CPA/ORD/19 February 2004/49 

 COALITION PROVISIONAL AUTHORITY ORDER NUMBER 49 

TAX STRATEGY OF 2004 

Pursuant to my authority as Administrator of the Coalition Provisional Authority (CPA), and 

under the laws and usages of war, and consistent with relevant U.N. Security Council 

resolutions, including Resolutions 1483 and 1511(2003), 

Noting the suspension by CPA Order Number 37 of all income tax for assessed income 

resources detailed in Article 2 of Income Tax Law Number 113 of 1982 and the real property 

rent tax of Law Number 162 of 1959 as amended, and all other taxes not specifically identified 

in Order 37 as continuing in force from April 16, 2003, to the end of calendar year 2003 and 

the reinstatement of these taxes on April 1, 2004, including the reinstatement of the income tax 

at the lower maximum rate of 15 percent, 

Noting the desire of the Governing Council to subject both private and public sector 

employees to tax in order to ensure that the tax burden is shared by all sectors of Iraqi society, 

Recognizing that these revenues are for the benefit of the Iraqi people, and 

Determined to create conditions suited to the economic reconstruction of Iraq, including an 

efficient and modern income tax system, 

 

I hereby promulgate the following:

Section 1 

Purpose

The purpose of this Order is to revise the tax rates and tax exemptions of Income Tax Law 

Number 113 of 1982, and the Real Estate Rent Tax Law Number 162 of 1959, to provide 

certain additional exemptions from tax, to suspend certain taxes, and to provide rules for 

applying unused losses against income from the same source earned in future years 

(“carrying forward losses”) in light of the suspension of income taxes for financial year 

2003 and for the first three months of financial year 2004. 

Section 2 

Increase in Allowances 

1) Item (1) of Article 12 of Income Tax Law Number 113 of 1982 is amended to read as 

follows: 

“(1) A resident person shall be granted the following allowances per each year of 

assessment on the basis of his or her status in the year in which the income has arisen: 
CPA/ORD/19 February 2004/49 2

a) ID 2,500,000 for the taxpayer himself (or herself, if she is unmarried (other 

than a widow or divorcee) or if her income is not added to her husband’s 

income), and ID 2,000,000 for his wife, or wives, if she is a housewife and 

has no income or if her income is added to his income. 

b) ID 200,000 for each of his children irrespective of their number. 

c) ID 3,200,000 for the widow or divorcee herself and ID 200,000 for every 

child lawfully maintained by her, regardless of the number.” 

2) Item (5) of Article 12 of Income Tax Law Number 113 of 1982 is amended to read as 

follows: 

“(5) The taxpayer shall be granted an additional allowance of ID 300,000 if his age is 

more than 63 years of age, in addition to allowances granted to him in other sections of 

this Article.” 

3) The allowances as set forth in paragraphs (1) and (2) of this section shall be reduced 

 by one-fourth during financial year 2004. 

Section 3 

Reduction in Income Tax Rates 

1) Item (1) of Article 13 of Income Tax Law Number 113 of 1982 is amended to read as 

follows: 

“(1) Tax shall be imposed on the taxpayer in respect of each year of assessment at the 

following rates: 

 (A) Income of resident individual after granting the allowance(s) provided for in 

 Article 12 as modified by this Order: 

 At the rate of 3% on amounts up to ID 250,000. 

 At the rate of 5% on amounts over ID 250,000 and up to ID 500,000. 

 At the rate of 10% on amounts over ID 500,000 and up to ID 1,000,000. 

. At the rate of 15% on amounts over ID 1,000,000. 

 

(B) Income of non-resident individual (other than the income provided for in 

Article 19 of this Law). 
CPA/ORD/19 February 2004/49 3

 At the rate of 3% on amounts up to ID 250,000. 

 At the rate of 5% on amounts over ID 250,000 and up to ID 500,000. 

 At the rate of 10% on amounts over ID 500,000 and up to ID 1,000,000. 

 At the rate of 15% on amounts over ID 1,000,000. 

(C) Income of limited liability companies, at a fixed rate of 15%. 

 

 (D) Income of private joint-stock companies, at a fixed rate of 15%. 

 

(E) Income of mixed joint-stock companies, at a fixed rate of 15%.” 

(F) The amounts delineating the tax brackets as set forth in paragraphs (A) and 

 (B) shall be reduced by one-fourth for financial year 2004. 

2) Item (2) of Article 13 of Income Tax Law Number 113 of 1982 is amended to read as 

follows: 

“(2) Iraqi nonresident individuals shall be subject to tax at the rates for Iraqi residents 

set forth in Section 3(1) of this Order on their income from Iraqi sources.” 

3) Foreign companies that are registered in Iraq or otherwise have a permanent 

establishment in Iraq will be subject to tax at a fixed rate of 15% on their income in 

Iraq. 

Section 4 

Exemptions 

1) The CPA, Coalition Forces, forces of countries acting in coordination with Coalition 

Forces, and departments and agencies of Coalition Forces’ governments, are not liable 

for any tax or similar charge within the territory of Iraq. 

2) Governments and international organizations are not liable for any tax or similar charge 

within the territory of Iraq. 

3) Foreign (non-Iraqi) employees and foreign (non-Iraqi) contractors and subcontractors of 

the CPA, Coalition Forces, forces of countries acting in coordination with Coalition 

Forces, and departments and agencies of Coalition Forces’ governments, that are 

providing technical, financial, logistical, administrative or other assistance to Iraq, and 

foreign employees of such contractors and subcontractors, shall not be liable to pay any 

tax on income or similar charge within the territory of Iraq on income from foreign 
CPA/ORD/19 February 2004/49 4

sources or on income from or paid on behalf of the CPA, Coalition Forces, forces of 

countries acting in coordination with Coalition Forces, or departments or agencies of 

the governments of Coalition Forces. 

4) Foreign (non-Iraqi) employees and foreign (non-Iraqi) contractors and subcontractors of 

foreign (non-Iraqi) governments, international organizations, and non-governmental 

organizations registered pursuant to CPA Order Number 45, that are providing 

technical, financial, logistical, administrative or other assistance to Iraq, and foreign 

employees of such contractors and subcontractors, shall not be liable to pay any tax on 

income or similar charge within the territory of Iraq on income from foreign sources or 

on income from or paid on behalf of such governments, international organizations, and 

non-governmental organizations. 

5) In addition to the foregoing, the following persons shall be exempt from payment of 

income tax: 

a) members of foreign diplomatic missions to Iraq, as well as members of their 

households, if they are not citizens of Iraq; 

b) members of consular offices, as well as members of their households, if they 

are not citizens of Iraq; 

c) honorary consuls of foreign countries, but only for income received from the 

country that has appointed them honorary consul. 

6) In accordance with administrative guidance to be issued by the Ministry of Finance, 

non-governmental organizations registered pursuant to CPA Order Number 45 and nonprofit organizations that are not required to register as non-governmental organizations 

that are not engaged in political activities are not liable for tax on income or similar 

charge within the territory of Iraq. 

Section 5 

Losses 

Article 11 of Income Tax Number 113 of 1982 is amended by adding new Items (3), (4) and 

(5) to read as follows: 

“(3) Income from financial year 2003 and for the first three months of financial year 

2004 shall not be taken into consideration in determining the income against which 

losses from preceding financial years may be deducted under this article. 

(4) Financial year 2003 shall not be taken into account in determining the 5 consecutive 

years to which losses may be carried under this article. 
CPA/ORD/19 February 2004/49 5

(5) Losses incurred in financial year 2003 and in the first three months of financial year 

2004 may not be carried forward under this article.” 

Section 6 

Reduction in Real Estate Rental Rates

The Law of the Real Estate Tax Number 162 for the year 1959 and its modifications (“the Law 

of Real Estate Tax”) is amended as follows: 

(1) Item (1) of Article 2 of the Law of Real Estate Taxis amended to read as follows: 

“(1) A tax is assessed and collected that is 10% of the annual revenue from all real 

estate including the subject’s living share from the real estate (other than income from 

sales of real estate).” 

 (2) Item (2) of Article 2 of the Law is deleted and Item (3) of the Law of Real Estate Tax is 

renumbered to Item (2). 

 

 (3) Item 1 of Article Twenty-One of the Law of Real Estate Tax is amended to read as 

follows: 

“The tax is to be collected in two equal parts; the first is due the first of January of the 

financial year and the second is due the first of July of the financial year. For financial 

year 2004, the tax will be paid in one part and is due on 1 July 2004. The subject has 

the right to pay this tax at the location of his residence, his work location or in the 

governorate where the majority of his real estate is located. All revenue shall be 

combined. A memo setting forth the calculation and form should be submitted with the 

payment.” 

 (4) Item 2 of Article Twenty-One of the Law of Real Estate Tax is deleted. 

 (5) Item 1(b) of Article Twenty-Two of the Law of Real Estate Tax is deleted and item 

1(c) is renumbered item 1(b). 

 (6) Article Twenty-three of the Law of Real Estate Tax is amended to read as follows: 

“The tax is collected according to the Law of Governmental Secured Debt Collection 

and is considered a secured debt on the subject real estate.” 

Section 7 

Suspension of 25% Levy on Company Profits 
CPA/ORD/19 February 2004/49 6

1) Law No. 101 of 1964 Regulating the Disposal of Company Profits is hereby suspended. 

2) Law No. 9 of 1998 Amending Law No. 101 of 1964 is hereby suspended. 

Section 8 

Suspension of Certain Taxes Until March 31, 2004

The following taxes are suspended from January 1, 2004, until March 31, 2004: 

1) All income tax for assessed income resources detailed in Article 2 of Income Tax Law 

Number 113 of 1982, as amended; and 

2) Real Property rent tax in accordance with Law Number 162 of 1959, as amended. 

3) Other taxes not specifically identified, but that were suspended by CPA Order Number 

37 (Tax Strategy for 2003). 

4) The following specified taxes are not suspended and shall continue in force: 

a) Excellent and first class hotel and restaurant tax in accordance with Resolution 

Number 36 of 1997; 

b) Tax upon the transfer of real property in accordance with Resolution Number 

120 of 2002; 

c) Car sale fee in accordance with Resolution Number 80 of 1998 and previous 

relevant laws in force; 

d) Petrol excise duties including, but not limited to, those provided for in Law 

Number 9 of 1939, Resolution Number 82 of 1996 and the Order Number 66 of 1999 

issued by the Economic Affairs Committee. 

5) The persons and entities listed in Order 37, paragraph 3(2), shall continue 

to be exempt from the taxes specified in paragraph 8(4), above after March 31, 2004. 

Section 9 

Depreciation 

The System of Depreciation and Elimination for Private, Mixed and Cooperative Sectors 

Regulation No. 9 of 1994 is modified as follows: 
CPA/ORD/19 February 2004/49 7

1) Item (3) of Article 3 is modified by adding the following sentence at the end thereof: 

“No part of book value shall be considered to have been cancelled during financial year 

2003 and for the first three months of financial year 2004.” 

2) New Item (5) is added to Article 3 to read as follows: 

“(5) A taxpayer that used the decreased installment method listed in Item 1(b) of Article 

6 during financial year 2002 will compute the depreciation deduction for financial year 

2004 by reconfiguring the opening balance of each asset account as of April 1, 2004. 

The opening balance of each asset account as of April 1, 2004, is equal to the balance of 

the asset account at the end of 2002, increased by the cost of assets purchased in the 

asset account and decreased by the fair market value of assets sold from the asset 

account in financial year 2003 and during the first three months of financial year 2004.” 

Section 10 

2002 Taxes 

1) The suspension of income taxes for financial year 2003 by CPA Order Number 37 does 

not affect income taxes for financial year 2002 and previous years, which remain 

payable by taxpayers and collectible by the Tax Commission. 

2) In case of late payment of taxes owed for financial year 2002, a taxpayer may file a 

written request with the Tax Commission requesting waiver of interest and penalties. 

The Tax Commission may, in its discretion, upon making a good faith determination 

that there was reasonable cause for the late payment, waive such interest and/or 

penalties. 

Section 11 

Government and State-Owned Enterprise Employees 

1. To ensure that the tax burden is shared by all sectors of Iraqi society, salaries, wages 

and allowances received by employees of the Government Offices, public and mixed 

sectors are subject to tax, beginning April 1, 2004. Accordingly: 

a) The phrase in paragraph (5) of Article 2 of the Income Tax Law No. 113 of 

1982 “other than those working for government offices, socialist and mixed 

sector companies” is deleted. 

b) Paragraph (5) of Article 7 of the Income Tax Law No. 113 of 1982 is deleted. 
CPA/ORD/19 February 2004/49 8

2. To ensure that the Ministry of Finance has sufficient capability to accurately and 

comprehensively assess and collect taxes on both public and private sector employees 

in a transparent manner: 

a) For financial year 2004, employees of the government offices, public and 

mixed sectors shall be entitled to an allowance of ID 5,300,000 for 

themselves, spouse, and children collectively under Item (1) of Article 12 of 

the Income Tax Law No. 113 of 1982. If an employee of the public sector has 

more than 4 children, he or she shall be entitled to an additional exemption of 

ID 200,000 per child. 

b) The allowances as set forth in paragraph (2)(a) of this section shall be reduced 

by one-fourth during financial year 2004. 

c) Beginning January 1, 2005, employees of the Government Offices, public and 

mixed sectors shall be entitled to the same allowances as employees of the 

private sector, as set forth in Section 2 of this Order. 

Section 12 

Foreign Tax Credit 

Article 5 of the Income Tax Law No. 113 of 1982 is revised by adding new paragraph (4) to 

read as follows: 

“(4) Income tax paid to a foreign country on income earned in that country may be 

credited against tax paid to Iraq. The amount of the credit may not exceed the amount 

of tax assessed in Iraq on the income earned in the foreign country at the rate in effect 

in Iraq. If taxes paid to a foreign country exceed the amount of this limitation then the 

excess taxes may be carried forward to credit in 5 consecutive years subject to the 

limitation in those years. The taxes paid in the carried forward year will be credited 

first. If, during a taxation period, income is earned in more than one country, the credit 

allowed by this paragraph will be applied on an individual basis to the income earned in 

each foreign country. To be credited, the amount of foreign tax paid to the foreign 

country must be confirmed by either a copy of the tax paid receipt or a confirmation of 

the amount of tax paid from the tax collection agency of the foreign country.” 

Section 13 

Implementation 

The Minister of Finance, in consultation with the CPA Office of Management and Budget, 

may issue Administrative Instructions to implement this Order. 

 

Section 14 

CPA/ORD/19 February 2004/49 1

EXPLANATORY NOTE 

CPA ORDER NUMBER 49, TAX STRATEGY OF 2004 

I. INTRODUCTION 

This note explains how CPA Order Number 49 resumes income taxes that were suspended for the 

2003 financial year by CPA Order Number 37 (Tax Strategy for 2003). Taxes suspended in that 

Order included the corporate and personal income taxes that were imposed on employees in the private 

sector, the self-employed, professionals and small enterprises. Under CPA Order Number 49 

corporate and personal income taxes will be reintroduced on April 1, 2004, at significantly reduced 

rates of no more than 15 percent as compared to the maximum rate of 40 percent under the previous 

income tax system. In addition, the existing allowances have been substantially increased. 

As a result of these changes, the income tax burden on the average Iraqi family will be eliminated or 

substantially reduced. For example, beginning in 2005, the first full calendar year in which the tax 

will be in effect, a one-earner family with four children will not pay tax on the first ID 5,300,000 of 

income compared to ID 1,400,000 under existing law. If that family’s income is ID 9,000,000, the tax 

will be reduced from ID 2,715,000 to ID 475,000, a savings of ID 2,240,000. Annex I describes the 

impact of the new tax rate structure in 2005 for families and single taxpayers. Similar reductions in 

tax will occur in 2004 for the nine months the income tax is in effect. 

Reducing the income tax rates, increasing the allowances, and retaining the rules in effect under 

existing law are important steps in supporting current reconstruction and stabilization efforts in Iraq. 

At the same time, the Ministry of Finance is committed to modernizing the current tax system to 

improve compliance and reduce the administrative burden on taxpayers. Resuming the existing 

income tax system, therefore, is an interim measure pending the completion of the tax reform process 

and restoration of the tax administration capabilities of the Tax Commission. 

II. INDIVIDUAL INCOME TAX 

1. Increased Allowances 

To lower the tax burden on individuals, the allowances for individuals described in Article 12 of 

Income Tax Number 113 of 1982 are increased by CPA Order Number 49. The full increase of 

exemptions will not occur until 2005, the first full year to which the order applies. Beginning in 2005, 

for each taxpayer, the allowance will increase from ID 600,000 to ID 2,500,000, with the allowance 

for a nonworking wife increasing from ID 400,000 to ID 2,000,000. The allowance for each child will 

double from ID 100,000 to ID 200,000, while the allowance for a widow will increase from ID 

1,000,000 to ID 3,200,000. These exemptions will be decreased by one-fourth for the year starting 

April 1, 2004, to reflect the fact that the income tax will not be reinstated for the first quarter of 2004. 

2. Top Rate Lowered to 15 Percent 

The personal income tax imposed on employees of private sector companies and collected through 

withholding by their employers will recommence on April 1, 2004, with a maximum rate of 15 percent 

as shown in the table below. 
CPA/ORD/19 February 2004/49 2

 Rate Annual Income (after allowances) 

3% Up to ID 250,000 

5% Over ID 250,000 and up to ID 500,000 

10% Over ID 500,000 and up to 1,000,000 

15% Over ID 1,000,000 

The amount delineating the tax bracket amounts will be decreased by one-fourth for the year starting 

April 1, 2004, to reflect the fact that the income tax will not be reinstated for the first quarter of 2004. 

Many workers will be exempt from the tax because of the increased allowances provided for in CPA 

Order Number 49. For those workers subject to the tax, the lower rates of 3-15 percent, compared to 

the former top rates of 40 percent for Iraqi residents and 45 percent for non-residents (Article 13 of 

Income Tax Law No.113), will reward work, encourage savings and investment by workers, and 

increase compliance with tax laws. 

3. Compliance Measures 

The wage withholding system will be improved in 2004 to better assist employers to meet their 

obligations under the law. The Tax Commission will create a new comprehensive taxpayer 

identification number system that will facilitate tracking of and improved control over tax payments. 

The Tax Commission will issue a new guide for employers that contains withholding tables reflecting 

the new rate structure. In addition, the Tax Commission will simplify information returns and 

payment forms. These new processes and forms will be distributed to employers well in advance of 

the deadline for remitting the tax on wages earned in 2004. 

4. Public and Mixed Sector Employees 

Beginning April 1st, public and mixed sector employees will have to share the tax burden along with 

the rest of Iraqi society. This is necessary to ensure that sufficient tax revenues can be collected while 

not overburdening any segment of society with high tax rates. To ensure that the tax on public and 

mixed sector employees is collected accurately and transparently, tax collection systems for those 

employees need to be developed. This will take time. Therefore, to ensure that the tax is accurately 

and transparently collected in 2004, higher allowances will apply to public and mixed sector workers. 

These higher allowances will effectively exempt many public and mixed sector workers from taxation, 

and with fewer such workers to tax initially, the capacity of the tax collection system can be properly 

developed over time. Beginning January 1, 2005, however, public, mixed, and private sector workers 

will be subject to taxation at the same rates. 

Example: 

Financial year 2004. Assume a public sector employee with a wife and two children is paid 

wages of ID 430,000 by the public sector employer during each month of financial year 2004. 

The employee will not be subject to tax in financial year 2004 since the monthly allowance 

allowed the employee during financial year 2004 is ID 441,667 (i.e., one-ninth of the presumed 

annual allowance of ID 3,975,000. The presumed annual allowance for financial year 2004 is 

ID 3, 975,000 or ID 5,300,000 reduced by one-quarter to take into account that the income tax 

is reinstituted on April 1, 2004). 
CPA/ORD/19 February 2004/49 3

Financial year 2005. Beginning on January 1, 2005, the employee is paid ID 450,000 per 

month. Under the order, the employee for financial year 2005 is entitled to a total allowance of 

ID 4,900,000 (i.e., personal allowance of ID 2,500,000, a spousal allowance of ID 2,000,000 

and an allowance of ID 200,000 for each child) or a monthly allowance of ID 408,334.. 

Accordingly, the employee will be subject to tax on ID 41,666 of wages. The taxpayer’s 

public sector employer will be required to withhold tax from that amount. 

III. CORPORATE INCOME TAX 

1. Lower 15 Percent Tax Rate 

The tax rate for income earned by corporations from April 1, 2004 will be a flat 15 percent. As 

provided for in the current Income Tax Law Number 113 of 1982, the rate will be levied on the 

income of private sector companies, including income of foreign companies operating in Iraq. This 

lower rate, compared to the prior rate of up to 40 percent, will encourage reinvestment of company 

profits. This in turn will encourage increased capital investment and job creation in Iraq by private 

sector firms. The lower flat rate also will lead to increased revenue collection as companies respond to 

Iraq’s transition to a free market-based economy. 

2. Transition Rules 

CPA Order Number 49 includes two transition rules to clarify the application of certain tax provisions 

to compute net income properly beginning on April 1, 2004. 

a. Treatment of Losses under Article 11 of Income Tax Law Number 113 of 1982. 

Under Article 11 of Income Tax Law Number 113, taxpayers can apply losses in excess of income 

against income earned from the same source in future years (“carry-forward” the unused loss) for up to 

five years. CPA Order Number 49 includes three modifications to Article 11 of Law Number113. 

First, CPA Order Number 49 provides that income from financial year 2003 and the first three months 

of financial year 2004 shall not be considered in determining the income against which losses may be 

deducted. Second, CPA Order Number 49 provides that any unused losses as of 31 December 2002 

may be carried forward for an additional year. Third, CPA Order Number 49 provides that losses 

incurred in financial year 2003 and in the first three months of financial year 2004 may not be carried 

forward under Article 11. 

Examples: 

• Modification 1: In 2002, Company A incurred a loss of 10 million dinars. In 2003, Company 

A had profits of 8 million dinars. Because the income tax was suspended for 2003, the carryforward loss of 10 million dinars cannot be used to offset the profits of 8 million dinars. 

Instead, the 10 million dinar loss is carried forward for up to five years beginning with the 

financial year beginning on April 1, 2004.
CPA/ORD/19 February 2004/49 4

• Modification 2: In 2003, Company B incurred a loss of 5 million dinars. Because the income 

tax was suspended for 2003, the 5 million dinar loss cannot be carried forward and is 

extinguished for tax purposes. 

• Modification 3: Company C in 2000 had a net operating loss of 10 million dinars. Under prior 

law, the loss could be used to offset profits earned in 2001-2005. In 2001 and 2002, the 

company had profits of 2 and 4 million dinars, respectively, and it offset these profits with the 

10 million dinar loss. At the end of 2002, its net operating loss was 4 million dinars. Under 

the transition rule announced in CPA Order Number 49, the 4 million dinar loss can be used to 

offset cumulative profits earned up to that amount in 2004, 2005 and 2006. 

b. Depreciation Deductions. Under Article 8 of Income Tax Law Number 113 of 1982 

and the “System of Depreciation and Elimination for Private, Mixed and Cooperative Sectors Number. 

9 of 1994,” taxpayers are entitled to take deductions for depreciation of buildings and other tangible 

assets and for amortization of intangible assets. CPA Order Number 49 modifies Regulation Number 

9 on depreciation rules regarding computation of depreciation deductions in 2004. The Order contains 

3 modifications to Regulation Number 9. First, no part of book value shall be considered to have been 

cancelled during financial year 2003 and the first three months of 2004. Second, if the taxpayer used 

the straight line method of depreciation in 2002, the depreciation deduction in 2004 is computed by 

extending the useful life of depreciable property by one year and three months. With respect to 

depreciable property purchased in 2003, the useful life of such property will commence in 2004. 

If the taxpayer used the declining balance method of depreciation in 2002, the depreciation deduction 

for 2004 is computed by reconfiguring the opening balance of each group as of April 1, 2004. The 

opening balance of each group for 2004 is equal to the balance of the group at the end of 2002 

increased by the cost of property purchased in the group and decreased by the fair market value of 

property sold from the group in 2003 and the first three months of 2004. 

Examples: 

• Straight-line: Company A purchased depreciable property with a useful life of five years 

for 1.2 million dinars in 2000. It took depreciation deductions using the straight line 

method of depreciation of 240,000 dinars each year, 20,000 per month, from 2000-2002. 

To compute depreciation deductions beginning April 1, 2004 the useful life of the property 

is extended by one year and three months to March 31, 2006. As a result, Company A can 

claim a depreciation deduction for such property in 2004 of 180,000, another depreciation 

deduction of 240,000 in 2005, and 60,000 in 2006. 

• Straight-line: Company B purchased depreciable property with a useful life of 10 years for 

4 million dinars in 2003. Company B can depreciate the property over 10 years beginning 

on April 1, 2004. 

• Declining Balance: Company C uses the declining balance method of depreciation. At the 

end of 2002, the balance of Group 3 property was 10 million dinars. No purchases or sales 

were made in 2003 or during the first three months of 2004. Company C can claim a 

depreciation deduction beginning April 1, 2004 for Group 3 property equal to 15 percent 
CPA/ORD/19 February 2004/49 5

(the yearly full rate is 20% for this group of property) of 10 million or 1.5 million dinars for 

Group 3 property. 

• Declining Balance: Company D uses the declining balance method of depreciation. In 

2003, it purchased Group 2 property for 5 million dinars. At the end of 2002, the balance 

of Group 2 property was 15 million dinars. Assuming no purchases or sales of property in 

Group 2 in 2003 and the first three months of 2004, Company D can claim a depreciation 

deduction in 2004 for Group 2 property equal to 15% of 20 million dinars (the yearly rate 

for Group 2 property is 20%) or 3 million dinars. 

3. Revision of Company Tax Return 

In order to ease the compliance burden on companies and improve tax collection, the Tax Commission 

will redesign the company tax return, simplifying the computation of tax liability. The new form will 

clearly explain how each element of the return should be computed and will require more detail on the 

income and deductions of the company so that its tax liability may be more easily determined. At the 

same time, the new form will eliminate the requirement to furnish significant commercial information 

unrelated to the tax liability computation. The new form will reconcile financial statement information 

with the tax return and will facilitate the transcription of the information to a computerized tax 

database. A draft form will be prepared by mid-2004 and will be made available for public comment. 

4. Compliance Measures 

In tandem with the changes outlined above, the Ministry of Finance will introduce in 2004 several 

measures to boost compliance and ease the administrative burden on taxpayers and the Tax 

Commission. One of the most significant initiatives will be the introduction of taxpayer identification 

numbers for the largest companies. This in turn will enable the Tax Commission to track payments 

made by each company to ensure greater accountability and control. The Tax Commission will phasein computerization of the existing interim tax system during 2004 to facilitate processing of tax returns 

and payments. In addition, the Tax Commission will launch a comprehensive tax training program for 

tax officials, along with a program to educate companies and their accountants on the revised company 

tax return. 

IV. FOREIGN TAX CREDIT 

The Order modifies Article 5 of the Income Tax Law Number 113 of 1982 to provide for a foreign tax 

credit for taxes paid to foreign countries. Because the foreign tax credit is intended to alleviate double 

taxation, and not to reduce Iraqi tax liabilities on profits earned within Iraq, the foreign tax credit is 

limited to Iraqi tax liability on income earned in the foreign country. For example, an Iraqi company 

(or individual) with ID 20,000,000 of income earned in Jordan that faces an Iraqi tax rate of 15 percent 

has a foreign tax credit limit of ID 3,000,000 (15 percent of ID 20,000,000). If the company (or 

individual) pays Jordanian income taxes of less than ID 3,000,000, then the company (or individual) 

would be entitled to claim a foreign tax credit for all of its Jordanian income taxes paid. If, however, 

the company (or individual) firm pays ID 4,000,000 of Jordanian taxes, then it would be permitted to 

claim no more than ID 3,000,000 of foreign tax credits. The excess Jordanian taxes in the amount of 
CPA/ORD/19 February 2004/49 6

ID 1,000,000 may be carried forward to the next 5 years and claimed as a credit subject to the 

limitation in those 5 years. The foreign taxes paid in the carried forward year will be credited first. 

The order provides that the limitation on the amount of foreign taxes that will be creditable is to be 

determined separately for each country to which the company (or individual) paid tax. In addition, the 

Order provides that the foreign tax will not be creditable unless the taxpayer substantiates the amount 

of tax paid by either supplying a copy of the payment receipt or a statement from the tax authority of 

the foreign country verifying the amount of tax paid. 

V. REAL ESTATE RENTS TAX 

In order to simplify the administration of the real estate rents tax (Real Estate Tax Law Number 162 

of 1959), the Order provides that rents from real estate will be taxed at a flat rate of 10% of the 

combined rental income from all real estate rented by the taxpayer. This replaces the two-tier system 

of current law. 

VI. CONCLUSION 

This note summarizes measures necessary to resume income taxation in Iraq in 2004 and improve 

compliance on an interim basis. The tax system must be reformed to support a market economy. 

Towards that end, the Ministry of Finance will comprehensively assess the tax system to identify 

means of (i) eliminating distortions that interfere with market activity; (ii) improving fairness by 

removing exemptions; and (iii) simplifying rules to improve compliance and ease administrative 

burdens on individual and corporate taxpayers. The Tax Commission will also be modernized by: (i) 

adopting a functional structure; (ii) computerizing processes and systems; and (iii) 

improving the training of tax officials. A formal consultation process with the taxpaying public will 

ensure that these reforms will serve the needs of the Iraqi people. 
CPA/ORD/19 February 2004/49 7

Annex I 

Impact of New Tax Rate Structure in 2005

One-earner Family with 4 Children 

Annual Income Current Tax New Tax Change in Tax 

I.D. I.D. I.D. I.D. 

1,000,000 0 0 0 

1,500,000 10,000 0 -10,000 

2,000,000 95,000 0 -95,000 

3,000,000 355,000 0 -355,000 

5,000,000 1,115,000 0 -1,115,000 

6,000,000 1,515,000 40,000 -1,475,000 

9,000,000 2,715,000 475,000 -2,240,000 

One-earner Family with 2 Children 

Annual Income Current Tax New Tax Change in Tax 

I.D. I.D. I.D. I.D. 

1,000,000 0 0 0 

1,500,000 35,000 0 -35,000 

2,000,000 135,000 0 -135,000 

3,000,000 415,000 0 -415,000 

5,000,000 1,195,000 3,000 -1,192,000 

6,000,000 1,595,000 85,000 1,510,000 

9,000,000 2,795,000 535,000 2,260,000 

Single Taxpayer with no Dependents 

Annual Income Current Tax New Tax Change in Tax 

I.D. I.D. I.D. I.D. 

600,000 0 0 0 

700,000 10,000 0 -10,000 

750,000 15,000 0 -15,000 

800,000 20,000 0 -20,000 

1,000,000 55,000 0 -55,000 

1,500,000 155,000 0 -155,000 

2,000,000 295,000 0 -295,000 

3,000,000 635,000 20,000 -615,000 

5,000,000 1,435,000 295,000 -1,140,000