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Contractors Accuse Iraq of Shake Downs to Force Tax Payments

FILE - A contractor walks between trucks returned from Iraq to Camp Arafjan in Kuwait December 16, 2011. Vehicles which return from Iraq are scrapped or repaired, cleaned and shipped to Afghanistan or returned to the United States.
FILE - A contractor walks between trucks returned from Iraq to Camp Arafjan in Kuwait December 16, 2011. Vehicles which return from Iraq are scrapped or repaired, cleaned and shipped to Afghanistan or returned to the United States.

American military contractors operating in Iraq are accusing Baghdad of employing strong-arm tactics to make them pay exorbitant income taxes, a practice they've warned the Trump administration is hampering the fight against Islamic State extremists.

To force payment of the taxes, which the companies say are haphazardly calculated and can total millions of dollars, Iraqi authorities have held up — and even threatened to stop altogether — delivery of essential supplies, including food, fuel and water, bound for U.S. and coalition forces, according to interviews and documents obtained by The Associated Press.

Iraqi government officials also have refused to issue, or have delayed, the delivery of work visas to employees of companies that won't hand over the money.

A senior executive at a U.S. company that supports American troops in Iraq said contractor vehicles are stopped at checkpoints frequently and ordered to produce documents that certify they've paid the taxes or prove their company has received an extension from Iraq's tax commission. The executive spoke on condition of anonymity to avoid retaliation from the Iraqi government for speaking out publicly.

He said the Iraqis typically calculate the tax bills by first determining the total value of the contract and then charging 20 percent of what they estimate the company's gross revenue would be. That can lead to eye-popping yet wildly inaccurate totals as high as $20 million. The big number is really aimed at getting the company to agree on a smaller yet still substantial amount, the executive said.

Najiha Abbas Habib, director general of Iraq's tax authority, rejected the allegation U.S. contractors are being gouged. American companies working in Iraq are not exempt from taxation, she said, adding that Iraq's tax rates are actually lower than other Middle East countries.

"Many foreign companies operate in Iraq without paying any taxes at all," Habib said.

Robert Mearkle, a spokesman for the U.S. Embassy in Baghdad, denied the tax demands have undercut the counterterrorism mission. "Iraqi enforcement of tax laws has not disrupted U.S. efforts to defeat ISIS," he said in an emailed statement, using an alternative acronym for the militant group that in 2014 burst into western and northern Iraq from Syria.

But a trade group representing a number of the contractors told Secretary of State Rex Tillerson several months ago that the tactics present a "direct threat to the U.S. government's mission in Iraq." The Professional Services Council also said in the previously undisclosed May 1 letter to Tillerson that the arbitrary way the Iraqis are collecting the taxes heightens the potential for fraud and waste in a country that already ranks as one of the most corrupt in the world.

David Berteau, president of the Professional Services Council, estimated in an AP interview that the Pentagon spent about $1 billion in just the last year on contracts with about 20 U.S. companies for support in Iraq. The work ranges from supplying U.S. and coalition bases to construction and weapon system maintenance.

Berteau said the companies either seek reimbursement from the U.S. government for the taxes or build the expense into the price they charge on the contract.

"Either way, U.S. taxpayers eventually foot the bill," Berteau said.

But the Trump administration hasn't confronted senior Iraqi officials over the matter. Tillerson, in a brief response he sent the organization in early July, said a diplomatic note between the two countries approved in 2014 during the Obama administration gave U.S. government personnel but not contractors protections from Iraqi law.

Tillerson said the U.S. Embassy in Baghdad routinely engages with the Iraqi government "to ensure fair treatment" of the U.S. contractors working there. But he also said it's "always important that U.S. companies follow local laws," which include the payment of taxes.

And Tillerson gave no indication the Trump administration would pursue what U.S. companies with overseas contracts really want: an agreement with the Iraqi government that gives them exemptions from the taxes and other legal protections to shield them from being prosecuted in Iraqi courts.

Iraq's push for the taxes has coincided with a sustained drop in oil prices. Oil revenue makes up nearly 95 percent of Iraq's budget, but the country has been reeling under an economic crisis since 2014, when prices began falling from a high of above $100 a barrel.

The seizure of territory across Iraq by the Islamic State group in 2014, including the fall of Mosul, worsened the situation. Badly needed resources have been diverted from productive investment to fight a long and costly insurgency.

U.S. Central Command, which oversees military operations in Iraq, referred questions to the State Department. The command declined to provide a list of the U.S. companies in Iraq with Defense Department contracts.

Among the companies operating in Iraq are General Dynamics Land Systems and DynCorp International. General Dynamics, which is based in Michigan, received a $65 million contract late last year to support Iraq's fleet of M1A1 battle tanks. DynCorp, located in McLean, Virginia, won a contract in 2015 with a potential value of $139 million to school Iraqi troops in vehicle maintenance and repair. Neither company responded to requests for comment about whether they'd paid taxes to the Iraqi government.

In its version of the annual defense policy bill, the GOP-led House Armed Services Committee expressed concern over Iraq's tax collection efforts. The legislation, approved in July, requested a briefing by the Defense and State departments on "tax collection, visa denials, and other issues that are affecting U.S. civilian contractors in Iraq."

And Sen. John Cornyn of Texas, the Senate's No. 2 Republican, has thrown his support to the U.S. companies, telling Tillerson and Defense Secretary Jim Mattis that he's concerned the income tax demands could lead American contractors to avoid Iraq altogether.

Cornyn wrote in early August that Iraq is "the only unstable conflict zone in the world where U.S. contractors and their employees have no legal tax protections."