20 April 2015
Global Tax Alert
Iraqi Government approves
the 2015 federal budget
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Executive summary
The Iraqi Government recently published the approved Iraqi Federal Budget Act No.
2 of 2015 (the Budget Act) in the official Iraqi Gazette. Constrained by falling global
oil prices, the Budget Act increases the level of borrowings to fund its projected
deficit. It also addresses the recoverability of petroleum costs incurred by foreign oil
companies undertaking upstream oil and gas activities, makes cuts to Iraq’s doubled
payroll tax brackets and exemptions as currently applied, and contains new taxes
and levies aimed at raising additional tax revenue.
In addition, the Budget Act addresses the distribution of Iraq’s Federal Government’s
revenues to Iraq’s regions and governorates. It also aims to ease the financial
arrangements between Iraq’s Federal Government and the semi-autonomous
Kurdistan Regional Government (KRG) by estimating fixed revenue contribution
figures from the KRG’s crude oil exports and, in turn, offers an agreed percentage of
the Federal Government’s budgeted revenues to the KRG.
Detailed discussion
Economic and fiscal considerations
Key numbers
The Budget Act forecasts revenue of IQD94b1 in 2015, with more than 90% of the
revenue coming from oil exports at an estimated rate of 3.3m barrels per day (bpd)
and an average sale price of US$56 per barrel. The Budget Act’s expected 3.3m
bpd of exports include contributions from the KRG, which has agreed to contribute
250,000 bpd of the Kurdistan Region of Iraq’s (KRI) production to be sold by the
federal State Oil Marketing Organization (SOMO), and to facilitate the export of
another 300,000 bpd of federal production from Kirkuk.
The Budget Act also foresees a IQD25b deficit to be financed through Treasury Bills,
government bonds, and borrowing from local banks. In addition, it is expected for
funds amounting to US$8.3b to be drawn from the International Monetary Fund
through Iraq’s Special Drawing Right (SDR).
Cooperation between the Federal Government and
the KRG
The Budget Act aims to ease the financial
arrangements between Iraq’s Federal Government
and the semi-autonomous KRG. The proposed
arrangements anticipate for the KRG to contribute to
the Federal Government’s budgeted revenue through
oil exports at 300,000 bpd of oil from Kirkuk and
250,000 bpd from the KRI’s own fields in return for a
17% share of the total Iraqi budget.
2
In 2015, the Budget Act finally did away with the
doubling provisions introduced in the 2008 Budget
Act, and the Iraqi tax authority has confirmed during
the first week of February 2015 that it will in fact be
reverting to the original brackets and exemptions. The
original brackets and exemptions that will again be
effective as a result of the Budget Act are shown in the
tables below.
Original Employee Income Tax Brackets
The Budget Act also makes it clear that the KRG will be
entitled to a share of 17% of federal spending that would
be calculated after subtracting the operating costs of the
Federal Government from the overall budget.
Monthly taxable income
Fiscal management
The Budget Act also contains provisions aimed at
improving controls over the country’s cash allocation
by authorizing the Ministry of Finance to act as a
centralized ledger of revenue and spending and calling
for all Iraqi ministries to record and report all revenues
realized and expenditures incurred back to the Ministry
of Finance.
Rate
From IQD
To IQD
0
250,000
3%
250,001
500,000
5%
500,001
1,000,000
10%
1,000,001
No uppper
limit
15%
Original Employee Income Tax Exemptions
Description
Amount (IQD)
In addition, the Ministry of Finance is given the right
to draw funds up to US$12b of Treasury Bills to cover
the Ministry of Oil’s requests to pay back recoverable
petroleum costs incurred by foreign oil companies
undertaking upstream oil and gas activities.
Personal deduction
2,500,000
Wife deduction
4,500,000
Taxation
Employee income tax
In 2008, Article 20 of the Iraqi Budget Act No. 20 of
2008 doubled the employee income tax exemptions
and brackets provided for in Article 12 and Article 13
of the Income Tax Law No. (113) of 1982 (as amended)
(the Income Tax Law), respectively. The Budget Act, by
its nature, runs annually until the following year’s Budget
Act is published. However, no formal guidance was
ever issued to revoke the doubling of the brackets and
exemptions, so the practice continued to apply from 2008
onwards even though the head of the Iraqi tax authority’s
legal department had indicated on numerous occasions
his opinion that this practice was incorrect.
Widow or divorcee
Global Tax Alert
Each child (under 18 or student
under 25)
Over retirement age (63)
200,000
3,200,000
300,000
It is very possible that the application of the original
brackets and exemptions will take effect as of 1 January
2014.
Sales tax
The Budget Act introduces new sales taxes on car
purchases and transport tickets at 15%, cellular
telephone SIM cards and the Internet at 20%, and on
the sale of cigarettes and alcoholic beverages at 300%.
The Minister of Finance is expected to issue instructions
that provide guidance as to the application of the new
sales taxes to taxpayers across Iraq.
Refugee and rebuilding levy
The Budget Act introduces a levy to help fund refugees
and the rebuilding of essential infrastructure damaged
by terrorism by imposing the levy on applicants filing
applications with Iraqi government authorities.
The rate of the levy and guidance with respect to its
application should soon be determined by the Ministry
of Finance’s Accounting Department.
Customs duty
On 19 September 2003, L. Paul Bremer, the
Administrator of the Coalition Provisional Authority
(CPA) which was established as a transitional
government following the invasion of Iraq, signed
CPA Order 38 (later amended and modified by CPA
Orders 47 and 70) whereby the CPA suspended the
previously existing Iraqi Customs Law No. 22 of 2010
(as amended).
The customs duty law and its amendments which were
previously suspended are being reinforced by the
Budget Act.
Endnote
1. All figures throughout the Alert are in Iraqi dinars (IQD) and/or US dollars (US$). The exchange rate is
approximately US$1:IQD1,170.
Global Tax Alert
3
For additional information with respect to this Alert, please contact the following:
4
Ernst & Young (Jordan), Amman
• Ali Samara +962 6 580 0777
• Jacob Rabie
+962 6 580 0777
[email protected]
[email protected]
Ernst & Young Middle East (Iraq), Baghdad
• Mustafa Abbas +964 1 543 0357
• Chris Lord +964 1 543 0357
• Nizar El Salem +964 1 543 0357
[email protected]
[email protected]
[email protected]
Global Tax Alert
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