IHK Nürnberg für Mittelfranken ‘Doing Business in Iraq’ 1 /05/2018 · Presentation . Doing Business in Iraq –6 Typical Problems with ... Excursus: International Oil Companies

Doing Business in Iraq – Typical Problems with Supply Contracts

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IHK Nürnberg für Mittelfranken

‘Doing Business in Iraq’

15/05/2018

Typical problems from an entrepreneurial perspective

by example of a supply contract to Iraq.


2

Why Iraq?

Potential Customers

Supply Contract to Iraq

1. General Remarks

2. Tendering

3. Contracting

4. Taxation

5. Payment

6. Import & Documents

AGENDA


3

Why Iraq?

Backlog demand in all sectors

Healthcare

Education

Infrastructure

Industry

Oil & gas

Sufficient funds to finance projects

143bn barrels oil reserves

Relatively untapped market

Huge opportunities for foreign companies


4

Why Iraq?

Potential Customers


1. General Remarks

2. Tendering

3. Contracting

4. Taxation

5. Payment


AGENDA


5

Potential Customers

1) Public Customers

Ministries

State Companies (incl. state oil companies)

Governorates

2) International Oil Companies (IOCs)

3) Private Iraqi Customers

Focus of

Presentation


6

Potential Customers Excursus: International Oil Companies (South Iraq, Selection)

South Oil

Company

(SOC)/

Basrah Oil

Company

(BOC)

National JV

Partner (25%)

BP & Petrochina

International JV

Partners (75%)

ENI, Occidental &

KOGAS

ExxonMobil

Lukoil & Statoil

Shell & Petronas

Oil Fields &

Production Targets

2016 (as per 2013)

Rumaila

2,850,000 b/d

Zubair

1,200,000 b/d

West Qurna 1

2,800,000 b/d

West Qurna 2

1,800,000 b/d

Majnoon

1,800,000 b/d

1,500,00 b/d

475,000 b/d

470,000 b/d

420,000 b/d

BOC

235,000 b/d

Actuals

2017/2018e


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Why Iraq?

Potential Customers


1. General Remarks

2. Tendering

3. Contracting

4. Taxation

5. Payment


AGENDA


8


GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5

IMPORT & DOCUMENTS 6


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1) General Remarks

Long-term approach and perspective required

Relations

Trust

Specifications

Procedures &

Bureaucracy

Time

Education & Persuasion Efforts

Time & Nerves

Issues Required

Security Trustworthy Partners &

Adequate Security Concept

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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2) Tendering | Public Customers

General Tender

Tender Types

Limited Tender

Remarks

• Public announcement

• > 50,000,000 IQD

• Submission of qualifying documents followed by

invitation to bid to qualified bidders

• Open tender, public announcement

• > 50,000,000 IQD

Two-Phase Tender • Submission of technical offer

• Subsequent submission of commercial offer

Direct Invitation • Invitation to selected companies (=> 3)

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5


One-Offer Tender

Purchase Committee

Tender

• Invitation to one bidder

• Direct awards

• < 5,000,000 IQD


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General Tenders vs.

Private Invitations

Issues

Formal Requirements &

Registrations

Remarks

• Long registration procedures, permanent follow-up

required

• Requirements as trade barriers, e.g. Ministry of

Oil: ~ USD 1.7m share capital

• Required for private invitations: trust, track record,

registration and pre-qualification

Specifications &

Tender Terms and

Conditions

• Diverse professional levels, from acceptable to

disastrous:

- Form / language

- Conditions

- Completeness

- Accurateness

- Tender period

Re-Tendering

• Reasons: - too few offers

- missing or miscalculated

project budgets

• Risk of offer price disclosure

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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General Issues / Common Experiences

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5


Intransparent decision

making processes

Lack of experience in

tender committees

Unclear technical

requirements

Lack of essential

information

Improper tender

publishing

Short bidding times

No consultants

Site readiness

Selection of lowest

bid neglecting

quality/technical specs

Contradicting contract

terms

No/rare application of

model contracts

Estimated costs below

price levels


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Excursus: International Loans

Public Budget 2018 ($ 88bn)

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5


World Bank

$ 1.3bn + $ 296m

IMF

$ 1.89bn

JICA Japan

$ 236m + $ 692m

Saudi

Development Fund

$ 35m

JBIC

$ 94m

KfW

$ 179m + $ 284m

Etc.

French

Development Agency

$ 88m

British Export Loans

$ 1bn

Swedish Loans

$ 141m

Italian Loans

$ 93m

Kuwait

Development Fund

$ 94m

Investment Budget 2018 ($ 20bn), thereof $ 4.5bn from Foreign Loans


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Excursus: International Loans

International Loans

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5


Partly routed via International Organizations

under Consultancy Involvement

REFAATO

Reconstruction Fund for Areas affected by Terrorist Operations:

https://www.refaato.iq/en

Mainly for liberated areas

Infrastructure Electricity

Anbar Ninivah Salah Ad-Din Diyala


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2) Tendering | IOC Customers

Professional Tendering

Manifold tender designs depending on specific IOCs

Pre-qualification and registration procedure time consuming

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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3) Contracting | Public Customers 1

Contract Drafts

Issues Remarks

• Diverse professional levels,

from acceptable to disastrous:

- Form / language

- Completeness

- Accurateness

Communication

• Diverse professional levels and speed of response

• Communication language English or Arabic

• Presence for follow-up required (with exemptions,

e.g. oil companies)

Conditions

• Specific conditions unnegotiable due to Iraqi rules

and regulations, e.g.:

- Performance Bond before contract

signing

- Penalty up to 10%

• Sometimes ministry-specific regulations hardly

implementable: e.g. Certificate of Origin

Legalisation; exlusion of war risks

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Taxation

Issues Remarks

• Contract content and wording affects contract

taxation/taxation exemption

Document Legalization

• Annualy legalized company registration

documents required for offer submission

• Legalization procedure time-consuming with 6

involved institutions

• In case of award, but depending on specific public

customer, sometimes legalization of all offer

documents required

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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3) Contracting | IOC Customers

Professional Contracts

Professional contract drafts

Conditions

Due to Iraq state share in IOC joint ventures, certain regulations of

the Ministry of Oil apply, resulting in complicated procedures (e.g.

Certificate of Origin legalization)

IOCs tend to shift risks to suppliers after negative custom and tax

clearance experiences in the past

DAP/DDP supplies preferred Incoterm meanwhile

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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4) Taxation | Iraqi Income Tax | General 1

In general, all revenues derived in Iraq are subject to income tax, also for

foreign companies

Partial performance in Iraq sufficient to cause full taxation:

For special projects, tax exemption letters can be applied for.

- Branch or rep office in Iraq, and contract signed

or executed (partly by them), or

- Handling activities like customs clearance

handled by supplier („D“ incoterms), or

- Contract (partially) paid inside Iraq, or

- Installation, maintenance, engineering work

included, or

- Payment via barter deal, or

- Etc.

Business in Iraq

Supply contract subject

to Iraqi income tax

- Non-fulfilment of above criteria indicates

business with Iraq

Business with Iraq Supply contract not

subject to Iraqi income

tax; tax exemption

letter required

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Corporate income tax is 15%, calculated on deemed profits of 20-40% (in

practice deemed profits of 20-23% assumed).

In practice 3.0 - 3.5% is collected on the goods’ value is payable at the

entry port. This amount is set off against requested tax payment by

responsible tax authority.

Public customers have to withhold up to 10% (in practice 3.0 – 5.0 %

WHT) of the payments until supplier proves tax settlement or tax

exemption documents.

Income tax payment to be anticipated in the offer/contract,

wherever applicable.

If not applicable, tax exemption letter to be arranged for (time-

consuming procedure)

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Differing income tax rate for contractual income from IOCs

For contracts with IOCs (oil & gas exploration related foreign

companies/activities), income tax rate is 35% on deemed profits (vs.

15%).

This results in 7.0 – 14.0% WHT, withheld by IOCs on all contracts

subject to income taxation.

In practice, mainly 7.0% WHT applies, whereas IOCs settle suppliers‘

income tax obligation usually directly to the tax authority.

As IOCs tend to contract under DDP incoterms, the suppliers‘ revenues

are subject to Iraqi income taxation, as contracts are considered

„business in Iraq“ and not „business with Iraq“.

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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EXCURSUS Custom Tariffs/Reconstruction Levy:

Besides income taxation, 5% reconstruction levy on goods‘ value to be

paid by importer in at the entry port, i.e.:

for „C“ incoterms, customers‘ obligation

For „D“ incoterms, suppliers‘ obligation

For supply contracts with public customers, custom tariff/levy exemption

letters can be applied for.

Provision of custom tariff/levy exemption letter time critical due to delay

and cost in custom clearance procedure (demurrage fees etc.)

Follow-up of custom tariff/levy exemption letter in any case

required by supplier

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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5) Payment | Public Customers 1

Payment per bank transfer against invoice

Not practice, not observed, neither recommended due to payment delays.

Cash or Payment

Not to be recommended due to:

Income taxation issue („business in Iraq“)

Payment delays and uncertainty

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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L/C Payment 1

Different level of knowledge on L/C payment standards

In general, level of L/C experience developable

Opening banks depending on L/C amount, usually:

< USD 2m: private banks

USD 2m – USD 4m: state banks

> USD 4m: Trade Bank of Iraq

L/Cs usually not correctly opened, adjustment to be made

L/C approval process:

Time until opening should take 3 weeks, in fact it takes > 3 months.

MoPlanning Customer MoFinance Central Bank

Trade Bank of Iraq Development

Fund for Iraq

Possibly referral to

other Iraqi bank

Start opening

procedure

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Recommendations to avoid payment problems:

Final payments of retentions/performance bond repayments often

problematic; deductions not unsual. Should be considered in

pricing!

Exact L/C instructions should be integral part of contracts!

Payment terms „upon instruction of the applicant“ are usual.

Avoidance of such clauses strictly recommended! However, up to

20% rentention market usage.

Extend allowed period for document presentation to 40 days to

documents legalization procedure!

Attempt to influence decision concerning opening bank due to L/C

confirmation problems!

Try to check L/C draft before submission to Trade Bank of Iraq by

customer to avoid amendment loop!

Consult your specialised freight forwarder!

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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6) Import & Documents 1

Commercial Invoice

(legalized)

Documents provided by

supplier/shipper

Required import documents:

Packing List

(+Arabic translation)

Certificate of Origin

(legalized)

Certificate of Conformity (CoC) or

Certificate of Inspection (CoI)

(to be considered in offer calculation)

Additional contract-specific

documents

Custom Tariff/Reconstruction Levy

Exemption Letter

(where applicable)

Documents provided by importer

Tax Exemption Letter

(where applicable)

Import License

(legalized)

MNR approval

(Kurdistan)

Authorization Letters

(for follow-up shipments, customs,

forwarder etc.)

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Exemplary Application Procedure for

Custom Tariff/Reconstruction Levy Exemption Letter

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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General:

Supplier/shipper should follow up all required documents, even the ones

in the customer‘s responsibility.

Otherwise, risk of delay and costs in the customs is non-negligible.

Clearance times in port of entry: up to 10 days depending on specific

entry port, given all required documents are available.

Certificate of Confirmity / Certificate of Inspection costly and time-

consuming; discussed with officially approved Third Party Inspection

companies well in advance.

Certificate of Origin: Legalization issue especially problematic for traders

with place of business outside country of origin.

100% correctness of documents crucial for import (and L/C

payment) procedure.

Consult specialized freight forwarder on every shipment.

GENERAL REMARKS 1

TENDERING 2

CONTRACTING 3

TAXATION 4

PAYMENT 5



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Iraq:

World Bank‘s „Doing Business Report“ Rank No. 165 (out of

185).

It‘s not easy, it is indeed difficult, but it‘s worth it:

the country, the people, the needs, the opportunities.

Calculate carefully, consider all obstacles, find the right

partner to guide you and develop your Iraq activities!


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Frankfurt, Germany

MDC Middle East Development

Company GmbH

Am Molkenborn 2

63303 Dreieich

Germany

MDC Middle East Development Company Group

[email protected]

Contact

Basrah, Iraq

Noor Al-Wahage for Oil Services LLC

Sayid Ameen Street 1

Bradheya District

Al-Basrah

Iraq

Tripoli, Libya

LDC Libya Development Company

Dat El Emad Tower 3, Floor 6

PO Box 91366

Tripoli

Libya

Baghdad, Iraq

Noor Al-Wahage for Oil Services LLC

Neighbourhood 909, Street 25

Karada District

Baghdad

Iraq

Contact

Phone: +49 6103 376927 0

Fax: +49 6103 376927 9