wage withholding tax

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Guide 05WWT407 E revise.doc

Guide 05Wage WithholdingTax

Introduction

Amendments to the Income Tax Law of Afghanistanhave changed some of the applications of the wagewithholding tax. This brochure will explain thosechanges and help you in complying with the

law.NoteThere

are no fees or charges payable to the Ministry ofFinance or its Revenue Department or the Musto-fiat for any Tax Guides or Forms or at any stageof the tax assessment collection or enforcementprocesses

Who Must Withhold?

Legal persons and natural persons (individuals) withtwo (2) or more employees during any month of thetax year are required to withhold tax from employees(Article 58 Income Tax Law) whose income exceedsthe threshold, discussed later. Legal persons includepartnerships, corporations, limited liability compa-nies, organizations, agencies, ministries and othernational or local government agencies and depart-ments, enterprises of the State and municipalities,and charitable institutions.

Note regarding Natural Persons who are Em-ployers: Effective September 23, 2005 (1 Mizan,1384) the Income Tax Law was changed to includenatural persons in the requirement to withhold taxesfrom employees.

What Payments are Subject to the Withhold-ing?

Payments to employees in the form of salaries andwages for work provided are subject to withholding.Salaries and wages include: regular pay for ser-

vices, overtime pay, cash allowances provided bythe employer to the employee (including, but not lim-ited to, food allowances and transportation allow-ances), and non-cash payments for services.

Who is Subject to Withholding?

All resident and non-resident employees working inAfghanistan whose salaries and wages exceed the

tax threshold of 12,500 Afghanis (or equivalent inforeign currency) per month or equivalent proratedamounts for those paid on alternate payroll periods.Non-resident employees are exempt from withhold-ing if their home country provides the same exemp-tion to residents of Afghanistan. Resident and non-resident employees of foreign governments and in-ternational organizations are subject to tax based onexisting treaties or contracts with the State.

Who is a Resident? Who is a Non-Resident?

According to the income Tax Law, a natural person

is a resident of Afghanistan (Article 2) for the taxyear if:

1) The person has his or her principal home in Af-ghanistan at any time during the year; or

2) The person is present in Afghanistan for a periodof one hundred eighty three (183) days in the taxyear; or

3) The person is an employee or an official of theGovernment of Afghanistan posted abroad at anytime during the tax year.

Worldwide income is taxable in Afghanistan on allresidents.

Non-residents are those people who do not meet theabove requirements. All Afghan-source income istaxable for non-residents. Afghan-source income isdefined as any income directly produced in Afghani-stan or paid for services provided in Afghanistan.

Example 1:

Joe Brown is a foreign national who arrived in Kabulon 12 May for a years assignment working for a

non-profit British aid organization. There is no con-tract with the State in place to exempt employees of

his organization from taxation in Afghanistan. He ispaid in pounds sterling from his home office in Lon-don. The money is deposited directly into his Britishbank account. However, his wages are paid for ser-vices provided in Afghanistan, so they are consid-ered Afghan-source income and would be subject towithholding. He remained in Afghanistan for the en-tire year, with the exception of two trips of threeweeks each to visit his family, who live in his princi-


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pal home in the UK. He has met the requirement ofbeing present in Afghanistan for 183 days in the taxyear, so he would be considered a resident for taxpurposes and be subject to tax on worldwide in-come.

Example 2:

Abdul Nasri is an Afghan national who lives in Du-

bai. He spent three months in Kabul working for thesame British firm as Mr. Brown. He also owns abuilding in Kabul which he rents out to a foreign aidorganization. Since he does not maintain his princi-pal home in Afghanistan, was not in the country forat least 183 days, and is not an employee of the Af-ghan government, he is considered a non-resident.However, both his wages for work in Afghanistanand his rental income from the building in Kabul areconsidered Afghan-source income and subject totax. The British firm is required to withhold on hiswages and pay the tax over to the Afghan govern-ment. In addition, Mr. Nasri should also file an in-

come tax return and declare his rental income.

What is the rate of Withholding?

There is a monthly exemption of 12,500 Afghanis (orprorated share for alternate payroll periods) per per-son. Taxes are withheld at rates based on themonthly schedule established in the Income TaxLaw (Article 4).

For monthly payrolls

Incomemore

than

Income notmore than

Tax

0 12,500 0%

12,500 100,00010% of amount over12,500

100,000 8750 + 20% of theamount over 100,000

Employees paid on alternate payroll schedules(weekly, semi-monthly, etc.) are subject to withhold-ing according to the following prorated schedules,which are based on the monthly schedule.

For semi-monthly payrollsIncomemorethan

Incomenot morethan

Tax

0 6250 0%

6250 50,00010% of amount over6250

50,000 4375 + 20% of theamount over 50,000

For bi-weekly payrolls

Incomemorethan

Income notmore than

Tax

0 5769 0%

5769 46,15410% of amount over5769

46,154 4038 + 20% of the

amount over 46,154

For weekly payrolls

Incomemorethan

Income notmore than

Tax

0 2885 0%

2885 23,07710% of amount over2885

23.077 2019 + 20% of theamount over 23,077

For daily payrolls

Incomemorethan

Income notmore than

Tax

0 411 0%

411 328810% of amount over411

3288 288 + 20% of theamount over 3288

Example 1:

ABC, Inc., a foreign firm, pays its foreign employeesworking in Afghanistan bi-weekly. However, the firmpays its local employees on a monthly basis. Thefirm would be required to withhold from each groupof employees on each separate pay date, but fileand pay the withheld tax within ten days of the endof the month.

Example 2:

XYZ, Inc., another foreign firm, pays its foreign em-ployees semi-monthly and its local employees

monthly. This firm would still have one filing re-quirement per month.

How is the Wage Withholding Tax Cal-

culated?

Wage withholding tax is calculated based on theabove tables. Determine which payroll period youuse. For each employee, look at the total salary (in-cluding taxable benefits). If it is in excess of the up-per threshold (100,000 for monthly payroll, 50,000


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for semi-monthly payroll, etc.), use the third row ofthe appropriate schedule. If the total salary (includ-ing taxable benefits) is more than the lower thresh-old (12,500 monthly, 6250, semi-monthly, etc.), butdoes not exceed the upper threshold, use the sec-ond row of the appropriate schedule. If the total sal-ary is less than the lower threshold, there is no with-holding requirement.

When Does the Tax Withheld Have to bePaid?

The employer is required to remit to the State theamount withheld no later than 10 days (Article 60)after the end of the month in which the amountswere withheld.

How is the Wage Withholding Tax Re-ported?

Annual salary and tax statement: The employermust give each employee an annual salary and taxstatement showing the employers name, address,and TIN; the employees name and address; and theamount of the employees total salary or wage, aswell as the amount withheld. A copy of this will beforwarded to the Ministry of Finance as well (Article61).

Annual summary report of tax withheld: The em-ployer will file an annual summary of all wages orsalaries paid to all employees during the tax year

and all taxes withheld (Article 61).

Wage withholding report and deposit form:This formmust be completed and filed within ten days of theend of the month in which the salaries were paid,reporting total wages or salaries paid for the monthand taxes withheld. Payment is due in Afghanis atDa Afghanistan Bank with the form (Article 60).

What is the Employees Responsibility?

If the employee has only one job they have no fur-ther responsibility or filing requirements. The Ministry

of Finance will receive the appropriate informationthrough the employers annual summary report filing.

If the employee has any other income (including, butnot limited to, another job, self-employment, divi-dends, rental income, etc.) he must file an individualincome tax return and calculate his total tax for theyear. He will be able to take credit for any tax with-held against his total tax liability (Article 63).

Talking to Your Employees about the Tax

Many employees will be confused by the implemen-tation of this tax. Although the wage withholding hasbeen in the law for many years, it has not been ef-fectively administered, or has not been administeredat all for a long time. It is important to explain to em-ployees that the income tax requirement has been apart of Afghan tax law for years, and that compliancewith the withholding tax is a legal requirement underthe Income Tax Law of Afghanistan.

If your employees have questions regarding thewage withholding specifically, or income tax filing ingeneral, please direct them to contact the Ministry ofFinance, Department of Revenue. If you would liketo have a representative of the Department of Reve-nue come to your place of business to address youremployees regarding these or other tax issues,please feel free to contact the Ministry to set up aconvenient time.

Tax Forms and Information

Tax forms and guides are available at the Ministry ofFinance, Revenue Department, Taxpayer Assis-tance Team.

For more information or assistance visit the RevenueDepartment, Taxpayer Assistance Team, visit theTax Information Page at www.mof.gov.af/tax or call075 2005 433.

Note: The Tax Information Page website also con-tains a copy of the Income Tax Law, various publicrulings, forms and Questions & Answers regardingthe wage withholding tax.

Enforcement Provisions

Failure to comply with the requirements of the In-come Tax Law may result in the Ministry of Financeusing administrative powers within the tax law to en-sure compliance. These provisions are contained inChapters XIV & XVI and include fines, penalties andimprisonment.

1386

Ministry of Finance

Afghanistan Revenue Department

Islamic Republic of Afghanistan

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