Afghanistan targets US defense contractors in row over back taxes

By Jessica Donati KABUL (Reuters) - Afghanistan is threatening to crack down on U.S. defense contractors it says owe hundreds of millions of dollars in back taxes, including by freezing their bank accounts and refusing to renew yearly business licenses when they expire. The United States disputes some of the payment demands, saying companies were exempt under military agreements in force at the time, and both sides are trying to resolve the dispute before the deadline set in a new deal between the nations. It has been extended by three months to Sept. 1. Major defense firms targeted include Raytheon, DynCorp International and Supreme Group, and they provide vital services to NATO forces, diplomatic missions and the aid sector. "If their tax position has not been cleared, we cannot issue licenses," deputy finance minister for customs and revenue, Gul Maqsood Sabit, told Reuters, referring to all companies being looked into. "We do not want to affect the movement of goods to the U.S. military because they are fighting a war... (but) if it comes to it, we will go all the way to Interpol," he added. Sabit did not specify why Afghanistan might approach the international police organization, but did say tough measures including travel bans for executives could be imposed on companies that did not agree to pay. One of the finance ministry's main targets, Supreme Group, is pulling out after its existing contracts end this year, although it did not give a reason. The size of the Afghan market for foreign contractors has shrunk significantly in recent years after the U.S.-led NATO force went from more than 100,000 at its peak to 9,800 soldiers now who train local forces and carry out limited operations. But supporting the mission is still a sizeable business, and other firms want to continue if the tax row is resolved. Over $20 billion is estimated to have been spent on U.S. Department of Defense contracts in Afghanistan from 2002 to 2014. "TOUGH TO SWITCH" For Kabul, the dispute presents tough choices. On the one hand, with revenue badly needed to run the country, significant tax payments would be welcome. Afghanistan has also sought to reassert control over areas of the economy dominated by foreign companies and aid groups. On the other, it relies heavily on U.S. Department of Defense contractors, of which there are around 30,000. It is difficult to switch contractors, because "the U.S. military has strict contracting procedures," said Sabit. "My problem has always been with contractors; they do not behave." The companies involved say the U.S. government is leading negotiations. "This is a policy dispute regarding tax exemptions between the U.S. and Afghan governments. We are aware that both governments are working toward a final resolution," said a spokeswoman for DynCorp. A U.S. official in Kabul said liabilities varied by firm, and Washington was working to ensure the law was applied fairly. "We insist that the government carefully apply relevant exemptions as provided by relevant bilateral agreements between the U.S. and Afghanistan," the official said. SLOW GOING Progress towards a solution has been slow, according to the International Stability Operations Association (ISOA), which represents a global network of companies including DynCorp. "We don't know what will happen," ISOA president Ado Machida said, adding that he feared more such cases in the future as a new Afghan-U.S. security pact did not clarify the position of contractors working for some sections of the U.S. government. Machida also said some contractors were being unfairly targeted by Afghan government officials. "Mid-level bureaucrats are coming out of the woodwork ... and bringing up all of the issues that in the past were resolved, and re-opening cases," he told Reuters. According to the finance ministry's Sabit, most of the money is owed by three big companies and a special commission has been appointed to deal with them. Sabit declined to name them, but company officials said privately that intense efforts surrounded Supreme Group, DynCorp and Raytheon. "Supreme Group has not applied for any future business license to operate in Afghanistan after the earlier licenses ended in March 2015," a company spokeswoman said. Supreme Group was once the primary supplier of food and water to U.S. troops, but lost its $8.8 billion contract after pleading guilty to criminal fraud. DynCorp said it supported several U.S. government contracts and had active licenses. Raytheon did not respond to requests for comment. (Additional reporting by Mirwais Harooni; Editing by Mike Collett-White)