Understanding Tax Obligations in Oilfield Agreements
Tax provisions in technical service contracts (TSCs) are a common point of discussion in Iraq’s oil and gas industry. The interpretation of these clauses under Iraqi law can have significant financial and operational implications for companies working in the sector. This article examines key legal principles governing tax provisions, the challenges that can arise, and the steps companies can take to ensure compliance and minimise risk.
Contract Interpretation Under Iraqi Law
Iraq follows a civil law system, with contract interpretation governed by the Iraqi Civil Code. Article 157 states that the plain language of an agreement must be given effect. If a contract is clear, courts will apply its terms as written.
Where there is ambiguity, article 160 provides that general contract terms should be interpreted broadly unless there is strong justification for a more restrictive reading. This ensures that contracts are applied as agreed, preventing unnecessary disputes.
The Duty of Good Faith in Contract Performance
Under Iraqi law, contracts must be performed in good faith. Article 150 requires that agreements are carried out honestly, fairly, and in a way that aligns with their intended purpose. This means that parties cannot seek to achieve indirectly what a contract expressly prohibits, and that reinterpreting obligations to shift liabilities in an unintended way may constitute a breach of good faith.
Good faith is a well-established principle in civil law jurisdictions. Iraqi courts, like those in other civil law systems, take a practical approach when assessing whether contractual terms are being applied in a fair and transparent manner.
Taxation in Iraq’s Oil & Gas Sector
Iraq’s tax framework is governed by Law No. 113 of 1982 and Law No. 19 of 2010, which regulate taxation for companies operating in the oil and gas industry. These laws confirm that:
- Income derived from activities in Iraq is subject to local tax, regardless of nationality or residence.
- Withholding tax applies to salaries, wages, and allowances paid to employees working on Iraqi projects.
- Companies cannot transfer their foreign tax liabilities onto Iraqi state entities.
Many contracts reflect these principles by clearly stating that Iraqi government-owned companies are not responsible for paying foreign taxes on behalf of their contractors or subcontractors.
Lessons for Companies Operating in Iraq
Companies working in Iraq’s oil and gas sector should take proactive steps to avoid potential tax-related disputes. These include:
- Ensuring contractual clarity – Tax allocation must be clearly defined to prevent misinterpretation.
- Aligning agreements with Iraqi tax law – Attempting to shift foreign tax burdens onto an Iraqi counterparty is unlikely to succeed.
- Maintaining strong documentation – The way a contract has been applied over time may be used as evidence of intent.
Legal Remedies Under Iraqi Law
If a company is charged for costs it is not responsible for, the Iraqi Civil Code provides for recovery. Article 169 allows a party to seek repayment of amounts improperly invoiced, as well as compensation for any financial losses incurred as a result. Interest may also be claimed at 5% per annum under article 171.
Iraqi courts have upheld these rights in past cases, reinforcing the principle that contractual financial obligations must be strictly applied as agreed.
Final Thoughts
Understanding tax provisions in oilfield contracts is essential for companies operating in Iraq. The best protection is to ensure agreements are drafted with precision, aligned with Iraqi law, and applied consistently. Companies should review their contracts carefully to ensure that tax obligations are clear, enforceable, and in compliance with local regulations.
Speak to Our Arbitration Team
For guidance on arbitration and dispute resolution in Iraq, please contact Mohammed Koperly, managing partner of our Baghdad office, and Ahmad Subhi, Managing Partner of our Abu Dhabi Office.
Ahmad began his legal career at Clifford Chance in Dubai before completing his training contract in London. He later joined Herbert Smith Freehills as an associate, playing a key role in the firm’s regional operations. He went on to serve as Senior Legal Counsel and Legal Director at Media Zone Investments, overseeing venture capital investments. Now leading Salt & Associates’ UAE practice, he specializes in international arbitration, private equity, and media law. With rights of audience before the DIFC and ADGM Courts, Ahmad is recognized for his strategic legal expertise and ability to navigate complex transactions.
Mohammed was educated in the United Kingdom, he is a highly regarded commercial and corporate lawyer with extensive experience in international arbitration, corporate structuring, and cross-border disputes. His career has spanned both Iraq and London, where he has advised multinational corporations on market entry strategies, complex commercial transactions, and regulatory compliance. Having worked with a leading Iraqi law firm and a prominent defence and security firm in London, he has developed a strong reputation for handling high-stakes commercial litigation, asset recovery, and contractual negotiations.
Speak to Our Tax Team
For guidance on tax matters in Iraq’s oil and gas sector, please contact Al Mustansir Billah Al Bakri, Head of Tax and Social Security at Salt & Associates. With over eight years of experience in corporate and tax law, he has built a reputation as a trusted advisor, guiding clients through complex tax regulations and dispute resolution. His expertise spans corporate tax accounting, legal compliance, and litigation, having worked with Iraq’s leading law firms. Known for his strategic approach and deep understanding of Iraqi tax laws, he has successfully represented both local and international companies, securing favourable outcomes in high-profile cases.
