual is considered to be a resident of Afghanistan if they meet one of the following circumstances:
- The individual’s principal residence was in Afghanistan for any period of time during the tax year.
- The individual maintains a presence in Afghanistan for a period of at least 183 days during the tax year.
- The individual is employed by, or is an official of, the Government of Afghanistan and has been assigned to spend time abroad during the tax year.
A business or corporation is considered taxable under Afghanistan laws if the business was established in Afghanistan or its base of operations is in Afghanistan for any time during the tax year.
An individual’s principal residence is determined with a facts and circumstance test. To determine if an individual’s principal residence is in Afghanistan the following factors will be examined:
- Whether the individual rents or owns a home in Afghanistan.
- Whether the individual rents or owns a home in another nation.
- The amount of time spent in Afghanistan by the individual and the amount of time they spend in other nations.
- Where the individual’s immediate family lives.
- The amount of time the individual has owned a home in Afghanistan and the amount of time the individual has owned property in any other nation or nations.
An individual who wishes to be considered a resident of Afghanistan will need to first apply. Residency in Afghanistan begins the day this application is approved and will end on the end they depart Afghanistan and terminate that residency. This is very important for an expat to understand as it will determine whether the Afghani government will tax them on income earned in Afghanistan only, or income earned worldwide.
Is Foreign Income Subject to Taxation in Afghanistan?
Afghanistan residents are required to pay income tax on any income earned worldwide and in Afghanistan. There is a foreign tax credit established, but this only applies to a portion of the total income earned for the year. Non-residents of Afghanistan are only obligated to pay taxes on income earned from a source inside of the country.
What are Personal Income Tax Rates for Americans working in Afghanistan?
Tax rates in Afghanistan are applied progressively depending on total income earned, and are capped at 20%:
| Taxable Income in Afghanistan (AFN) | Tax Percentage Applied to Earned Income |
| Up to 5000 per month | Exempt from personal income tax |
| From 5001 to 12500 per month | 2% |
| From 12501 to 100000 per month | 10% |
| 100001 or above per month | 20% |
When Are Tax Returns Due in Afghanistan?
The Islamic Republic of Afghanistan’s Ministry of Finance changed the tax year in 2008 to start on the first day of Haman – March 21st– and end on the last day of Hoot – March 20th. Employers in Afghanistan are required to withhold income taxes from employees. If this is the individual’s only source of income, they will not have to file a tax form with the Ministry of Finance. Self-employed individuals and those who hold more than one job have three months from the last day of the tax year to file a return.
What is the Tax Year-End for Taxpayers Living in Afghanistan?
The tax year differs in Afghanistan from the United States as it ends on the 20th of March as opposed to the 31st of December.
What Income is Considered Taxable Income in Afghanistan?
Any monetary compensation for a service rendered in Afghanistan is considered taxable income. This includes payments made in kind, and all allowances.
What are Compliance Procedures in Afghanistan?
It is the responsibility of the employer to withhold taxes from employees monthly and deposit them into a government account within ten days of the closure of the month. Employers must also file monthly and annual salary and tax statements for each person under their employ. If the proper amount of tax is withheld and the employee has only one source of income, then there is no need to file a tax return. In the event that the employer did not meet the obligation then the employee will have to pay his or her taxes on their earned income.
What is the Social Security System in Afghanistan?
The social security system of Afghanistan is available for all citizens residing in the country. Workers pay 3% of their total earnings into a social insurance program which is then used to fund health care, unemployment insurance, and disability insurance for Afghani citizens. Whether or not the expat must also pay into the US social security system will be dependent on their residency status.
Is There the Social Security Agreement and/or Tax Treaty Between the USA and Afghanistan?
Despite being previously barred from any type of tax relief for US expats, including FEIE and foreign tax credit, they are now eligible to receive these provisions on their tax returns. There are no tax treaties between the United States and Afghanistan, but both nations have regulations in place to help avoid double taxation.
Are There Other Taxes in Afghanistan?
There are taxes in Afghanistan levied on personal income, dividends, all types of capital gains and royalties or any fees. Any type of income is taxed in Afghanistan with the exception of assets earned through an inheritance.
What are the FBAR and FATCA Requirements for Americans in Afghanistan?
The Foreign Bank Accounts Report (FBAR) is legislation enacted by the United States government which requires that all US citizens report financial balances held in a foreign bank account. This is with disregard to the nation that they reside in. Additionally, the US expat must file FinCEN form 114 if the balance of their foreign account is in excess of $10,000 USD. There are no extensions given for this form, which must be filed no later then the 30th of June to avoid being subjected to large fines.
The Foreign Account Tax Compliance Act (FACTA) was enacted in order to expose those US expats who are evading paying their US taxes. From 8938 must be filed with a US tax return if the expat meets the obligatory threshold. This threshold will be increased for married expats.
Do You Need Expatriate Tax Advice and Help While Working in Afghanistan?
Americans who are planning on working inside of Afghanistan are encouraged to seek advice regarding the issues surrounding taxation by the US and Afghanistan. Experts in expat tax laws and how they apply to Afghanistan will be happy to assist you with any of your tax concerns.